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Item 5. Market for Registrant’s Common Equity

2021-03-08 compared with 2020-03-06 · 10 added, 429 removed, 29 unchanged (94% of the section changed)

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

On June 19, 2014, our common stock commenced trading on The Nasdaq Global Market under the symbol “ARDX”.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

On June 19, 2014, our common stock commenced trading on The Nasdaq Global Market under the symbol “ARDX”.

Prior to that date, there was no public trading market for our common stock.

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Recent Sales of Unregistered Securities

As disclosed in our Current Report on Form 8-K filed with the SEC on December 2, 2019, on November 22, 2019, we entered into a Stock Purchase Agreement with KKC pursuant to which we sold an aggregate of 2,873,563 shares of common stock in a private placement exempt from registration pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) the Securities Act of 1933, as amended (the “Securities Act”), and Regulation D under the Securities Act.

In accordance with the instructions to Part II, Item 5(a) of Form 10-K, the Item 701 information is omitted from this Annual Report on Form 10-K.

Use of Proceeds

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SELECTED FINANCIAL DATA

The data set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the financial statements and the notes included elsewhere in this annual report on Form 10‑K and also with “ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”

and our financial statements and the notes thereto included in Part II, Item 8, of this Annual Report on Form 10‑K.

The data set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the financial statements and the notes thereto in Item 8 of Part II, “Financial Statements and Supplementary Data,” and the information contained in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Historical results are not necessarily indicative of future results .

Year Ended December 31,

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(in thousands, except share and per share amounts)

Licensing revenue

Collaborative development revenue

Other revenue

Product supply revenue

Licensing revenue

Total revenues

Cost of revenue

Operating expenses:

Cost of revenue

Research and development

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Interest expense

Other income (expense), net

Other income, net

Loss before provision for income taxes

Provision for (benefit from) income taxes

Provision for income taxes

Net loss per common share, basic and diluted

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(in thousands)

Cash, cash equivalents and short-term investments

Loan payable, net of current portion

Cash and investments

Loan payable, current and non-current

Accumulated deficit

Total stockholders' equity

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 section of this report entitled “Selected Financial Data”

and our financial statements and related notes included elsewhere in this report.

This discussion 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.

We are a specialized biopharmaceutical company focused on developing first-in-class medicines to improve treatment for people with cardiorenal diseases.

This includes patients with chronic kidney disease, or CKD, on dialysis suffering from elevated serum phosphorus, or hyperphosphatemia;

and patients with 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 medicine in late-stage clinical development for the control of serum phosphorus in patients with CKD on dialysis.

Tenapanor has a unique mechanism of action and acts locally in the gut to inhibit the sodium hydrogen exchanger 3, or NHE3.

This results in the tightening of the epithelial cell junctions, thereby significantly reducing paracellular uptake of phosphate, the primary pathway of phosphate absorption.

We have evaluated tenapanor in a Phase 3 program for the control of serum phosphorus in CKD patients on dialysis.

In December 2019, we reported statistically significant topline efficacy results from our second monotherapy Phase 3 clinical trial, the PHREEDOM trial.

The PHREEDOM trial followed a successful monotherapy Phase 3 clinical trial completed in 2017, which achieved statistical significance for the primary endpoint.

P HREEDOM is a one-year study with a 26-week open-label treatment period and a 12-week double-blind, placebo-controlled randomized withdrawal period followed by a 14-week open-label safety extension period.

An active safety control group, for safety analysis only, received sevelamer, open-label, for the entire 52-week study period.

Patients completing the PHREEDOM trial from both the tenapanor arm and the sevelamer active safety control arm had the option to participate in NORMALIZE, an ongoing open-label 18-month extension study.

The goal of the NORMALIZE study is to further our understanding of the potential for the dual mechanism of tenapanor and sevelamer to reduce patients’

serum phosphorus levels towards normal (<4.6 mg/dL) while minimizing medication burden.

In addition, in September 2019, we reported positive results from the AMPLIFY trial, a Phase 3 study evaluating tenapanor in patients with CKD on dialysis who had uncontrolled hyperphosphatemia despite phosphate binder treatment.

We are preparing to submit a New Drug Application, or NDA, to the United States Food and Drug Administration, or FDA, for tenapanor for the control of serum phosphorus in adult patients with CKD on dialysis in mid-2020.

Tenapanor, if approved, would be the first therapy for phosphate management that is not a phosphate binder.

As tenapanor is a novel, potent, small molecule there would be significantly less pill burden than with phosphate binders.

Tenapanor is dosed as a single pill, twice-daily, which we believe could greatly improve patient adherence and compliance and free patients from having to take multiple pills before every meal.

