What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-08 compared with 2020-03-06 · 329 added, 377 removed, 584 unchanged (55% of the section changed)

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Statements of Operations and Comprehensive Loss

Statements of Stockholders’

Statements of Stockholders’ Equity

Statements of Cash Flows

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We have audited the accompanying balance sheets of Ardelyx, Inc.

(the “Company”) as of December 31, 2019 and 2018, the related statements of operations and comprehensive loss, stockholders’

equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”).

(the “Company”) as of December 31, 2020 and 2019, the related statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated March 6, 2020 expressed an unqualified opinion thereon.

Adoption of ASU No.

As discussed in Note 2 to the financial statements, the Company changed its method for recognizing revenue as a result of the adoption of Accounting Standards Update (ASU) No.

2014-09, Revenue from Contracts with Customers (Topic 606), and the related amendments effective January 1, 2018.

Basis for Opinion

These financial statements are the responsibility of the Company‘s management.

Our responsibility is to express an opinion on the Company‘s financial statements based on our audits.

These financial statements are the responsibility of the Company‘s management.

Our responsibility is to express an opinion on the Company‘s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Accrued clinical and contract manufacturing expenses

Description of the Matter

During 2020, the Company incurred $65.1 million of research and development expenses and accrued $2.2 million of clinical expenses and $1.8 million of contract manufacturing expenses as of December 31, 2020.

As described in Note 2 to the Financial Statements, the Company estimates the accruals for its contracts with third party service providers including contract research organizations (“CROs”), investigative sites, vendors related to contract manufacturing, development and distribution of clinical supplies, and vendors in connection with preclinical development activities, which comprise a significant component of the Company’s research and development activities.

External costs are accrued and expensed based on estimates of the services received and efforts expended pursuant to contracts with multiple CROs, investigative sites, contract manufacturing vendors, and preclinical development vendors.

The timing and the amount of payments required under each individual arrangement are often different from the pattern of costs actually incurred.

The Company accrues the cost of the services under its contracts with third party service providers based on the extent of activities completed by vendors over the estimated service period, number of subjects enrolled, and number of sites activated.

Auditing management’s accounting for accrued clinical and contract manufacturing expenses is especially challenging because the evaluation is dependent on a high volume of data exchanged between third-party service providers, internal clinical and manufacturing personnel as well as the company’s finance team.

Determining the accrued amounts is based on an evaluation of the unique terms and conditions set in each respective CRO, investigative site, contract manufacturing, and pre-clinical development agreement.

Additionally, due to the duration of clinical-related development activities and the timing of invoices received from third parties, the determination of the accrual for services incurred requires application of judgment by management.

How We Addressed the Matter in Our Audit

To test accrued clinical and contract manufacturing expenses, our audit procedures included, among others, testing the accuracy and completeness of the inputs used in management’s analysis to determine costs incurred.

We also inspected terms and conditions for material vendor contracts and change orders and compared these to the cost models management used in tracking progress of service agreements.

We met with internal legal personnel to understand material unique contract terms and conditions that require special consideration in estimating the accrued research and development expenses.

We met with internal clinical and manufacturing personnel to understand the status of significant clinical and contract manufacturing activities.

We evaluated estimated services incurred by third parties by understanding the terms and timeline of significant projects, evaluating management’s estimate of work performed, subjects enrolled and sites activated and costs incurred, and obtaining external confirmation of contracts and change orders executed with the Company for a sample of vendors as well as key terms and conditions of those contracts.

Further, we inspected material invoices received from third parties after the balance sheet date and evaluated whether services performed prior to the balance sheet date had been properly included in the accrual.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2009.

Redwood City, California

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Short-term investments

Accounts receivable

Unbilled revenue

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Property and equipment, net

Long-term investments

Right-of-use assets

Liabilities and stockholders’

Liabilities and stockholders’ equity

Current liabilities:

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Accrued compensation and benefits

Uncharged license fees

Current portion of operating lease liability

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Loan payable, net of current portion

Other long-term liabilities

Total liabilities

Commitments and contingencies (Note 16)

Stockholders’

Stockholders’ equity:

Preferred stock, $ 0.0001 par value;

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Accumulated deficit

Accumulated other comprehensive income (loss)

Total stockholders’

Total liabilities and stockholders’

Accumulated other comprehensive income

Total stockholders’ equity

Total liabilities and stockholders’ equity

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

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Year Ended December 31,

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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Comprehensive loss:

Unrealized gains on available-for-sale securities

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

Comprehensive loss

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ARDELYX, INC.

STATEMENTS OF STOCKHOLDERS’

STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

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Balance as of December 31, 2017

Adoption of ASU No.

2014-09 on January 1, 2018

Issuance of common stock under employee stock purchase plan

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Unrealized gains on available-for-sale securities

Issuance of common stock upon underwritten public offering, net of issuance costs

Balance as of December 31, 2018

Adoption of ASU No.

2014-09 on January 1, 2018

Issuance of common stock under employee stock purchase plan

Issuance of common stock for services

Issuance of common stock upon vesting of restricted stock units

Issuance of common stock upon exercise of options

Stock-based compensation

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Issuance of common stock upon underwritten public offering, net of issuance costs

Issuance of common stock upon private placement, net of issuance costs

Balance as of December 31, 2019

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Unrealized gains on available-for-sale securities

Issuance of common stock upon underwritten public offering, net of issuance costs

Issuance of common stock upon private placement, net of issuance costs

Issuance of common stock in At-the-market offering

Balance as of December 31, 2020

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(in thousands)

Year Ended December 31,

Operating activities

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Amortization of deferred compensation for services

Amortization of (premium) discount on investment securities

Amortization of premium on investment securities

Non-cash lease expense

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Investing activities

Proceeds from maturities of investments

Sales and redemptions of investments

Proceeds from maturities and redemptions of investments

Purchases of investments

Purchases of property and equipment

Net cash provided by (used in) investing activities

Net cash (used in) provided by investing activities

Financing activities

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Proceeds from issuance of common stock upon private placement, net of issuance costs

Proceeds from issuance of common stock under stock plans

Issuance of common stock upon exercise of options

Proceeds from loan payable, net of issuance costs

Proceeds from issuance of common stock in At-the-market offering, net of issuance costs

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

Proceeds from (payments for) loan payable, net of issuance costs

Net cash provided by financing activities

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

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Supplementary disclosure of cash flow information:

Income taxes paid

Cash paid for interest

Cash paid for income taxes

Supplementary disclosure of non-cash activities:

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Issuance of derivative in connection with issuance of loan payable

Acquisition of property and equipment included in accounts payable and accrued liabilities

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

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Ardelyx, Inc.

(the “Company,”

“we,”

“us”

or “our”) is a specialized biopharmaceutical company focused on developing first-in-class medicines to improve treatment choices for people with cardiorenal diseases.

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

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

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”).

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

Prior Period Errors

In connection with our review of our financial statements as of and for the six months ended June 30, 2019, we corrected errors related to the accounting for clinical trial accruals that had resulted in an overstatement of research and development expenses during the year ended December 31, 2018.

Specifically, management concluded that the Company’s research and development expenses recorded during the year ended December 31, 2018 had been overstated by $3.6 million and that the Company’s accrued expenses and other current liabilities as of December 31, 2018 had been overstated by the same amount .

Specifically, management concluded that the Company’s research and development expenses recorded during the year ended December 31, 2018 had been overstated by $ 3.6 million and that the Company’s accrued expenses and other current liabilities as of December 31, 2018 had been overstated by the same amount.

Management analyzed the potential impact of these errors in accordance with the U.S.

Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin No.

108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements , and concluded that while the errors were significant to the Company’s financial statements as of and for the six months ended June 30, 2019, a correction of the errors would not have been material to the full year results for 2019 and 2018 nor affect the trend of financial results .

Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin No.

108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, and concluded that while the errors were significant to the Company’s financial statements as of and for the six months ended June 30, 2019, a correction of the errors would not have been material to the full year results for 2019 and 2018 nor affect the trend of financial results.

Accordingly, the Company reduced accrued and other liabilities by $ 3.6 million and recorded a cumulative adjustment of $ 3.6 million in the statement of operations and comprehensive loss to reduce research and development expenses in 2019 .

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Actual results could materially differ from those estimates.

As of December 31, 2019, the Company had cash and cash equivalents and short-term investments of approximately $247.5 million, which include net proceeds of approximately $134.9 million and approximately $20.0 million received in connection with the 2019 Offering and the Private Placement, respectively, as defined and discussed in Note 7.

We believe our current available cash, cash equivalents and short-term investments will be sufficient to fund

our planned expenditures and meet the Company’s obligations for at least 12 months following March 6, 2020, which is the date that the financial statements are being issued.

As of December 31, 2020, the Company had cash and investments of approximately $ 188.6 million, which include net proceeds of approximately $ 21.0 million from the 2020 At-the-Market Offerings, $ 134.9 million from the 2019 Offering, and $ 20.0 million received in connection with the 2019 Private Placement, respectively, as defined and discussed in Note 7.

We believe our current available cash and investments will be sufficient to fund our planned expenditures and meet the Company’s obligations for at least 12 months following March 8, 2021, which is the date that the financial statements are being issued.

Cash and Cash Equivalents

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The Company is exposed to credit risks in the event of default by the counterparties to the extent of the amount recorded in its balance sheet.

Cash, cash equivalents and short-term investments are invested through banks and other financial institutions in the United States.

Accounts Receivable

An allowance for doubtful accounts will be recorded based on a combination of historical experience, aging analysis, and information on specific accounts.

Account balances will be written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

No provision was made for doubtful accounts as of December 31, 2019, 2018 and 2017.

Cash, cash equivalents and short-term investments are invested through banks and other financial institutions in the U.S.

Foreign Currency and Forward Contracts

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The Company primarily conducts its business in U.S.

however, a portion of the Company’s expense and capital activities are transacted in foreign currencies which are subject to exchange rate fluctuations that can affect cash or earnings.

The Company has been in a loss position and therefore its primary objective is to conserve and manage cash.

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The carrying value of long-lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the asset may not be recoverable.

An impairment loss is recognized when the total of estimated future undiscounted cash flows, expected to result from the use of the asset and its eventual disposition, are less than the asset’s carrying amount.

Impairment, if any, would be assessed using discounted cash flows or other appropriate measures of fair value.

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Revenue Recognition

On January 1, 2018 the Company adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No.

2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments (“ASC 606”), on a modified retrospective basis, which resulted in an adjustment to the opening accumulated deficit balance on the adoption date.

On January 1, 2018 the Company adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No.

As a result of the adoption of the new standard, on January 1, 2018, the Company recorded the following:

(i) unbilled 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 Kirin Co., Ltd.

(formerly known as Kyowa Hakko Kirin Co., Ltd, or KHK) (“KKC”), which was subsequently achieved by KKC and collected in February 2019, thereby reducing the unbilled revenue balance to zero, (ii) uncharged license fees under current liabilities of $1.0 million representing the corresponding future payable related to AstraZeneca AB, or AstraZeneca, in accordance with the Company’s termination agreement with AstraZeneca, which, upon KKC achieving the milestone, was reclassified to accounts payable and subsequently paid to AstraZeneca during the second quarter of 2019, and (iii) a related decrease in accumulated deficit of approximately $4.0 million as the new standard permitted revenue from milestones that possess certain criteria to be recognized earlier and also contained different recognition criteria related to milestones than under the previous accounting standard.

(i) unbilled 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 Kirin Co., Ltd.

(formerly known as Kyowa Hakko Kirin Co., Ltd, or KHK) (“KKC”), which was subsequently achieved by KKC and collected in February 2019, thereby reducing the unbilled revenue balance to zero , (ii) uncharged license fees under current liabilities of $ 1.0 million representing the corresponding future payable related to AstraZeneca AB, or AstraZeneca, in accordance with the Company’s termination agreement with AstraZeneca, which, upon KKC achieving the milestone, was reclassified to accounts payable and subsequently paid to AstraZeneca during the second quarter of 2019, and (iii) a related decrease in accumulated deficit of approximately $ 4.0 million as the new standard permitted revenue from milestones that possess certain criteria to be recognized earlier and also contained different recognition criteria related to milestones than under the previous accounting standard.

The Company generates 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 the Company’s 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 the Company of one or more of the following:

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(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 constraints on

variable consideration;

(iii) measurement of the transaction price, including the constraints on variable consideration;

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

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The Company evaluates 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 the Company’s estimated measure of progress are accounted for prospectively as a change in accounting estimate.

The Company recognizes collaboration revenue by measuring the progress toward complete satisfaction of the performance obligation using an input measure.

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The Company 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 the Company’s balance sheets.

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

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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.

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, 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).

If the Company is entitled to additional payments when the customer exercises these options, any payments are recorded in product supply revenue when the customer obtains control of the goods, which is upon delivery.

To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.

Licenses of intellectual property:

If a license granted to a customer to use the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes 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, the Company applies 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.

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.

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

Contract costs:

The Company recognizes as an asset the incremental costs of obtaining a contract with a customer if the costs are expected to be recovered.

The Company has elected a practical expedient wherein it recognizes the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that it otherwise would have recognized is one year or less.

To date, the Company has not incurred any material incremental costs of obtaining a contract with a customer.

Contract modifications:

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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 the Company’s 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, the Company accounts for the contract modification as a termination of the existing contract and a creation of a new contract.

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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 the Company performs its obligations under these arrangements.

Where applicable, amounts are recorded as unbilled revenue when the Company’s right to consideration is unconditional.

The Company does 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.

Research and Development Costs

Research and development costs are charged to expense as incurred and consist of costs incurred to further the Company’s research and development activities and include salaries and related employee benefits, costs associated with clinical trials, costs related to pre-commercialization manufacturing activities such as manufacturing process validation activities and the manufacturing of clinical drug supply, nonclinical research and development activities, regulatory activities, research-related overhead expenses and fees paid to external service providers and contract research and manufacturing organizations that conduct certain research and development activities on behalf of the Company.

Accrued Research and Development Expenses

The Company is required to estimate its accrued expenses at the end of each reporting period.

This process involves reviewing open contracts and purchase orders, communicating with Company personnel to identify services that have been performed on the Company’s 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 costs.

The majority of the Company’s service providers submit 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 the financial statements based on facts and circumstances known to the Company at that time.

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● 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 the Company’s 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.

Stock-Based Compensation

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For employee and nonemployee stock options, the Company determines the grant date fair value of the awards using the Black-Scholes option-pricing model and generally recognizes the fair value as stock-based compensation expense on a straight-line basis over the vesting period of the respective awards.

For restricted stock and performance-based restricted stock, to the extent they are probable, the compensation cost for these awards is based on the closing price of the Company’s common stock on the date of grant and recognized as compensation expense on a straight-line basis over the requisite service period.

Stock-based compensation expense is based on the value of the portion of stock-based payment awards that is ultimately expected to vest.

As such, the Company’s stock-based compensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Derivatives and Hedging Activities

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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 balance sheets.

Right-of-use assets represent the Company’s 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.

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The operating lease right-of-use assets also include any lease payments made and exclude lease incentives.

The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise any such options.

Lease expense is recognized on a straight-line basis over the expected lease term.

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net loss and other comprehensive income (loss).

Other comprehensive income (loss) refers to gains and losses that are recorded as an element of stockholders’

equity but are excluded from net loss.

Other comprehensive income (loss) refers to gains and losses that are recorded as an element of stockholders’ equity but are excluded from net loss.

Net Loss per Share

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New Accounting Pronouncements - Recently Adopted

On January 1, 2019, the Company adopted the FASB’s Accounting Standards Update (“ASU”), No.

2018-07, Compensation –

Stock Compensation , which simplifies the accounting for share-based payments to non-employees by aligning it with the accounting guidance for share-based payments for employees.

This ASU expands the scope of Topic 718, Compensation –

Stock Compensation , which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services.

Consequently, the accounting for share-based payments to non-employees and employees is substantially aligned.

The adoption of this standard did not have a material impact on the Company’s financial statements.

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 (“ASU 2018-11”).

In issuing ASU 2018-11, the FASB permitted 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.

The Company elected the transition method and package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical lease classification, its assessment on whether a contract is or contains a lease, and its initial direct costs for

any leases that exist prior to adoption of the new standard.

The Company 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 expense and other current liabilities and other long-term liabilities in the period of adoption.

Impact of Adoption

The Company, on adopting Topic 842 on January 1, 2019, 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 Company’s balance sheet on January 1, 2019 (in thousands):

Due to Topic 842

Right-of-use assets

Current portion of operating lease liability

Operating lease liability, net of current portion

Accrued expenses and other current liabilities

Other long-term liabilities

As a result of adopting Topic 842 on January 1, 2019, the following financial statement line items in the Company’s balance sheet at December 31, 2019 and the statement of operations and comprehensive loss for the year ended December 31, 2019 were affected compared to as would have been recorded under ASC 840, Leases (Topic 840) , (in thousands):

December 31, 2019

As Reported under Topic 842

Under Topic 840

Effect of Change

Right-of-use assets

Current portion of operating lease liability

Operating lease liability, net of current portion

Accrued expenses and other current liabilities

Other long-term liabilities

Year Ended December 31, 2019

As Reported under Topic 842

Under Topic 840

Effect of Change

Operating expenses:

Research and development related to leases

General and administrative related to leases

New Accounting Pronouncements –

Adoption on January 1, 2020

In December 2019, as part of its initiative to reduce complexity in the accounting standards, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes.