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.

Similar to what we have done with tenapanor in developing a non-binder approach for the treatment of elevated serum phosphate levels, RDX013 is designed to offer a non-binder alternative to lowering elevated potassium with a much lower pill burden than potassium binders and we believe may provide significant advantages as a stand-alone agent or in combination with potassium binders.

In addition to the development of tenapanor in our cardiorenal portfolio, we have developed tenapanor for the treatment of patients with irritable bowel syndrome with constipation, or IBS-C.

On September 12, 2019, we received US FDA approval of IBSRELA®

(tenapanor) for the treatment of IBS-C in adults.

IBS-C is a burdensome GI disorder affecting a significant number of people.

It is characterized by significant abdominal pain, constipation, straining during bowel movements, bloating and/or gas.

IBSRELA (tenapanor) is a locally acting inhibitor NHE3, an antiporter expressed on the apical surface of the small intestine and colon primarily responsible for the absorption of dietary sodium.

By inhibiting NHE3 on the apical surface of the enterocytes, tenapanor reduces absorption of sodium from the small intestine and colon, resulting in an increase in water secretion into the intestinal lumen, which accelerates intestinal transit time and results in a softer stool consistency.

Tenapanor has also been shown to reduce abdominal pain by decreasing visceral hypersensitivity and by decreasing intestinal permeability in animal models.

In a rat model of colonic hypersensitivity, tenapanor reduced visceral hyperalgesia and normalized colonic sensory neuronal excitability.

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 product candidates that act upon those targets to take advantage of the gut’s ability to communicate with other organs.

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.

As of December 31, 2019, we had an accumulated deficit of $460.5 million.

We expect to continue to incur substantial operating losses for the foreseeable future as a result of costs associated with the following activities:

our continued development of tenapanor for the control of serum phosphorus in CKD patients on dialysis;

the preparation of the NDA to seek marketing approval in the United States for tenapanor for the control of serum phosphorus in patients with CKD on dialysis;

our preparations for the commercialization of tenapanor in the United States for the control of serum phosphorus in CKD patients on dialysis, including significant increased personnel costs associated with building out our commercial team;

the performance of certain activities required as a result of our NDA approval of tenapanor for IBS-C, including costs associated with conducting the pediatric clinical trials for IBS-C;

and 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

Our revenue to date has been generated primarily through license, research and development collaborative agreements with various collaboration partners.

We have not generated any revenue from product sales.

In the future, we may generate revenue from a combination of license fees and other upfront payments, milestone payments, product sales and royalties in connection with our current or future collaborative partnerships.

We expect that any revenue we generate will fluctuate in future periods as a result of, among other factors:

the timing and progress of goods and services provided pursuant to our current or future collaborative partnerships;

our or our collaborators’

achievement of preclinical, clinical, regulatory or commercialization milestones, to the extent achieved;

the timing and amount of any payments to us relating to the aforementioned milestones;

and the extent to which any of our product candidates are approved and successfully commercialized by us or a collaboration partner.

If we, our current collaboration partners or any future collaboration partners fail to develop product candidates in a timely manner or to obtain regulatory approval for product candidates, our ability to generate future revenue from collaborative arrangements, and our results of operations and financial position, would be materially and adversely affected.

Our past revenue performance is not necessarily indicative of results to be expected in future periods.

See NOTE 2, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES , in the notes to our financial statements, included in Part II, Item 8, of this Annual Report on Form 10-K, for further details .

Cost of Revenue

Cost of revenue currently represents payments due to AstraZeneca, which under the terms of a termination agreement entered into in 2015 is entitled to (i) future royalties at a rate of 10% of net sales of tenapanor or other NHE3 products by us or our licensees, and (ii) 20% of non-royalty revenue received from a new collaboration partner should we elect to license, or otherwise provide rights to develop and commercialize tenapanor or certain other NHE3 inhibitors.

We have agreed to pay AstraZeneca up to a maximum of $75.0 million in the aggregate for (i) and (ii).

We recognize these expenses as cost of revenue when we recognize the corresponding revenue that gives rise to payments due to AstraZeneca.

To date, we have recognized an aggregate of $10.5 million of the $75.0 million under the AZ Termination Agreement.

See details in NOTE 13, COLLABORATION AND LICENSING AGREEMENTS, under AstraZeneca, in the notes to our financial statements, included in Part II, Item 8, of this Annual Report on Form 10-K .

Research and Development

We recognize all research and development expenses as they are incurred to support the discovery, research, 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 contract research organizations, or 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;

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 further progress the development of tenapanor, as well as our other product candidates, as we advance our research programs into the preclinical stage and as we 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 not succeed in achieving marketing approval for all of our product candidates, including tenapanor for the control of serum phosphorus .