The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

The Company early adopted ASU 2019-12 on April 1, 2020 and this adoption had no material impact on the Company’s financial position or results of operations.

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808):

Clarifying the Interaction between Topic 808 and Topic 606 , which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement

participant is a customer.

For the Company, the amendment is effective January 1, 2020.

Management does not expect that adoption of this guidance will have a significant impact on the Company’s financial statements .

Clarifying the Interaction between Topic 808 and Topic 606 (“ASU 2018-18”), which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under the FASB’s Accounting Standards Codification (“ASC”) No.

606, Revenue from Contracts with Customers (“ASC 606”) when the collaborative arrangement participant is a customer.

The Company adopted ASU 2018-18 on January 1, 2020, and the adoption of this standard did not have a material impact on the Company’s financial statements.

In August 2018, the FASB issued ASU No.

2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement .

ASU 2018-13 considers cost and benefits, and removes, modifies and adds disclosure requirements in Topic 820.

Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which considers cost and benefits and removes, modifies and adds disclosure requirements in Topic 820.

The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty is to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption.

All other amendments 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, including interim periods within that fiscal year and early adoption was permitted.

Management does not expect that adoption of this guidance will have a significant impact on the Company’s financial statements.

New Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12 Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes , which removes certain exceptions for intra period allocations, recognizing deferred taxes for investments and calculating income taxes in interim periods.

This ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group.

The guidance is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

Management is currently assessing the impact of this standard on the Company’s financial statements.

All other amendments were to be applied retrospectively to all periods presented.

The Company adopted ASU 2018-13 on January 1, 2020, and the adoption of this standard did not have a material impact on the Company’s financial statements.

In August 2018, the FASB issued ASU No.

2018-15, Intangibles (Topic 350):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract .

The amendments in this Update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

This ASU requires a customer in a cloud computing arrangement (i.e.

hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred.

ASC 350-40 requires that certain costs incurred during the application development stage be capitalized and other costs incurred during the preliminary project and post-implementation stages be expensed as incurred.

We adopted this ASU on January 1, 2020 and the adoption of this standard did not have a material impact on our financial statements.

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate (“LIBOR”).

The guidance provides certain expedients and exceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging relationships, and other transactions that reference LIBOR as a benchmark rate are modified.

This guidance was effective upon issuance and expires on December 31, 2022.

The Company adopted ASU 2020-04 on April 1, 2020, and the adoption of this standard did not have a material impact on the Company’s financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No.

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Measurement of Credit Losses on Financial Instruments , an amendment which modifies the measurement and recognition of credit losses for most financial assets and certain other instruments.

The amendment updates the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the “incurred loss”

model with an “expected loss”

The amendment updates the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model.

Accordingly, these financial assets will be presented at the net amount expected to be collected.

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Early adoption is permitted.

Management is currently assessing the impact of this standard on the Company’s financial statements .

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Securities classified as cash, cash equivalents and short-term investments as of December 31, 2019 and December 31, 2018 are summarized below (in thousands).

Management is currently assessing the impact of this standard on the Company’s financial statements.

CASH AND INVESTMENTS

Securities classified as cash and investments as of December 31, 2020 and December 31, 2019 are summarized below (in thousands).

Estimated fair value is based on quoted market prices for these investments.

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Money market funds

Corporate bonds

Commercial paper

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Short-term investments:

Corporate bonds

Commercial paper

Asset-backed securities

Corporate bonds

government-sponsored agency bonds

treasury notes

Total short-term investments

Long-term investments:

Corporate bonds

Total cash equivalents and investments

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Commercial paper

Corporate bonds

Total cash and cash equivalents

Short-term investments

treasury securities

Corporate bonds

Commercial paper

Corporate bonds

Asset-backed securities

Total short-term investments

Total cash equivalents and investments

Total cash equivalents and short-term investments

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 income (loss) within stockholders’

equity on the Company’s 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 statement of operations.

All available-for-sale securities held as of December 31, 2019 and 2018, had contractual maturities of less than one year.

The Company’s available-for-sale securities are subject to a periodic impairment review.

As of December 31, 2020, the Company held both short- and long-term investments.

All short-term available-for-sale securities held as of December 31, 2020 and 2019, had contractual maturities of less than one year.

The long-term securities held as of December 31, 2020 had contractual maturities greater 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.

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.

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.

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As of December 31, 2020 and 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.

As of December 31, 2020, the amortized cost and estimated fair value of available-for-sale debt securities by contractual maturity were as follows (in thousands):

Amortized Cost

Due in one year or less

Due in one to two years

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.

participants on the measurement date.

Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

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

Level 1 –

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

Level 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;

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;

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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) :

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):

December 31, 2020

Money market funds

Corporate bonds

Commercial paper

Asset-backed securities

Corporate bonds

government-sponsored agency bonds

treasury notes

Derivative liability for Exit Fee

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Money market funds

treasury securities

Corporate bonds

Commercial paper

Corporate bonds

Asset-backed securities

Derivative liability for Exit Fee

Foreign currency derivative contracts

Where quoted prices are available in an active market, securities are classified as Level 1.

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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, in connection with entering into the Loan Agreement, as defined and discussed in Note 6, the Company entered into an agreement pursuant to 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 for the treatment of hyperphosphatemia in CKD patients on dialysis and (ii) FDA approval of tenapanor for the treatment of patients with irritable bowel syndrome with constipation, or IBS-C, which was obtained on September 12, 2019 when the FDA approved IBSRELA ®

(tenapanor), a 50 mg, twice daily oral pill for the treatment of IBS-C, in adults (the “Exit Fee Agreement”) .

Notwithstanding the prepayment or termination of the Term Loan, the Company’s obligation to pay the Exit Fee will expire on May 16, 2028.

The Company classifies corporate bonds, commercial paper, asset-backed

securities and foreign currency derivative contracts as Level 2.

In certain cases, where there is limited activity or less transparency around inputs to valuation, securities or derivative liabilities such as the Exit Fee, as defined and discussed in Note 6, are classified as Level 3.

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 December 31, 2020 and December 31, 2019, due to their short-term nature.

Fair Value of Debt

The interest rate of the Company’s term loan facility approximates the rate at which the Company could obtain alternative financing.

Therefore, the carrying amount of the term loan facility approximated its fair value at December 31, 2020 and 2019.

DERIVATIVE LIABILITY

In May 2018, in connection with entering into the Loan Agreement, as defined and discussed in Note 6, the Company entered into an agreement pursuant to 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 for the treatment of hyperphosphatemia in CKD patients on dialysis and (ii) FDA approval of tenapanor for the treatment of patients with irritable bowel syndrome with constipation, or IBS-C, which was obtained on September 12, 2019 when the FDA approved IBSRELA® (tenapanor), a 50 mg, twice daily oral pill for the treatment of IBS-C, in adults (the “Exit Fee Agreement”).

Notwithstanding the prepayment or termination of the Term Loan, the Company’s obligation to pay the Exit Fee will expire on May 16, 2028.

The Company concluded that the Exit Fee is a freestanding derivative which should be accounted for at fair value on a recurring basis.

The estimated fair value of the Exit Fee is recorded as a derivative liability and included in accrued expense and other current liabilities on the accompanying balance sheets.

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.

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, adjusted with current LIBOR.

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 statements of operations and were as follows for the year ended December 31, 2019 (in thousands):

Estimated Fair Value

of Derivative Liability

Balance of Level 3 Liabilities at December 31, 2017

Initial estimated fair value of derivative liability for Exit Fee in May 2018

Change in estimated fair value of derivative liability for Exit Fee

Balance of Level 3 Liabilities at December 31, 2018

Change in estimated fair value of derivative liability for Exit Fee

Balance of Level 3 Liabilities at December 31, 2019

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 December 31, 2019 and December 31, 2018, due to their short-term nature.

DERIVATIVE FINANCIAL INSTRUMENTS

Foreign Currency Exchange Rate Exposure

The Company has used 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, or CHF, and the euro, or EUR.

The derivative instruments the Company uses to hedge this exposure are not designated as cash flow hedges, and as a result, changes in the fair value of the derivative instruments are recorded in other income (expense), net, in the Company's 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.