Additionally, for the marketing approval received in the United States 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 or in 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.

General and Administrative

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, for our executive, board, finance, legal, business development, market development, commercial and support staff.

Other general and administrative expenses include facility related costs and professional fees for legal, accounting and audit, investor relations, other consulting services and allocated facility-related costs not otherwise included in research and development expenses.

We anticipate that our general and administrative expenses will increase in the future primarily because of increased pre-commercial activities, personnel costs and professional fees for services to support the potential launch and commercialization of tenapanor for the control of serum phosphorus in CKD patients on dialysis.

Interest Expense

Interest expense represents the interest paid on our loan payable.

Other Income, net

Other income consists of interest income earned on our cash and cash equivalents and held-to-maturity investments, the periodic revaluation of the exit fee related to our loan and currency exchange gains and losses.

Provision for Income Taxes

Our provision for income taxes includes current and deferred tax, including foreign withholding taxes paid on payments received from certain collaboration partners.

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Our deferred tax assets continue to be fully offset by a valuation allowance, including deferred tax assets related to our net operating loss carryforwards, which may be subject to annual limitations as a result of ownership changes that may have occurred or could occur in the future.

CRITICAL ACCOUNTING POLICES AND ESTIMATES

A detailed discussion of our significant accounting policies can be found in NOTE 2, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, in the notes to our financial statements, included in Part II, Item 8, of this Annual Report on Form 10-K.

Critical accounting policies are those that require significant judgment and/or estimates by management at the time that financial statements are prepared such that materially different results might have been reported if other assumptions had been made.

These estimates form the basis for making judgments about the carrying values of assets and liabilities.

We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.

Actual results could differ materially from these estimates.

We consider certain accounting policies related to revenue recognition, accrued research and development expenses and stock-based compensation to be critical policies to understanding the judgments and estimates applied in our reported financial results.

Revenue Recognition

We generate revenue primarily from research and collaboration and license agreements with customers.

Goods and services in the agreements may include the grant of licenses for the use of our technology, the provision of services associated with the research and development of product candidates, manufacturing services, and participation in joint steering committees.

The terms of these arrangements typically include payment to us of one or more of the following:

non-refundable, up-front license fees;

research, development, regulatory and commercial milestone payments;

reimbursement of research and development services;

option payments;

reimbursement of certain costs;

payments for manufacturing supply services;

and future royalties on net sales of licensed products.

When two or more contracts are entered into with the same customer at or near the same time, we evaluate the contracts to determine whether the contracts should be accounted for as a single arrangement.

Contracts are combined and accounted for as a single arrangement if one or more of the following criteria are met:

(i) the contracts are negotiated as a package with a single commercial objective;

(ii) the amount of consideration to be paid in one contract depends on the price or performance of the other contract;

or (iii) the goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation.

In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements, management 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 any constraints on variable consideration;

(iv) allocation of the transaction price to the performance obligations;

and (v) recognition of revenue when (or as) we satisfy each performance obligation.

As part of the accounting for contracts with customers, we develop assumptions that require judgment to determine whether promised goods and services represent distinct performance obligations and the standalone selling price for each performance obligation identified in the contract.

This evaluation is subjective and requires us to make judgments about the promised goods and services and whether those goods and services are separable from other aspects of the contract.

Further, determining the standalone selling price for performance obligations requires significant judgment, and when an observable price of a promised good or service is not readily available, we consider relevant assumptions to estimate the standalone selling price, including, as applicable, market conditions, development timelines, probabilities of technical and regulatory success, reimbursement rates for personnel costs, forecasted revenues, potential limitations to the selling price of the product and discount rates.

We apply judgment in determining whether a combined performance obligation is satisfied at a point in time or over time, and, if over time, concluding upon the appropriate method of measuring progress to be applied for purposes of recognizing revenue.

We evaluate the measure of progress each reporting period and, as estimates related to the measure of progress change, related revenue recognition is adjusted accordingly.

Changes in our estimated measure of progress are accounted for prospectively as a change in accounting estimate.

We recognize collaboration revenue by measuring the progress toward complete satisfaction of the performance obligation using an input measure.

In order to recognize revenue over the research and development period, we measure actual costs incurred to date compared to the overall total expected costs to satisfy the performance obligation.

Revenues are recognized as the program costs are incurred.

We will re-evaluate the estimate of expected costs to satisfy the performance obligation each reporting period and make adjustments for any significant changes.