In March 2019, the Company settled its forward foreign currency exchange contract in the aggregate notional amount of CHF 3.3 million.

As of December 31, 2019, the Company has no open forward foreign currency exchange contracts.

The net loss associated with the Company's derivative instruments of $60,558 and $124,194 for the years ended December 31, 2019 and 2018, respectively, is recognized in other income (expense), net, in the statement of operations and comprehensive loss.

There were no expenses related to the Company’s derivative instruments during the year ended December 31, 2017.

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 ), not to exceed 100 %, in the probability of occurrence would result in a fair value fluctuation of no more than $ 0.1 million.

Fair value of Exit Fee derivative liability at January 1

Change in estimated fair value of derivative liability

Fair value of Exit Fee derivative liability at December 31

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.

and Western Alliance Bank (“the Lenders”).

The Loan Agreement provides for a $ 50.0 million term loan facility with

a maturity date of November 1, 2022 (”the Term Loan”).

The full amount of the Tern 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 costs.

On October 9, 2020, the Company and the Lenders entered into an amendment to the Loan Agreement (“the 2020 Amendment”) to extend the date through which the Company is permitted to make interest-only payments on the Term Loan by twelve months to December 1, 2021 subject to the repayment terms noted below.

Borrowings under the Term Loan bear interest at a floating per annum rate equal to 7.45 % plus the one-month London Inter-bank Offered Rate, or LIBOR.

The Company is permitted to make interest-only payments on the Term Loan through June 1, 2020, unless 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, in which case the Company is permitted to make interest-only payments on the Term Loan through December 1, 2020.

On December 3, 2019, the Company reported positive topline results for PHREEDOM, a long-term Phase 3 study evaluating the efficacy

and safety of tenapanor as monotherapy for the treatment of hyperphosphatemia in patients with CKD on dialysis.

The Lenders are in agreement that these positive data from the Phase 3 PHREEDOM study achieve the “Phase 3 Endpoint”

required by the Loan Agreement to extend the interest only period by six months to December 1, 2020 .

The Company was permitted to make interest-only payments on the Term Loan through June 1, 2020, until it achieved 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, in which case the Company would have been permitted to make interest-only payments on the Term Loan through December 1, 2020.

On December 3, 2019, the Company reported positive topline results for PHREEDOM, a long-term Phase 3 study evaluating the efficacy and safety of tenapanor as monotherapy for the treatment of hyperphosphatemia in patients with CKD on dialysis.

The Lenders were in agreement that these positive data from the Phase 3 PHREEDOM study achieve the “Phase 3 Endpoint” required by the Term Loan to extend the interest only period by six months to December 1, 2020.

Subsequent to the 2020 Amendment, the interest only period was extended an additional twelve months to December 1, 2021.

Accordingly, beginning on December 1, 2021 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.

If however, either the FDA does not approve the Company’s New Drug Application for tenapanor for control of serum phosphorus in adult CKD on dialysis on or before May 31, 2021 or the FDA issues a complete response letter (“CRL”) for tenapanor for the control of serum phosphorus in adult CKD on dialysis, then the Company is to begin principal payments on the earlier of June 1, 2021 or the first day of the month immediately following the date that the FDA issues a CRL to the Company.

The Company paid a closing fee of $ 0.5 million, upon the closing of the Term Loan and $ 0.1 million upon closing of the 2020 Amendment.

Under the Term Loan, the Company was 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.

Under the 2020 Amendment, the final fee was increased to 4.95 % of the Term Loan.

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 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 the Company’s intellectual property and certain other customary exclusions.

Additionally, in connection with the Term Loan, the Company entered into the Exit Fee Agreement, as discussed in Note 4.

The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants.

The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants, including restrictions on payment of dividends for our common stock.

As of December 31, 2020, 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 its 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 December 31, 2019, to the Company’s knowledge, there were no facts or circumstances in existence that would give rise to an event of default.

As of December 31, 2019, the Company’s future debt payment obligations towards the principal and final fee, excluding interest payments and the Exit Fee are as follows (in thousands):

Total principal and final fee payments

As of December 31, 2020, to the Company’s knowledge, there were no facts or circumstances in existence that would give rise to an event of default.

As of December 31, 2020, the Company’s future debt payment obligations towards the Term Loan principal and final fee, excluding interest payments and the Exit Fee are as follows (in thousands):

Total repayment obligations

Unamortized discount and debt issuance costs

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Loan payable, net of current portion

STOCKHOLDERS’

On December 9, 2019, the Company 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, the Company 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 the Company granted to the 2019 Underwriters a 30-day option to purchase up to an additional 3,000,000 shares of the Company’s common stock, or the 2019 Overallotment.

The Company completed the sale of 23,000,000 shares, inclusive of the 2019 Overallotment, to the 2019 Underwriters and that sale resulted in the receipt by the Company 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, the Company and KKC entered into a stock purchase agreement, pursuant to which the Company sold an aggregate of 2,873,563 shares of its common stock at $6.96 per share for net proceeds of approximately $20.0 million, or the Private Placement.

STOCKHOLDERS’ EQUITY

In July 2020, the Company filed a Form S-3 registration statement, which became effective in August 2020, containing (i) a base prospectus for the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $ 250.0 million of the Company’s common stock, preferred stock, debt securities, warrants and/or units, from time to time in one or more offerings;

and (ii) a prospectus supplement for the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $ 100.0 million of its common stock that may be issued and sold, from time to time, under an Open Market Sales Agreement with Jefferies LLC, as sales agent, deemed to be “at the market offerings.” As of December 31, 2020, we had sold 3.3 million shares of our common stock for aggregate gross proceeds of $ 21.7 million at a weighted average price of $ 6.65 per share under the Open Market Sales Agreement.

From the period of January 2, 2021 through February 28, 2021, we sold an additional 4.9 million shares of our common stock for aggregate gross proceeds of $ 35.0 million at a weighted average price of $ 7.09 per share.

In aggregate during the life of the Open Market Sales Agreement, we have sold 8.2 million shares of our common stock for aggregate gross proceeds of $ 56.7 million at a weighted average sales price of approximately $ 6.91 per share .

Pursuant to the Open Market Sales Agreement, Jefferies, as sales agent, receives a commission of up to 3.0 % of the gross sales price for shares of common stock sold under the Open Market Sales Agreement.

On December 9, 2019, the Company completed an underwritten public offering of 20.0 million 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, the Company 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 the Company granted to the 2019 Underwriters a 30-day option to purchase up to an additional 3.0 million shares of the Company’s common stock, or the 2019 Overallotment.

The Company completed the sale of 23.0 million shares, inclusive of the 2019 Overallotment, to the 2019 Underwriters and that sale resulted in the receipt by the Company 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, the Company and KKC entered into a stock purchase agreement, pursuant to which the Company sold an aggregate of approximately 2.9 million shares of its common stock at $ 6.96 per share for net proceeds of approximately $ 20.0 million, or the Private Placement.

The Private Placement closed on November 25, 2019.

On May 25, 2018, the Company 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, the Company 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 the Company granted to the 2018 Underwriters a 30-day option to purchase up to an additional 1,875,000 shares of the Company’s common stock, or the 2018 Overallotment.

The Company completed the sale of 14,375,000 shares, inclusive of the 2018 Overallotment, to the 2018 Underwriters, and that sale resulted in the receipt by the Company 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 25, 2018, the Company completed an underwritten public offering of 12.5 million 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, the Company entered into an underwriting agreement, or the 2018 Underwriting Agreement, with Jefferies LLC and SVB Leerink (formerly known as Leerink Partners LLC) (together the “2018 Underwriters”) pursuant to which the Company granted to the 2018 Underwriters a 30-day option to purchase up to an additional 1.9 million shares of the Company’s common stock, or the 2018 Overallotment.

The Company completed the sale of 14.4 million shares, inclusive of the 2018 Overallotment, to the 2018 Underwriters, and that sale resulted in the receipt by the Company 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.

In June 2015, the Company sold and issued warrants to purchase 2.2 million shares of common stock.

The purchase price for the warrants was $ 0.125 per warrant.

The warrants were exercisable for an exercise price of $ 13.91 per share at any time prior to the earlier of (i) 5 years from the date of issuance or (ii) certain changes in control of the Company.

In June 2020, the warrants expired with none of the warrants exercised.

EQUITY INCENTIVE PLANS

The Company granted options under its 2008 Stock Incentive Plan (the “2008 Plan”) until June 2014 when it was terminated as to future awards, although it continues to govern the terms of options that remain outstanding under the 2008 Plan.