Amounts received prior to satisfying the revenue recognition criteria are recorded as contract liabilities in our balance sheets.

If the related performance obligation is expected to be satisfied within the next twelve months, this will be classified in current liabilities.

Amounts recognized as revenue prior to receipt are recorded as contract assets in our balance sheets.

If we expect to have an unconditional right to receive the consideration in the next twelve months, this will be classified in current assets.

A net contract asset or liability is presented for each contract with a customer .

Milestone Payments:

At the inception of each arrangement that includes research and development milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate 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 us 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 standalone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied.

At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such development milestones and any related constraints, and if necessary, adjust our estimate of the overall transaction price.

Any such adjustments are recorded on a cumulative catch-up basis, which would affect earnings in the period of adjustment.

Manufacturing supply services:

Arrangements that include a promise for the 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.

We assess if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations.

If we are 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.

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and where the license is deemed to be the predominant item to which the royalties relate, we recognize 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, we have not recognized any royalty revenue resulting from any of our licensing arrangements.

Licenses of intellectual property :

If a license granted to a customer to use our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from consideration allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license.

For licenses that are bundled with other promises, we apply judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, to conclude upon the appropriate method of measuring progress for purposes of recognizing revenue related to consideration allocated to the performance obligation.

Customer options, such as options granted to allow a licensee to choose to research, develop and commercialize licensed compounds are evaluated at contract inception in order to determine whether those options provide a material right (i.e., an optional good or service offered for free or at a discount) to the customer.

If the customer options represent a material right, the material right is treated as a separate performance obligation at the outset of the arrangement.

We allocate the transaction price to material rights based on the standalone selling price, and revenue is recognized when or as the future goods or services are transferred or when the option expires.

Customer options that are not material rights do not give rise to a separate performance obligation, and as such, the additional consideration that would result from a customer exercising an option in the future is not included in the transaction price for the current contract.

Instead, the option is deemed a marketing offer, and additional option fee payments are recognized or being recognized as revenue when the licensee exercises the option.

The exercise of an option that does not represent a material right is treated as a separate contract for accounting purposes .

Contract costs:

We recognize as an asset the incremental costs of obtaining a contract with a customer if the costs are expected to be recovered.

We have elected a practical expedient wherein we recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less.

To date, we have not incurred any material incremental costs of obtaining a contract with a customer.

Contract modifications:

Contract modifications, defined as changes in the scope or price (or both) of a contract that are approved by the parties to the contract, such as a contract amendment, exist when the parties to a contract approve a modification that either creates new or changes existing enforceable rights and obligations of the parties to the contract.

Depending on facts and circumstances, we account for a contract modification as one of the following:

(i) a separate contract;

(ii) a termination of the existing contract and a creation of a new contract;

or (iii) a combination of the preceding treatments.

A contract modification is accounted for as a separate contract if the scope of the contract increases because of the addition of promised goods or services that are distinct and the price of the contract increases by an amount of consideration that reflects our standalone selling prices of the additional promised goods or services.

When a contract modification is not considered a separate contract and the remaining goods or services are distinct from the goods or services transferred on or before the date of the contract modification, we account for the contract modification as a termination of the existing contract and a creation of a new contract.

When a contract modification is not considered a separate contract and the remaining goods or services are not distinct, we account for the contract modification as an add-on to the existing contract and as an adjustment to revenue on a cumulative catch-up basis.

We receive payments from our licensees as established in each contract.

Upfront payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future

period until we perform our obligations under these arrangements.

Where applicable, amounts are recorded as unbilled revenue when our right to consideration is unconditional.

We do not assess whether a contract with a customer has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less.

Accrued Research and Development Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses.

This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost.

The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met.

We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time.

We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary.

Examples of estimated accrued research and development expenses include fees paid to:

CROs in connection with clinical studies;

investigative sites in connection with clinical studies;

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

collaborator entities in connection with our collaboration agreements;

vendors in connection with preclinical development activities.

We record expenses related to clinical studies and manufacturing development activities based on our estimates of the services received and efforts expended pursuant to contracts with our CROs and manufacturing vendors that conduct and manage these activities on our 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 our 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, we estimate the time period over which each component of a service will be performed, and estimate, with vendor input if appropriate, the resulting level of completion of each component of the service, with such estimates often involving drivers that provide a surrogate measurement of completion such as number of enrolled subjects and/or number of sites activated in the calculation of clinical trial fee accruals.

If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrued or prepaid expense balance accordingly.

Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, we may report amounts that are too high or too low in any particular period.

Stock-Based Compensation

We estimate the fair value of stock options and Employee Stock Purchase Plan, or ESPP, shares using the Black-Scholes valuation model.