The 2008 Plan provided for the granting of incentive and non-qualified stock options, and stock purchase rights to employees, directors and consultants at the discretion of the Board of Directors.

Stock options granted generally vest over a period of four years from the date of grant.

In connection with the Board of Directors and stockholders’

approval of the 2014 Plan, all remaining shares available for future award under the 2008 Plan were transferred to 2014 Plan, and the 2008 Plan was terminated.

The 2014 Equity Incentive Award Plan (the “2014 Plan”) became effective on June 18, 2014.

Under the 2014 Plan, 1,419,328 shares of common stock were initially reserved for issuance pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights, or SARs, restricted stock awards, service-based restricted stock unit (“RSU”) awards, performance-based restricted stock unit (“PRSU”) awards, deferred stock awards, deferred stock unit awards, dividend equivalent awards, stock payment awards and performance awards.

In addition, 35,221 shares that had been available for future awards under the 2008 Plan as of June 18, 2014, were added to the initial reserve available under the 2014 Plan, bringing the total reserve upon the effective date of the 2014 Plan to 1,454,549.

The number of shares initially reserved for issuance or transfer pursuant to awards under the 2014 Plan will be increased by (i) the number of shares represented by awards outstanding under 2008 Plan on June 18, 2014, that are either forfeited or lapse unexercised or that are repurchased for the original purchase price thereof, up to a maximum of 1,153,279 shares, and (ii) if approved by the Administrator of the 2014 Plan, an annual increase on the first day of each fiscal year ending in 2024 equal to the lesser of (A) four percent (4.0%) of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (B) such smaller number of shares of stock as determined by our board of directors;

provided, however, that no more than 10,683,053 shares of stock may be issued upon the exercise of incentive stock options.

In November 2016, the Company’s board of directors approved the 2016 Employment Commencement Incentive Plan (the “Inducement Plan”) under which 1,000,000 shares were reserved.

As of December 31, 2019, no shares of the Company’s common stock were subject to inducement grants that were issued pursuant to the Inducement Plan.

In connection with the Board of Directors and stockholders’ approval of the 2014 Plan, all remaining shares available for future award under the 2008 Plan were transferred to 2014 Plan, and the 2008 Plan was terminated.

The 2014 Equity Incentive Award Plan (the “2014 Plan”) became effective on June 18, 2014.

In addition, 35 thousand shares that had been available for future awards under the 2008 Plan as of June 18, 2014, were added to the initial reserve available under the 2014 Plan, bringing the total reserve upon the effective date of the 2014 Plan to 1.5 million shares.

The number of shares initially reserved for issuance or transfer pursuant to awards under the 2014 Plan will be increased by (i) the number of shares represented by awards outstanding under 2008 Plan on June 18, 2014, that are either forfeited or lapse unexercised or that are repurchased for the original purchase price thereof, up to a maximum of 1.2 million shares, and (ii) if approved by the Administrator of the 2014 Plan, an annual increase on the first day of each fiscal year ending in 2024 equal to the lesser of (A) four percent ( 4.0 %) of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (B) such smaller number of shares of stock as determined by our board of directors;

provided, however, that no more than 10.7 million shares of stock may be issued upon the exercise of incentive stock options.

In November 2016, the Company’s board of directors approved the 2016 Employment Commencement Incentive Plan (the “Inducement Plan”) under which 1.0 million shares were reserved.

As of December 31, 2020, 0.4 million shares of the Company’s common stock were subject to inducement grants that were issued pursuant to the Inducement Plan.

Stock Plan Activity

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Options granted

( 3,727,947 )

Options exercised

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Exercisable at December 31, 2020

The aggregate intrinsic value represents the difference between the total pre-tax value (i.e., the difference between the Company’s stock price and the exercise price) of stock options outstanding as of December 31, 2019, based on the Company’s common stock closing price of $7.51 per share, which would have been received by the option holders had all their in-the-money options been exercised as of that date.

The intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017, was $0.4 million, zero, and $0.3 million, respectively.

The aggregate intrinsic value represents the difference between the total pre-tax value (i.e., the difference between the Company’s stock price and the exercise price) of stock options outstanding as of December 31, 2020, based on the Company’s common stock closing price of $ 6.47 per share, which would have been received by the option holders had all their in-the-money options been exercised as of that date.

The intrinsic value of options exercised during the years ended December 31, 2020, 2019 and 2018, was $ 2.7 million, $ 0.4 million, and zero , respectively.

The weighted-average grant-date estimated fair value of options granted during the years ended December 31, 2020, 2019 and 2018 was $ 4.82 , $ 1.79 and $ 4.29 per share, respectively.

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Dividend yield

Expected Term —The Company has limited historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock-option grants.

As such, the expected term was 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, the Company has used the historic volatility of its own stock over the retrospective period corresponding to the expected remaining term of the options, or the period since its shares were first quoted on The Nasdaq Global Market, if that is shorter, to compute its 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 the Company’s stock option grants.

Dividend Yield —To date, the Company has not declared or paid any cash dividends and does not have any plans to do so in the future.

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 the Company’s stock option grants.

Dividend Yield —To date, the Company has not declared or paid any cash dividends and does not have any plans to do so in the future.

Therefore, the Company used an expected dividend yield of zero.

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Non-vested restricted stock units at December 31, 2020

RSUs and PRSUs are generally subject to forfeiture if employment terminates prior to the release of vesting restrictions.

The related compensation expense, which is based on the grant date fair value of the Company’s common stock multiplied by the number of units granted, is recognized ratably over the period during which the vesting restrictions lapse.

In January 2017, the Company granted 161,865 PRSUs to certain employees that vested upon the achievement of specified performance conditions, subject to the employees’

continued service relationship with the Company through the date of achievement, of which 125,895 PRSUs vested in November 2018.

None of these PRSUs vested during the year ended December 31, 2017.

The related compensation cost was recognized as an expense over the estimated vesting period ratably after achievement of the milestone was deemed probable.

The expense recognized for these awards was based on the grant date fair value of the Company’s common stock multiplied by the number of units granted.

The Company recognized zero, $0.6 million and $1.0 million of related expense during the year ended December 31, 2019, 2018 and 2017, respectively.

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 December 31, 2019, 849,757 of these PRSUs were outstanding and none vested.

Based on the evaluation of the performance conditions at December 31, 2019, the Company recorded stock-based compensation expense of $2.4 million for the year ended December 31, 2019.

Stock-based compensation expense recorded related to these PRSUs were zero for the year ended December 31, 2018.

The related compensation cost was recognized as an expense over the estimated vesting period ratably when achievement of the milestone was considered probable.

The expense recognized for these awards is based on the grant date fair value of the Company’s common stock multiplied by the number of units granted .

With respect to RSUs, we recognize expense over the estimated vesting period ratably, contingent on continued service.

The Company recognized $0.3 million, $0.9 million and $0.9 million of related expense during the year ended December 31, 2019, 2018 and 2017, respectively.

The total estimated fair value of RSUs vested during the years ended December 31, 2019, 2018 and 2017 was $0.2 million, $0.6 million and $0.4 million, respectively.

In July 2018, the Company granted 0.9 million 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.

During 2020, the Company granted an additional 30 thousand PRSUs subject to the same performance conditions.

All 0.9 million of these PRSUs vested in September 2020.

None of these PRSUs vested during the years ended December 31, 2019 or 2018.

The Company recognized $ 1.2 million and zero of related expense during the year ended December 31, 2020 and 2019, respectively.

The Company recognized $ 30 thousand, $ 0.3 million and $ 0.9 million of RSU related expense during the year ended December 31, 2020, 2019 and 2018, respectively.

The total estimated fair value of RSUs vested during the years ended December 31, 2020, 2019 and 2018 was zero , $ 0.2 million and $ 0.6 million, respectively.

Issuance of Common Stock for Services

During the years ended December 31, 2019, 2018 and 2017, the Company issued 113,136, 75,183 and 46,858 shares , respectively, of common stock to members of the board of directors who elected to receive stock in lieu of their cash fees under the Company’s Non-Employee Director Compensation Program.

The shares issued during the years ended December 31, 2019, 2018 and 2017 were valued at $0.3 million, $0.3 million and $0.2 million, respectively, based on the fair value of the common stock on the date of grant.

During the years ended December 31, 2020, 2019 and 2018, the Company issued approximately 42 thousand, 113 thousand and 75 thousand shares, respectively, of common stock to members of the board of directors who elected to receive stock in lieu of their cash fees under the Company’s Non-Employee Director Compensation Program.

The shares issued during the years ended December 31, 2020, 2019 and 2018 were valued at $ 0.3 million for each year, respectively, based on the fair value of the common stock on the date of grant.

Employee Stock Purchase Plan

The Company adopted the 2014 Employee Stock Purchase Plan (“ESPP”) and initially reserved 202,762 shares of common stock as of its effective date of June 18, 2014.

The Company adopted the 2014 Employee Stock Purchase Plan (“ESPP”) and initially reserved approximately 0.2 million shares of common stock as of its effective date of June 18, 2014.

If approved by the Administrator of the ESPP, on the first day of each calendar year, ending in 2024, the number of shares in the reserve will increase by an amount equal to the lesser of (i) one percent ( 1.0 %) of the shares of common stock outstanding on the last day of the immediately preceding fiscal year and (ii) such number of shares of common stock as determined by the board of directors;

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Stock-based Compensation

Total stock-based compensation recognized was as follows:

Total stock-based compensation recognized was as follows (in thousands):

Year Ended December 31,

(in thousands)

Research and development

General and administrative

At December 31, 2019, the Company had total unrecognized stock-based compensation expense, net of estimated forfeitures, of the following:

At December 31, 2020, the Company had total unrecognized stock-based compensation expense, net of estimated forfeitures, of the following (dollars in thousands):

At December 31, 2020

Unrecognized Compensation Expense

Average Vesting Period

(in thousands)

Stock options grants

Offering of Common Stock and Warrants

In June 2015, the Company sold and issued an aggregate of 7,242,992 shares of its common stock and warrants to purchase 2,172,899 shares of common stock for aggregate gross proceeds of approximately $77.8 million or net proceeds, after deducting issuance costs, of approximately $74.3 million.

The purchase price for the common stock was $10.70 per share and the purchase price for the warrants was $0.125 per warrant.

The warrants are exercisable for an exercise price of $13.91 per share at any time prior to the earlier of (i) 5 years from the date of issuance or (ii) certain changes in control of the Company.

The Company had determined that the warrants should be classified as equity.

In July 2015, the Company filed a registration statement with the SEC with respect to the common stock and warrants.

Other than with respect to warrants issued to holders affiliated with New Enterprise Associates, the warrants contain limitations that prevent each holder of warrants from acquiring shares upon exercise of the warrants that would cause the number of shares beneficially owned by it and its affiliates to exceed 9.99% of the total number of shares of the Company’s common stock then issued and outstanding.

In addition, upon certain changes in control of the Company, each holder of a warrant can elect to receive, subject to certain limitations and assumptions, securities in a successor entity.

None of the warrants issued in June 2015 have been exercised including during each of the years ended December 31, 2019, 2018 and 2017.

Average Remaining Vesting Period (Years)

Stock options grant

PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

(in thousands)

Property and equipment consist of the following (in thousands):

Laboratory equipment

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

Accrued clinical and non-clinical expenses

Accrued clinical expenses

Accrued contract manufacturing expenses

Derivative liability for exit fee

Accrued regulatory expenses

Accrued sales and marketing expenses

Accrued professional and consulting services

Foreign currency derivative contract

The Company has obtained the right of use for office space assets under two operating lease agreements.

Accrued regulatory services

The Company has recorded right-of-use operating lease assets under three 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, California, under a lease agreement entered into in September 2008 that was amended in December 2012 to extend the lease agreement to September 2016.

The Company has recorded a right-of-use operating lease asset located in Fremont, California under a lease agreement entered into in September 2008 that was amended in December 2012 to extend the lease agreement to September 2016.

In September 2014, the Company signed the second amendment to its facility lease agreement to add space and to extend the lease term through September 2019.

In May 2016, the Company signed a third amendment to its facility lease agreement in Fremont, California to add space and to extend the lease term through September 2021 (the “Third Amendment”).

The office space consists of 72,500 square feet, that includes an additional 10,716 square feet added in September 2019, with 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 at the higher of (i) a 3% annual escalation of the then-current base rent and (ii) the then-current fair market value for comparable premises , by giving written notice of its election to exercise such option at least 12 months but not more than 18 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 exercise of the option is uncertain and therefore deemed not probable.

The Company also obtained the right of use of 3,520 square feet of office space located in Waltham, Massachusetts, in October 2018 that terminates on September 30, 2021.

All of the Company’s leases are operating leases.

In May 2016, the Company signed a third amendment to its facility lease agreement in Fremont, California to add space and to extend the lease term through September 2021 (the “Third Amendment”).

The office space consists of 72,500 square feet, that includes an additional 10,716 square feet added in September 2019, with the entire lease terminating in September 2021.

The Company will not exercise its option to renew the lease at our current Fremont location and expect to enter into a new facility lease in Fremont, California during the first quarter of 2021.

The Company has recorded a right-of-use operating lease asset located in Waltham, Massachusetts under a lease agreement entered into in October 2018.

The office space consists of 3,520 square feet with the lease terminating in September 2021.

We have not renewed the lease at our current Waltham, Massachusetts facility.

During December 2020, we entered into a new lease agreement for a different location in Waltham, Massachusetts which has an expected lease commencement date in April 2021.

The Company has recorded a right-of-use operating lease asset located in Milwaukee, Wisconsin under a lease agreement entered into in October 2020 with a lease commencement date in November 2020.

The office space consists of 4,768 square feet with the lease terminating in February 2026.

The Company has an option to extend the lease term by one five-year period.

This option to extend the lease term has not been included in the calculation since currently the exercise of the option is uncertain and therefore deemed not probable.

The Company recorded a $ 0.4 million right-of use asset and lease liability for the Milwaukee lease upon commencement of the lease.

All of the Company’s leases are operating leases and each contain customary rent escalation clauses.

Certain of the leases have both lease and non-lease components.

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As of December 31, 2020, the weighted average discount rate used for the calculations was 11.7 % and the weighted average remaining lease term was 1.5 years.

The following table provides additional details of the leases presented in the balance sheets (in thousands except remaining life and discount rate):

December 31, 2019

The following table provides additional details of the leases presented in the balance sheets (dollars in thousands):

Right-of-use assets

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Operating lease liability, net of current portion

Total liabilities

Weighted-average remaining life

Weighted-average remaining life (years)

Weighted-average discount rate

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

December 31, 2019

Operating lease cost

Year Ended December 31,

Operating lease expense

Cash paid for operating lease

The following table summarizes the Company’s undiscounted cash payment obligations for its operating lease liabilities as of December 30, 2019 (in thousands):

Years Ending December 31,

The following table summarizes the Company’s undiscounted cash payment obligations for its operating lease liabilities as of December 31, 2020 (in thousands):

Ending December 31,

Total undiscounted operating lease payments

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(2019 KKC Agreement)

In November 2019, the Company entered into a research collaboration and option agreement with KKC, or the 2019 KKC Agreement, for the research to identify two pre-clinical study-ready compounds that are ready for designation as development compounds, with one compound inhibiting the first undisclosed target, or Program 1, and a second inhibiting the second undisclosed target, or Program 2.

Pursuant to the 2019 KKC Agreement, upon completion of the research and designation by the research steering committee of one or more development candidates, or DCs, KKC, has the right to execute one or more separate collaborative agreements relating to the development and commercialization of one or both DCs in certain specified territories.

Under the terms of the 2019 KKC Agreement, KKC agreed to pay the Company a non-refundable, non-creditable upfront fee of $10.0 million, which is payable as follows:

the first installment of $5.0 million within 30 days of the

Effective Date, and the second installment of $5.0 million on the first anniversary of the Effective Date, unless the 2019 KKC Agreement is earlier terminated by KKC due to material breach by the Company.

The term of the 2019 KKC Agreement commenced on November 11, 2019, or the Effective Date, and ends on the earliest of:

In November 2019, the Company entered into a research collaboration and option agreement with KKC (“the 2019 KKC Agreement”), to undergo research to identify two pre-clinical study-ready compounds for designation as development compounds, with one compound inhibiting the first undisclosed target (“Program 1”) and a second inhibiting the second undisclosed target (“Program 2”).

Pursuant to the 2019 KKC Agreement, upon completion of the research and designation by the research steering committee of one or more development candidates (“DCs”), KKC has the right to execute one or more separate collaborative agreements relating to the development and commercialization of one or both DCs in certain specified territories.

Under the terms of the 2019 KKC Agreement, KKC agreed to pay the Company a non-refundable, non-creditable upfront fee of $ 10.0 million, which was payable as follows:

the first installment of $ 5.0 million within 30 days of the Effective Date, and the second installment of $ 5.0 million on the first anniversary of the Effective Date, unless the 2019 KKC Agreement was earlier terminated by KKC due to material breach by the Company.