The Black-Scholes model requires the input of highly subjective assumptions which determine the fair value of stock-based awards.

These assumptions include:

Expected Term—

We have limited historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for our stock-option grants.

As such, the expected term is estimated using the simplified method whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option.

Expected Volatility —

Since January 1, 2017, we have used the historic volatility of our own stock over the retrospective period corresponding to the expected remaining term of the options, or the period since our shares were first quoted on The Nasdaq Global Market, if that is shorter, to compute our expected stock price volatility.

Risk-Free Interest Rate —The risk-free interest rate assumption is based on the zero-coupon U.S.

Treasury instruments on the date of grant with a maturity date consistent with the expected term of our stock option grants.

Expected Dividend —

To date, we have not declared or paid any cash dividends and do not have any plans to do so in the future.

Therefore, we use an expected dividend yield of zero.

As required, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value employee stock-based awards granted in future periods.

Employee and director stock-based compensation costs are to be recognized over the vesting period of the award, and we have elected to use the straight-line attribution method.

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

We estimate forfeitures based on historical experience.

Restricted stock units, or RSUs, are measured at the fair value of our common stock on the date of grant and expensed over the period of vesting using the straight-line attribution approach.

Performance-based RSUs, or PRSUs, are valued at grant-date fair market value.

The vesting of the PRSUs is based on performance conditions.

Performance conditions include:

(i) a specific performance criteria and (ii) the employee’s continuous employment by the company for a stated period of time in order to earn the right to the related PRSUs to vest.

The Company recognizes compensation cost with respect to the vesting of the PRSUs on a ratable basis over the requisite service period, upon the performance conditions being deemed probable of achievement.

RESULTS OF OPERATIONS

Comparison of the Years Ended December 31, 2019 and 2018

Year Ended December 31,

(in thousands)

Licensing revenue

Collaborative development revenue

Other revenue

Total revenues

Dollar change from prior year

Percent change from prior year

Total revenues for the year ended December 31, 2019 were $5.3 million, which represents an increase of $2.7 million, or 103%, as compared to total revenues of $2.6 million for the year ended December 31, 2018.

The licensing revenue of $4.5 million is attributable to the achievement of a milestone, which amounted to $3.0 million, pursuant to our exclusive license agreement with Fosun Pharma, entered into in December 2017 for the development, commercialization and distribution of tenapanor in China for both hyperphosphatemia and IBS-C, and the full recognition of the $1.5 million license fee related to the XuanZhu Agreement, as discussed in NOTE 13, COLLABORATION AND LICENSING AGREEMENTS, to our financial statements, included in Part II, Item 8 of this Annual Report on Form 10-K.

The increase in collaborative development revenue of $0.5 million is attributable entirely to the revenue recognized, under the input method, during the fourth quarter of 2019 related to the 2019 KKC Agreement.

We expect to recognize the remaining $9.5 million of the initial transaction price over the research and development period of the program that is currently expected to extend through the end of 2021.

However, we will revisit our current estimates and timing of performance at the end of each future reporting period and adjust as necessary.

The other revenue of $0.3 million relates to the manufacturing supply of tenapanor and other materials sold to KKC in connection with that collaboration partner’s product development and clinical trials in Japan.

Cost of Revenue

Year Ended December 31,

(in thousands)

Cost of revenue

Dollar change from prior year

Percent change from prior year

Cost of revenue was $0.6 million for the year ended December 31, 2019, an increase of $0.1 million, or 29%, compared to $0.5 million for the year ended December 31, 2018.

The cost of revenue in both periods represent payments due to AstraZeneca under the AstraZeneca Termination Agreement and are related primarily to tenapanor-related up front and milestone payments from our collaboration partners.

Research and Development

Year Ended December 31,

(in thousands)

Research and development

Dollar change from prior year

Percent change from prior year

Research and development expenses were $71.7 million for the year ended December 31, 2019, an increase of $2.3 million, or 3%, compared to $69.4 million for the year ended December 31, 2018.

The increase consisted of a $3.7 million increase in our internal program costs and a $1.4 million decrease in our external program costs.

The increase in our internal costs of $3.7 million was primarily due to an increase in headcount and related personnel costs and an increase in stock-based compensation expenses.

The decrease in our external program costs of $1.4 million included a $4.6 million decrease in expenses primarily related to manufacturing of tenapanor and regulatory expenses related to our IBS-C NDA in 2018, partially offset by $2.5 million increase in clinical development expenses related to our RDX013 program and a $0.7 million increase primarily related to our tenapanor clinical trial expenses that includes an out-of-period adjustment recorded during the second quarter of 2019 that reduced clinical trial expenses by $3.6 million related to our tenapanor clinical trials.