The term of the 2019 KKC Agreement commenced on November 11, 2019 (“the Effective Date”) and ends on the earliest of:

(a) two years following the Effective Date, or (b) the nomination of a program DC for both programs, (c) or the nomination of one program DC and the decision by the parties to cease research for the other program, (d) or the decision by the parties to cease research for both programs.

The Company assessed the 2019 KKC Agreement in accordance with ASC 606 and concluded that the contract’s counterparty, KKC, is a customer.

Management also considered the modification guidance prescribed in ASC 606 and concluded that the 2019 KKC Agreement should be accounted for as a separate contract from the 2017 KKC Agreement, as defined and discussed below.

The Company identified various promises in the 2019 KKC Agreement, including the grant of an initial research license, the Program 1 research, the Program 2 research, the right to obtain certain development and commercialization rights with Program 1 in certain territories and the right to obtain development and commercialization rights with Program 2 in certain territories, and participation in a joint steering committee, or JSC, and determined that KKC could not benefit from either of the research programs without the research license and participation in the JSC.

The Company identified various promises in the 2019 KKC Agreement, including the grant of an initial research license, the Program 1 research, the Program 2 research, the right to obtain certain development and commercialization rights with Program 1 in certain territories and the right to obtain development and commercialization rights with Program 2 in certain territories, and participation in a joint steering committee (“the JSC”) and determined that KKC could not benefit from either of the research programs without the research license and participation in the JSC.

As such, the combined license, research programs and participation in the JSC were deemed to be the highest level of goods and services that can be deemed distinct for each of the Program 1 research and Program 2 research.

The Company concluded that the options to obtain additional development and commercialization rights that are exercisable by KKC under certain circumstances are not performance obligations of the contract at inception because the option fees reflect the standalone selling price of the options, and therefore, the options are not considered to be material rights.

At the outset of the 2019 KKC Agreement, the Company determined that the initial transaction price is $10.0 million and that revenue associated with the combined performance obligations will be recognized as services are provided using a input method.

Since transfer of control occurs over time, in management’s judgment this input method is the best measure of progress towards satisfying the performance obligations and reflects a faithful depiction of the transfer of goods and services .

Revenue will be recognized over the Program 1 and Program 2 research periods, which are currently expected to extend through the end of 2021.

At the outset of the 2019 KKC Agreement, the Company determined that the initial transaction price is $ 10.0 million and that revenue associated with the combined performance obligations will be recognized as services are provided using the input method.

Revenue will be recognized over the Program 1 and Program 2 research periods.

Management will re-evaluate the estimates related to the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur and adjust the timing of revenue recognition as necessary.

During the year ended December 31, 2019, the Company recognized $0.5 million as revenue under the 2019 KKC Agreement in the statement of operations and comprehensive loss.

The aggregate amount of the transaction price allocated to the Company’s partially unsatisfied performance obligations as of December 31, 2019 was $9.5 million, of which $4.5 million is presented in the balance sheet as deferred revenue.

As of December 31, 2019, the Company expects to recognize the remaining transaction price allocated to the Company’s partially unsatisfied performance obligations over the remaining research terms, which, as noted above, are currently expected to extend through the end of 2021.

During the years ended December 31, 2020 and 2019, the Company recognized $ 5.4 million and $ 0.5 million, respectively, as revenue under the 2019 KKC Agreement in the statement of operations and comprehensive loss.

The aggregate amount of the transaction price allocated to the Company’s partially unsatisfied performance obligations as of December 31, 2019 was $ 9.5 million, of which $ 4.5 million was presented in the balance sheet as deferred revenue for the respective period.

As of December 31, 2020, the Company expects to recognize the remaining transaction price allocated to the Company’s partially unsatisfied performance obligations over the remaining research terms, which are currently expected to extend through the end of 2021.

Xuanzhu (HK) Biopharmaceutical Limited, or XuanZhu

In November 2019, the Company entered into a license agreement with XuanZhu, or the XuanZhu Agreement, for a license to certain specific patent and patent applications.

In November 2019, the Company entered into a license agreement with XuanZhu (“the XuanZhu Agreement for a license to certain specific patent and patent applications.

The Company assessed these arrangements in accordance with ASC 606 and concluded that the contract counterparty, XuanZhu, is a customer.

Under the terms of the XuanZhu Agreement, the Company recognized $1.5 million in license fees when the agreement was executed, of which, $750,000 was received upfront in November 2019 and achievement for the second $750,000 payment was determined to be not materially at risk and probable of achievement and it was included in the transaction price and the amount was not probable of revenue reversal .

Based on the Company’s assessment, it identified that it has one combined performance obligation, which is the license and the specific patent grant.

Under the terms of the XuanZhu Agreement, the Company recognized $ 1.5 million in license fees when the agreement was executed, of which, $ 0.8 million was received upfront in November 2019 and achievement for the second $ 0.8 million payment was determined to be not materially at risk and probable of achievement and it was included in the transaction price and the amount was not probable of revenue reversal.

Based on the Company’s assessment, it identified that it has one combined performance obligation, which is the license and the specific patent grant.

In addition to the license fee of $ 1.5 million, the Company may be entitled to receive milestone payments.

The variable consideration related to the remaining milestone payments has not been included in the transaction price as these were fully constrained at December 31, 2019.

For the year ended December 31, 2019, $1.5 million of license revenue was recorded with no cost of revenue related to the XuanZhu Agreement.

For the years ended December 31, 2020 and 2019, zero and $ 1.5 million, respectively, of license revenue was recorded with no cost of revenue related to the XuanZhu Agreement.

2017 KKC Agreement

3 unchanged sentences

Pursuant to the License Agreement, KKC is responsible for all of the development and commercialization costs for tenapanor in treatment of cardiorenal diseases and conditions, excluding cancer in Japan.

Under the 2017 KKC Agreement, the Company is responsible for supplying the tenapanor drug product for KKC’s use in development and during commercialization until KKC has assumed such responsibility.

Additionally, the Company is responsible for supplying the tenapanor drug substance for KKC’s use in development and commercialization throughout the term of the 2017 KKC Agreement, provided that KKC may exercise an option to manufacture the tenapanor drug substance under certain conditions

The Company assessed these arrangements in accordance with ASC 606 and concluded that the contract counterparty, KKC, is a customer.

Under the terms of the 2017 KKC 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 unbilled revenue under current assets of $ 5.0 million and an increase in uncharged license fees under current liabilities of $ 1.0 million related to the first milestone under the 2017 KKC Agreement that KKC 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 ASC 606 prior to January 1, 2018.

On KKC’s achievement of the milestone in February 2019, the balance related to unbilled revenue was adjusted to zero.

On KKC’s achievement of the milestone in February 2019, the balance related to unbilled revenue was adjusted to zero .

Correspondingly, the $ 1.0 million balance related to uncharged license fees that the Company owed to AstraZeneca was reclassified to accounts payable during the first quarter of 2019, and subsequently paid to AstraZeneca during 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, or $78.3 million at the currency exchange rate on December 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.

The variable consideration related to the remaining development milestone payments has not been included in the transaction price as these were fully constrained at December 31, 2019.

For the years ended December 31, 2019 and 2018, $0.3 million each of other revenue was recorded for manufacturing supply of tenapanor and other materials to KKC for its product development and clinical trials in Japan, in accordance with the Company’s agreement with KKC, and for each period, negligible cost of revenue was recorded pursuant to the AstraZeneca Termination Agreement.

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, 8.5 billion Japanese yen for commercialization milestones, or approximately $ 82.4 million at the currency exchange rate on December 31, 2020, 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.

The variable consideration related to the remaining development milestone payments has not been included in the transaction price as these were fully constrained at December 31, 2020 and 2019.

For the years ended December 31, 2020, 2019 and 2018, $ 1.4 million, $ 0.3 million, and $ 0.3 million, respectively, of product supply revenue was recorded for manufacturing supply of tenapanor and other materials to KKC for its product development and clinical trials in Japan, in accordance with the Company’s agreement with KKC, and for each period, negligible cost of revenue was recorded pursuant to the AstraZeneca Termination Agreement.

Shanghai Fosun Pharmaceutical Industrial Development Co.

Ltd., or Fosun Pharma

, 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.

1 unchanged sentence

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.

In addition, the Company may be entitled to additional development and commercialization milestones of up to $ 110.0 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 %.

The variable consideration related to the remaining development milestone payments has not been included in the transaction price as these were fully constrained at December 31, 2019.