General and Administrative

Year Ended December 31,

(in thousands)

General and administrative

Dollar change from prior year

Percent change from prior year

General and administrative expenses were $24.3 million for the year ended December 31, 2019, an increase of $0.6 million, or 2%, compared to $23.7 million for the year ended December 31, 2018.

The increase was primarily due to an increase in personnel costs, stock-based compensation expense, audit expenses and recruiting expenses, partially offset by a decrease in other professional services.

Interest Expense

Interest expense was $5.7 million for the year ended December 31, 2019, an increase of $2.2 million, or 62%, compared to $3.5 million for the year ended December 31, 2018.

The increase in interest expense in 2019 compared to 2018 was because the interest expense during 2018 represents only part of the year related to the loan agreement entered in May 2018, as compared with a full year of interest expense in 2019.

Other Income, net

Other income, net, was $2.4 million for the year ended December 31, 2019, which represents a decrease of $0.8 million, or 26%, compared to $3.2 million for the year ended December 31, 2018.

The decrease was primarily due to a decrease in treasury-related income and a revaluation to higher exit fee revaluation adjustments related to our loan agreement .

Comparison of the Years Ended December 31, 2018 and 2017

Year Ended December 31,

(in thousands)

Licensing revenue

Other revenue

Total revenues

Dollar change from prior year

Percent change from prior year

Total revenues were $2.6 million for the year ended December 31, 2018, a decrease of $39.4 million, or 94%, compared to $42.0 million for the year ended December 31, 2017.

Total revenues of $2.6 million in the year ended December 31, 2018 included $2.3 million of licensing revenue related to the upfront payment from Knight and $0.3 million of other revenue related to the manufacturing supply of tenapanor and other materials to KKC, for its product development and clinical trials in Japan, in accordance with our license agreement with KKC.

Total revenue of $42.0 million in the year ended December 31, 2017 was comprised of licensing revenue related to upfront payments in accordance with our KKC and Fosun Pharma license agreements.

Cost of Revenue

Year Ended December 31,

(in thousands)

Cost of revenue

Dollar change from prior year

Percent change from prior year

Cost of revenue was $0.5 million for the year ended December 31, 2018, a decrease of $7.9 million, or 94%, compared to $8.4 million for the year ended December 31, 2017.

The cost of revenue in both periods represented payments due to AstraZeneca under the AstraZeneca Termination Agreement and are related primarily to tenapanor-related up front and milestone payments from our collaboration partners.

Research and Development

Year Ended December 31,

(in thousands)

Research and development

Dollar change from prior year

Percent change from prior year

Research and development expenses were $69.4 million for the year ended December 31, 2018, a decrease of $6.1 million, or 8%, compared to $75.5 million for the year ended December 31, 2017.

The decrease consisted of a $1.1 million decrease in our external program costs and a $5.0 million decrease in our internal program costs.

The decrease in our external program costs of $1.1 million included a $11.7 million decrease due to discontinuation of the RDX7675 program and a $1.7 million reduction of activities associated with the RDX8940 program that was partially offset by a $12.3 million increase in expense primarily related to our tenapanor programs.

The $12.3 million increase included an increase in expense related to the start of our second tenapanor hyperphosphatemia Phase 3 study that was partially offset by a decrease in expenses for clinical development activities related to the completion of our tenapanor IBS-C Phase 3 clinical program as well as our first tenapanor hyperphosphatemia Phase 3 clinical trial.

The decrease in our internal costs of $5.0 million was primarily due to a decrease in personnel costs, including stock-based compensation costs as a result of a reduction in force during the third quarter of 2017, and a related decrease in research and development activities

General and Administrative

Year Ended December 31,

(in thousands)

General and administrative

Dollar change from prior year

Percent change from prior year

General and administrative expenses were $23.7 million for the year ended December 31, 2018, an increase of $0.5 million, or 2%, compared to $23.2 million for the year ended December 31, 2017.

The increase was primarily due to an increase in professional services and stock-based compensation expense, partially offset by a reduction in personnel costs due to reduction in force during the third quarter of 2017.

Interest Expense

Interest expense was $3.5 million for the year ended December 31, 2018, an increase of $3.5 million, compared to zero for the year ended December 31, 2017.

The increase in 2018 represents loan and interest expense related to the loan agreement entered in May 2018.

Other Income, net

Other income, net was $3.2 million for the year ended December 31, 2018, an increase of $1.2 million, or 63%, compared to $2.0 million for the year ended December 31, 2017.

The increase was primarily due to an increase in treasury-related income , partially offset by currency exchange loss.

LIQUIDITY AND CAPITAL RESOURCES

(in thousands)

Cash and cash equivalents

Short-term investments

Total liquid funds

As of December 31, 2019, we had cash, cash equivalents and short-term investments totaling $247.5 million compared to $168.1 million as of December 31, 2018.

On December 9, 2019, we completed an underwritten public offering of 20,000,000 shares of common stock at a price of $6.25 per share before underwriting discounts and commissions, or the 2019 Offering.

In connection with the 2019 Offering, we entered into an underwriting agreement, or the 2019 Underwriting Agreement, with Citigroup Global Markets Inc., Cowen and Company LLC, SVB Leerink LLC and Piper Jaffray & Co., or collectively the 2019 Underwriters, pursuant to which we granted to the 2019 Underwriters a 30-day option to purchase up to an additional 3,000,000 shares of our common stock, or the 2019 Overallotment.

We completed the sale of 23,000,000 shares, inclusive of the 2019 Overallotment, to the 2019 Underwriters and that sale resulted in our receipt of aggregate gross proceeds of approximately $143.8 million, less underwriting discounts, commissions and offering expenses totaling approximately $8.9 million, which resulted in net proceeds of approximately $134.9 million .

On November 22, 2019, we and KKC entered into a stock purchase agreement, pursuant to which we sold an aggregate of 2,873,563 shares of our common stock at $6.96 per share for aggregate net proceeds of approximately $20.0 million, or the Private Placement.

The Private Placement closed on November 25, 2019 .

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.

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 SVB Leerink (formerly known as Leerink Partners LLC), or Leerink, on August 9, 2018.

As of December 31, 2019, no shares have been offered or issued or sold against the Sales Agreement with Leerink.

On May 25, 2018, we completed an underwritten public offering of 12,500,000 shares of common stock at a price of $4.00 per share before underwriting discounts and commissions, or the 2018 Offering.

In connection with the 2018 Offering, we entered into an underwriting agreement, or the 2018 Underwriting Agreement, with Jefferies LLC and SVB Leerink (formerly known as Leerink Partners LLC), or together the 2018 Underwriters, pursuant to which we granted to the 2018 Underwriters a 30-day option to purchase up to an additional 1,875,000 shares of our common stock, or the 2018 Overallotment.

We completed the sale of 14,375,000 shares, inclusive of the 2018 Overallotment, to the 2018 Underwriters, and that sale resulted in our receipt of aggregate gross proceeds of approximately $57.5 million, less underwriting discounts, commissions and offering expenses totaling approximately $3.7 million, which resulted in net proceeds of approximately $53.8 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.

Our primary sources of cash have been from the sale and issuance of common stock, public offerings, private placement and convertible preferred stock, funds from our collaboration partnerships, and funds from our loan agreement.

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 December 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.

There are numerous risks and uncertainties associated with research, development and commercialization initiatives, and actual results could vary materially as a result of a number of factors, many of which are outside of our control.

Our future capital requirements are difficult to forecast and will depend on many factors, including :

the preparation and submission of an NDA with the FDA to request marketing authorization for tenapanor for the control of serum phosphorus in CKD patients on dialysis ;

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 for the control of serum phosphorus in CKD patients on dialysis, 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;

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, including RDX013;

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;

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

The following table summarizes our cash flows for the periods indicated:

Year Ended December 31,

(in thousands)

Cash used in operating activities

Cash provided by (used in) investing activities

Cash provided by financing activities

Net increase in cash and cash equivalents

Cash Flows from Operating Activities

Net cash used in operating activities during the year ended December 31, 2019, was $76.5 million, as compared to $70.3 million of net cash used in operating activities during the year ended December 31, 2018.

The $6.2 million increase in net cash used in operating activities is attributable to:

a $0.4 million decrease in cash received from collaboration partners during the year ended December 31, 2019 as compared to payments received during the year ended December 31, 2018.