For the year ended December 31, 2019, $3.0 million revenue was recorded towards achievement of a milestone related to the Fosun Agreement, and for the year ended December 31, 2018, there was no revenue recorded.

Knight Therapeutics, Inc., or Knight

For the year ended December 31, 2019, $ 3.0 million revenue was recorded towards achievement of a milestone related to the Fosun Agreement, and for the years ended December 31, 2020 and 2018, no revenue was recorded.

Knight Therapeutics, Inc.

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 ASC 606 and concluded that the contract counterparty, Knight, is a customer.

Under the terms of the agreement, the Company is eligible to receive up to CAD 25.0 million in total payments, or $ 19.6 million at the currency exchange rate on December 31, 2020, 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.

The variable consideration related to the remaining development milestone payments has not been included in the transaction price as these were fully constrained at December 31, 2020.

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

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 certain other NHE3 inhibitors, up to a maximum of $75.0 million in aggregate for (i) and (ii).

To date in aggregate, the Company has recognized $10.5 million of the $75.0 million, recorded as cost of revenue, as follows:

For the years ended December 31, 2020, 2019 and 2018, $ 0.7 million, zero and $ 2.3 million of revenue was recorded, respectively, related to the Knight Agreement.

For the year ended December 31, 2020, $ 0.1 million product supply revenue was recorded related to the Knight Agreement.

There was no product revenue related to the Knight Agreement in 2019 or 2018.

Pursuant to the AstraZeneca Termination Agreement, $ 0.1 million, zero and $ 0.5 million of cost of revenue was recorded during 2020, 2019 and 2018, respectively.

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 certain other NHE3 inhibitors, up to a maximum of $ 75.0 million in

aggregate for (i) and (ii).

To date in aggregate, the Company has recognized $ 10.6 million of the $ 75.0 million, recorded as cost of revenue, as follows (in thousands):

Cost of Revenue

(in thousands)

Maximum payment per termination agreement

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Provision for income taxes

The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate:

Year Ended December 31,

2 unchanged sentences

State taxes, net of federal benefit

Net impact related to foreign subsidiary

Impact of tax reform rate change

Stock based compensation

1 unchanged sentence

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.

Significant components of the Company’s deferred tax assets are as follows as of December 31, 2019 and 2018:

(in thousands)

Significant components of the Company’s deferred tax assets are as follows as of December 31, 2020 and 2019 (in thousands):

Deferred tax assets:

12 unchanged sentences

The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets.

A significant component of objective negative evidence evaluated was the Company’s cumulative loss incurred over the three-year period ended December 31, 2019.

A significant component of objective negative evidence evaluated was the Company’s cumulative loss incurred over the three-year period ended December 31, 2020.

Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.

On the basis of this evaluation, as of December 31, 2019, December 31, 2018 and December 31, 2017, a full valuation allowance has been recorded against Company’s net deferred tax asset.

On the basis of this evaluation, as of December 31, 2020, December 31, 2019 and December 31, 2018, a full valuation allowance has been recorded against Company’s net deferred tax asset.

The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.

6 unchanged sentences

The future utilization of net operating loss and tax credit carryforwards and credits may be subject to an annual limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that may have occurred previously or that could occur in the future.

Due to the existence of the valuation allowance, limitations under Section 382 and 383 will not impact the Company’s effective tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(in thousands)

Due to the existence of the valuation allowance, limitations under Section 382 and 383 will not impact the Company’s effective tax rate.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted and signed into law in response to coronavirus disease 2019 (“COVID-19”).

The CARES Act, among other things, included several significant provisions that impacted corporate taxpayers’ accounting for income taxes.

Prior to the enactment of the CARES Act, the 2017 Tax Cuts and Jobs Act generally eliminated the ability to carryback net operating losses (“NOLs”),

and permitted the NOLs arising in tax years beginning after December 31, 2017 to be carried forward indefinitely, limited to 80% of the taxpayer’s income.

The CARES Act amended the NOL rules, suspending the 80% limitation on the utilization of NOLs generated after December 31, 2017 and before January 1, 2021.

Additionally, the CARES Act allows corporate NOLs arising in taxable years beginning after December 31, 2017 and before January 1, 2021, to be carried back to each of the five taxable years preceding the taxable year of the loss.

Also, the CARES Act allows companies to defer making certain payroll tax payments until future years.

With the enactment of the CARES Act, the company does not expect a financial statement impact from income taxes.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

Balance at beginning of year

Additions based on tax positions related to prior year

Additions (subtractions) based on tax positions related to prior year

Additions based on tax positions related to current year

Balance at end of year

The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.

Income tax positions must meet a more likely than not recognition at the effective date to be recognized.

The unrecognized tax benefits, if recognized and in absence of full valuation allowance, would impact the income tax provision by $ 13.3 million, $ 13.2 million, and $ 9.8 million as of December 31, 2020, 2019 and 2018, respectively.

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Although the timing and outcome of an income tax audit is highly uncertain, the Company does not anticipate that the amount of existing unrecognized tax benefits will significantly change during the next 12 months.

The Company files a federal income tax return in the U.S.

and state income tax returns in California, Georgia, Maryland, Massachusetts, Michigan, New Hampshire, Oregon and Wisconsin.

Because carryforward attributes

generated in past years may be adjusted in a future period, the income tax returns remain open to U.S.

federal and California state tax examinations.

The Company files income tax returns in the U.S.

federal, Arizona, California, Colorado, DC, Florida, Georgia, Illinois, Indiana, Massachusetts, Michigan, New York, New York MTA, Oregon, Tennessee, Texas and Wisconsin tax jurisdictions.

Due to the Company’s net operating loss and tax credit carryforwards, the income tax returns remain open to U.S.

federal and state tax examinations.

The Company is not currently under examination in any tax jurisdiction.

7 unchanged sentences

Total revenue

(1) Revenues from North America in 2018 comprised of $2.3 million from Canada in accordance with the Knight Agreement.

(2) Revenues from Asia Pacific in 2019 comprised $0.3 million and $0.5 million from Japan in accordance with the 2017 KKC Agreement and 2019 KKC Agreement, respectively, $1.5 million from Hong Kong in accordance with the XuanZhu Agreement and $3.0 million from China in accordance with the Fosun Agreement.

(3) Revenues from Asia Pacific in 2018 comprised $0.3 million from Japan in accordance with the 2017 KKC Agreement.

(4) Revenues from Asia Pacific in 2017 included $30.0 million from Japan in accordance with the 2017 KKC Agreement and $12.0 million from China in accordance with the Fosun Agreement.

Revenues are attributed to geographical areas based on the domicile of the Company’s collaboration partners.

Revenues from North America are comprised of amounts earned from Canada in accordance with the Knight Agreement.

Revenues from Asia Pacific in 2020 are comprised of amounts earned from Japan in accordance with the 2017 KKC Agreement and 2019 KKC Agreement.

(3) Revenues from Asia Pacific in 2019 were comprised of $ 0.8 million from Japan in accordance with the 2017 KKC Agreement and 2019 KKC Agreement, $ 1.5 million from Hong Kong in accordance with the XuanZhu Agreement and $ 3.0 million from China in accordance with the Fosun Agreement.

(4) Revenues from Asia Pacific in 2018 were comprised of amounts earned from Japan in accordance with the 2017 KKC Agreement.

Revenues are attributed to geographical areas based on the domicile of the Company’s collaboration partners.

Revenues recorded in the years ended December 31, 2020, 2019 and 2018, were wholly from collaboration partnerships.

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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 years ended December 31, 2019, 2018 and 2017, 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):

As the Company had net losses for the years ended December 31, 2020, 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 per share amounts):

Year Ended December 31,

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COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company has facility leases (see Note 12), as well as operating equipment leases.

Future minimum payments on the Company’s noncancelable operating leases as of December 31, 2019 are as follows (in thousands):

Year Ended December 31,

Guarantees and Indemnifications

3 unchanged sentences

however, the Company currently holds director and officer liability insurance, which allows the transfer of risk associated with our exposure and may enable the Company to recover a portion of any future amounts paid.

The Company believes that the fair value of these

indemnification obligations is minimal.

The Company believes that the fair value of these indemnification obligations is minimal.

Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented.

1 unchanged sentence

From time to time the Company may be involved in claims arising in connection with its business.

Based on information currently available, management believes that the amount, or range, of reasonably possible losses in connection with any pending actions against the Company will not be material to the Company’s financial condition or cash flows, and no contingent liabilities were accrued as of December 31, 2019 or 2018 .

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

8 unchanged sentences

Net loss per share - basic and diluted

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

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 8. Financial Statements and Supplementary Data