Specifically, we received a total of $14.1 million from collaboration partners during 2019, which was comprised of a $5.0 million upfront payment received in connection with the 2019 KKC Agreement, a $0.7 million upfront payment received in connection with the XuanZhu Agreement, a $5.0 million milestone payment received from KKC in connection with the 2017 KKC Agreement, a $3.0 million milestone payment received in connection with the Fosun Agreement and $0.4 million of manufacturing supply service revenue, as compared to a total of $14.5 million in cash payments received from collaboration partners during 2018;

a $1.9 million decrease in payments made to AstraZeneca during 2019 in connection with the AZ Termination Agreement, as compared to payments made in 2018;

a $0.4 million increase in cash R&D expenses (excluding working capital-related fluctuations) in 2019, as compared to 2018;

a $0.4 million decrease in cash G&A expenses (excluding working capital-related fluctuations) in 2019, as compared to 2018;

a $2.1 million increase in net cash interest payments in 2019, as compared to 2018;

a $0.9 million decrease in cash paid for income taxes in 2019, as compared to 2018;

a $6.5 million net increase in cash used related to fluctuations in components of our non-revenue-related working capital in 2019, as compared to 2018, which was comprised of a $7.8 million decrease, a $1.9 million decrease and a $0.4 million decrease in cash provided by fluctuations in our non-payroll-related accruals and other current liabilities, lease liability and prepaid expenses and other current assets, respectively, partially offset by a $2.2 million increase and a $1.4 million increase of cash provided by fluctuations in our accrued compensation and benefits and accounts payable.

Net cash used in operating activities during the year ended December 31, 2018, was $70.3 million, as compared to $65.2 million of net cash used in operating activities during the year ended December 31, 2017.

The $5.1 million increase in net cash used in operating activities is predominantly attributable to:

a $15.5 million decrease in cash received from collaboration partners during the year ended December 31, 2018 as compared to payments received during the year ended December 31, 2017.

Specifically, we received a total of $14.5 million from collaboration partners during 2018, which was comprised of a $12.0 million upfront payment received in connection with the Fosun Agreement, a $2.3 million upfront payment in

connection with the Knight Agreement and a $0.2 million of manufacturing supply service revenue, as compared to a total of $30.0 million in cash payments received from collaboration partners during 2017;

a $3.1 million decrease in payments made to AstraZeneca during 2018 in connection with the AZ Termination Agreement, as compared to payments made in 2017;

a $5.3 million decrease in cash R&D expenses (excluding working capital-related fluctuations) in 2018, as compared to 2017;

a $3.2 million increase in net cash interest payments in 2018, as compared to 2017;

a $1.1 million increase in cash paid for income taxes in 2018, as compared to 2017;

a $6.3 million net decrease in cash used related to fluctuations in components of our non-revenue-related working capital in 2018, as compared to 2017, which was comprised of a $2.7 million increase, a $3.1 million increase and a $1.1 million increase in cash provided by fluctuations in our prepaid expenses and other current assets, accounts payable and our non-payroll-related accruals and other current liabilities, respectively, partially offset by a $0.6 million decrease of cash provided by fluctuations in our accrued compensation and benefits.

Cash Flows from Investing Activities

Net cash provided by investing activities increased by $53.3 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018.

This increase was attributable to a $66.3 million decrease in purchases of short-term available-for-sale investments and a $1.2 million increase in sales and redemptions of investments, partially offset by a decrease in proceeds from the sale of short-term investments of $14.2 million.

Net cash used in investing activities increased by $95.2 million during the year ended December 31, 2018 as compared to the year ended December 31, 2017.

This increase was attributable to an $85.0 million increase in purchases of short-term available-for-sales investments and a decrease of $17.1 million in sales and redemptions of investments, partially offset by a $4.9 million increase in proceeds from the sales of short-term investments and a $2.0 million decrease in the purchases of property and equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities increased by $51.9 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018.

This increase was predominantly attributable to an $81.2 million increase in net proceeds received in connection with underwritten public offering initiatives and a $20.0 million increase in net proceeds received in connection with the Private Placement, partially offset by a net $49.3 million decrease in proceeds received in connection with a long-term loan borrowing.

Net cash provided by financing activities increased by $102.9 million during the year ended December 31, 2018, as compared to the year ended December 31, 2017.

This increase was attributable to a $53.8 million increase in net proceeds received in connection with an underwritten equity offering and a $49.3 million increase in net proceeds received in connection with a long-term borrowing, partially offset by a $0.2 million decrease in proceeds received pursuant to the issuance of common stock under stock plans and the exercise of stock options.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2019, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K as promulgated by the SEC.

JOBS ACT ACCOUNTING ELECTION

Up to December 31, 2019 we were an “emerging growth company,”

as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

We had irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, were subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

In addition, as an emerging growth company, we had reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We ceased to be an emerging growth company on January 1, 2020 .

SMALLER REPORTING COMPANY

On June 28, 2018, the SEC adopted amendments that raise the thresholds in the smaller reporting company, or SRC, definition, whereby we were determined to qualify as an SRC.

We elected to reflect that determination and avail ourselves with most of the SRC scaled disclosure accommodations in our filings subsequent to the adoption.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity