Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
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ARDELYX, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share and per share amounts)
March 31,
2024 December 31,
2023
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 36,147 $ 21,470
Short-term investments 166,431 162,829
Accounts receivable 28,162 22,031
Inventory 9,813 12,448
Prepaid commercial manufacturing 5,519 18,925
Prepaid expenses and other current assets 11,867 8,408
Total current assets 257,939 246,111
Inventory, non-current 69,045 37,039
Prepaid commercial manufacturing, non-current 4,235 4,235
Right-of-use assets 4,641 5,589
Property and equipment, net 1,019 1,009
Other assets 5,503 3,596
Total assets $ 342,382 $ 297,579
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 17,277 $ 11,138
Accrued compensation and benefits 6,727 12,597
Current portion of operating lease liability 4,314 4,435
Deferred revenue 6,586 7,182
Accrued expenses and other current liabilities 21,991 15,041
Total current liabilities 56,895 50,393
Operating lease liability, net of current portion 778 1,725
Long-term debt, net of current portion 99,834 49,822
Deferred revenue, non-current 12,103 8,644
Deferred royalty obligation related to the sale of future royalties 21,881 20,179
Total liabilities 191,491 130,763
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, $ 0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively.
— —
Common stock, $ 0.0001 par value; 500,000,000 shares authorized; 233,959,744 and 232,453,190 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively.
23 23
Additional paid-in capital 1,023,610 1,012,773
Accumulated deficit ( 872,722 ) ( 846,204 )
Accumulated other comprehensive (loss) income ( 20 ) 224
Total stockholders’ equity 150,891 166,816
Total liabilities and stockholders’ equity $ 342,382 $ 297,579
The accompanying notes are an integral part of these condensed financial statements.
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ARDELYX, INC.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except share and per share amounts)
Three Months Ended March 31,
2024 2023
Revenues:
Product sales, net $ 43,512 $ 11,355
Product supply revenue 2,126 2
Licensing revenue 17 12
Non-cash royalty revenue related to the sale of future royalties 368 —
Total revenues 46,023 11,369
Cost of goods sold:
Cost of product sales 1,013 372
Other cost of revenue 6,115 1,165
Total cost of goods sold 7,128 1,537
Operating expenses:
Research and development 10,579 9,093
Selling, general and administrative 52,994 26,803
Total operating expenses 63,573 35,896
Loss from operations ( 24,678 ) ( 26,064 )
Interest expense ( 2,356 ) ( 1,028 )
Non-cash interest expense related to the sale of future royalties ( 1,702 ) ( 969 )
Other income, net 2,339 1,302
Loss before provision for income taxes ( 26,397 ) ( 26,759 )
Provision for income taxes 121 14
Net loss $ ( 26,518 ) $ ( 26,773 )
Net loss per share of common stock - basic and diluted $ ( 0.11 ) $ ( 0.13 )
Shares used in computing net loss per share - basic and diluted 233,065,960 207,023,127
Comprehensive loss:
Net loss $ ( 26,518 ) $ ( 26,773 )
Unrealized (losses) gains on available-for-sale securities ( 244 ) 34
Comprehensive loss $ ( 26,762 ) $ ( 26,739 )
The accompanying notes are an integral part of these condensed financial statements.
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ARDELYX, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three Months ended March 31, 2024 and 2023
(Unaudited)
(in thousands, except shares)
Three Months Ended March 31, 2024
Common Stock Additional
Paid-In
Capital Accumulated
Deficit Accumulated
Other
Comprehensive
Income Total
Stockholders'
Equity
Shares Amount
Balance as of December 31, 2023 232,453,190 $ 23 $ 1,012,773 $ ( 846,204 ) $ 224 $ 166,816
Issuance of common stock under employee stock purchase plan 253,312 — 1,038 — — 1,038
Issuance of common stock upon exercise of options 701,578 — 2,183 — — 2,183
Issuance of common stock upon vesting of restricted stock units 551,664 — — — — —
Stock-based compensation — — 7,616 — — 7,616
Unrealized losses on available-for-sale securities — — — — ( 244 ) ( 244 )
Net loss — — — ( 26,518 ) — ( 26,518 )
Balance as of March 31, 2024 233,959,744 $ 23 $ 1,023,610 $ ( 872,722 ) $ ( 20 ) $ 150,891
Three Months Ended March 31, 2023
Common Stock Additional
Paid-In
Capital Accumulated
Deficit Accumulated
Other
Comprehensive
Income Total
Stockholders'
Equity
Shares Amount
Balance as of December 31, 2022 198,575,016 $ 20 $ 878,500 $ ( 780,137 ) $ ( 54 ) $ 98,329
Issuance of common stock under employee stock purchase plan 165,969 — 138 — — 138
Issuance of common stock upon exercise of options 36,001 — 62 — — 62
Issuance of common stock upon vesting of restricted stock units 207,773 — — — — —
Issuance of common stock in at the market offering 15,477,291 1 50,718 — — 50,719
Stock-based compensation — — 2,912 — — 2,912
Unrealized gains on available-for-sale securities — — — — 34 34
Net loss — — — ( 26,773 ) — ( 26,773 )
Balance as of March 31, 2023 214,462,050 $ 21 $ 932,330 $ ( 806,910 ) $ ( 20 ) $ 125,421
The accompanying notes are an integral part of these condensed financial statements.
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ARDELYX, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended March 31,
2024 2023
Operating activities
Net loss $ ( 26,518 ) $ ( 26,773 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense 435 ( 3 )
Non-cash lease expense 948 902
Stock-based compensation 7,616 2,912
Non-cash interest expense 1,753 1,044
Other, net ( 1,265 ) 499
Changes in operating assets and liabilities:
Accounts receivable ( 6,131 ) ( 4,387 )
Inventory ( 29,371 ) ( 16,601 )
Prepaid commercial manufacturing 13,406 ( 268 )
Prepaid expenses and other assets ( 5,450 ) ( 774 )
Accounts payable 6,139 ( 346 )
Accrued compensation and benefits ( 5,870 ) ( 2,474 )
Operating lease liabilities ( 1,068 ) ( 937 )
Accrued and other liabilities 6,791 ( 1,396 )
Deferred revenue 2,863 3,807
Net cash used in operating activities ( 35,722 ) ( 44,795 )
Investing activities
Proceeds from maturities and redemptions of investments 31,602 11,000
Purchases of investments ( 34,024 ) ( 20,763 )
Purchases of property and equipment ( 150 ) ( 14 )
Net cash used in investing activities ( 2,572 ) ( 9,777 )
Financing activities
Proceeds from 2022 Loan, net of issuance costs 49,750 —
Proceeds from issuance of common stock in at the market offering, net of issuance costs — 50,719
Proceeds from issuance of common stock under equity incentive and stock purchase plans 3,221 200
Net cash provided by financing activities 52,971 50,919
Net increase (decrease) in cash and cash equivalents 14,677 ( 3,653 )
Cash and cash equivalents at beginning of period 21,470 96,140
Cash and cash equivalents at end of period $ 36,147 $ 92,487
Supplementary disclosure of cash flow information:
Cash paid for interest $ 2,095 $ 860
Cash paid for income taxes $ 1 $ —
The accompanying notes are an integral part of these condensed financial statements.
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ARDELYX, INC .
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Ardelyx, Inc. (Company, we, us or our) is a biopharmaceutical company founded with a mission to discover, develop and commercialize innovative first-in-class medicines that meet significant unmet medical needs. We developed a unique and innovative platform that enabled the discovery of new biological mechanisms and pathways to develop potent, and efficacious therapies that minimize the side effects and drug-drug interactions frequently encountered with traditional, systemically absorbed medicines. The first molecule we discovered and developed was tenapanor, a minimally absorbed, first-in-class, oral, small molecule therapy. Tenapanor, branded as IBSRELA ® , is approved in the U.S. for the treatment of adults with irritable bowel syndrome with constipation (IBS-C). Tenapanor, branded as XPHOZAH ® , was approved by the U.S. Food and Drug Administration (U.S. FDA) on October 17, 2023, to reduce serum phosphorus in adults with chronic kidney disease (CKD) on dialysis as add-on therapy in patients who have an inadequate response to phosphate binders or who are intolerant of any dose of phosphate binder therapy.
We operate in one business segment, which is the development and commercialization of biopharmaceutical products.
Basis of Presentation
These condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and pursuant to the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted. These condensed financial statements have been prepared on the same basis as our most recent annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary to present fairly our financial position, results of operations, changes in stockholders’ equity, and cash flows for the interim periods presented.
The accompanying condensed financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023. The results for the three months ended March 31, 2024 are not necessarily indicative of results to be expected for the entire year ending December 31, 2024, or for any other interim period or future year.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes thereto. On an ongoing basis, management evaluates its estimates, including those related to recognition of revenue, clinical trial accruals, contract manufacturing accruals, expected demand for inventory, fair value of assets and liabilities, income taxes and stock-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could materially differ from those estimates.
Liquidity
As of March 31, 2024, we had cash, cash equivalents and short-term investments of approximately $ 202.6 million. We have incurred operating losses since inception in 2007 and our accumulated deficit as of March 31, 2024 is $ 872.7 million. We have addressed our operating cash flow requirements through cash generated from product sales of IBSRELA and XPHOZAH, proceeds from the sale of shares of our common stock under our at-the-market offering, from the receipt of milestone payments from our collaboration partners and payments from our Japanese collaboration partner under the second amendment to our License Agreement, and through funds from our loan agreements with SLR Investment Corp. (SLR), as amended. We believe our available cash, cash equivalents and short-term investments as of March 31, 2024 will be sufficient to fund our planned operations for at least a period of one year from the issuance of these condensed financial statements.
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Summary of Significant Accounting Policies
Our significant accounting policies are described in Note 2 to our audited financial statements for the fiscal year ended December 31, 2023, included in our Annual Report on Form 10-K. There have been no material changes in our significant accounting policies as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Recent Accounting Pronouncements
New Accounting Pronouncements - Recently Adopted
We have adopted no new accounting pronouncements subsequent to filing our most recent Annual Report on Form 10-K.
Recent Accounting Pronouncements Not Yet Adopted
In October 2023, the Financial Accounting Standards Board (FASB) issued ASU No. 2023-06, Disclosure Improvements - Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. The amendments in this Update modify the disclosure or presentation requirements of a variety of Topics in the Codification. The amendments are in response to the U.S. Securities and Exchange Commission's (SEC) Release No. 33-10532, Disclosure Update and Simplification, in which the SEC referred certain of its disclosure requirements that overlap with, but require incremental information to, generally accepted accounting principles to the FASB for potential incorporation into the Codification. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. For all other entities, the amendments will be effective two years later. For all entities, if by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the Codification and will not become effective for any entity. Management is currently assessing the impact of this standard on the Company’s financial statements.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. This Update requires publicly traded entities to provide enhanced disclosures about significant segment expenses regularly reviewed by the chief operating decision maker (CODM), including public traded entities with a single reportable segment. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. Management is currently assessing the impact of this standard on the Company’s financial statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures, an amendment which modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The amendments in this Update provide more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2024. Early adoption is permitted on a prospective basis for annual financial statements that have not yet been issued or made available for issuance. Management is currently assessing the impact of this standard on the Company’s financial statements.
In March 2024, the FASB issued ASU No. 2024-02, Codification Improvements - Amendments to Remove References to the Concepts Statements, an amendment to the Codification which removes references to various FASB Concepts Statements. The amendments apply to all reporting entities within the scope of the affected accounting guidance, but in most instances the references removed are extraneous and not required to understand or apply the guidance. Generally, the amendments in ASU 2024-02 are not intended to result in significant accounting changes for most entities. The amendments in this update are effective for fiscal years beginning after December 15, 2024 and are not expected to have a significant impact on our financial statements.
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NOTE 2. CASH, CASH EQUIVALENTS AND INVESTMENTS
Securities classified as cash, cash equivalents and short-term investments as of March 31, 2024 and December 31, 2023 are summarized below (in thousands):
March 31, 2024
Gross Unrealized
Amortized Cost Gains Losses Fair Value
Cash and cash equivalents:
Cash $ 3,844 $ — $ — $ 3,844
Money market funds 32,303 — — 32,303
Total cash and cash equivalents 36,147 — — 36,147
Short-term investments:
U.S. government-sponsored agency bonds $ 101,706 $ 34 $ ( 23 ) $ 101,717
Commercial paper 53,549 11 ( 39 ) 53,521
Asset-backed securities 8,707 — ( 3 ) 8,704
U.S. treasury securities 2,489 — — 2,489
Total short-term investments 166,451 45 ( 65 ) 166,431
Total cash, cash equivalents and investments $ 202,598 $ 45 $ ( 65 ) $ 202,578
December 31, 2023
Gross Unrealized
Amortized Cost Gains Losses Fair Value
Cash and cash equivalents:
Cash $ 2,829 $ — $ — $ 2,829
Money market funds 18,641 — — 18,641
Total cash and cash equivalents 21,470 — — 21,470
Short-term investments:
U.S. government-sponsored agency bonds $ 101,892 $ 235 $ ( 34 ) $ 102,093
Commercial paper 49,630 41 ( 17 ) 49,654
Asset-backed securities 8,628 2 ( 5 ) 8,625
U.S. treasury securities 2,455 2 — 2,457
Total short-term investments 162,605 280 ( 56 ) 162,829
Total cash, cash equivalents and investments $ 184,075 $ 280 $ ( 56 ) $ 184,299
Cash equivalents consist of money market funds with original maturities of three months or less at the time of purchase, and the carrying amount is a reasonable approximation of fair value. We invest our cash in high quality securities of financial and commercial institutions. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in accumulated other comprehensive loss within stockholders’ equity on our balance sheets. We use the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. Realized gains or losses have not been significant and are included in other income, net, in the statement of operations and comprehensive loss.
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All of the short-term available-for sale securities held as of March 31, 2024 and December 31, 2023 had contractual maturities of less than one year . Our available-for-sale securities are subject to a periodic impairment review. We consider a debt security to be impaired when its fair value is less than its carrying cost, in which case we would further review the investment to determine whether it is other-than-temporarily impaired. When we evaluate an investment for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, intent to sell, and whether it is more likely than not we will be required to sell the investment before the recovery of its cost basis. If an investment is other-than-temporarily impaired or subject to credit losses, we write it down through the statement of operations and comprehensive loss to its fair value and establish that value as a new cost basis for the investment. Our unrealized losses as of March 31, 2024 and December 31, 2023 were not material. We determined that none of our available-for-sale securities were other-than-temporarily impaired as of March 31, 2024 and December 31, 2023, and no investment was in a continuous unrealized loss position for more than one year. As such, we believe that it is more likely than not that the investments will be held until maturity or a forecasted recovery of fair value.
NOTE 3. FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:
Level 1 –
Valuations are based on quoted prices in active markets for identical assets or liabilities and readily accessible by us at the reporting date.
Level 2 –
Valuations based on inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 –
Valuations based on unobservable inputs for which there is little or no market data, which require us to develop our own assumptions.
The following table sets forth the fair value of our financial assets and liabilities that are measured or disclosed on a recurring basis by level within the fair value hierarchy (in thousands):
March 31, 2024
Total
Fair Value Level 1 Level 2 Level 3
Assets:
Money market funds $ 32,303 $ 32,303 $ — $ —
U.S. government-sponsored agency bonds 101,717 — 101,717 —
Commercial paper 53,521 — 53,521 —
Asset-backed securities 8,704 — 8,704 —
U.S. treasury securities 2,489 — 2,489 —
Total $ 198,734 $ 32,303 $ 166,431 $ —
Liabilities:
Derivative liabilities for exit fee $ 834 $ — $ — $ 834
Total $ 834 $ — $ — $ 834
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December 31, 2023
Total
Fair Value Level 1 Level 2 Level 3
Assets:
Money market funds $ 18,641 $ 18,641 $ — $ —
U.S. government-sponsored agency bonds 102,093 — 102,093 —
Commercial paper 49,654 — 49,654 —
Asset-backed securities 8,625 — 8,625 —
U.S. treasury securities 2,457 — 2,457 —
Total $ 181,470 $ 18,641 $ 162,829 $ —
Liabilities:
Derivative liability for exit fees $ 675 $ — $ — $ 675
Total $ 675 $ — $ — $ 675
Where quoted prices are available in an active market, securities are classified as Level 1. We classify money market funds as Level 1. When quoted market prices are not available for the specific security, we estimate fair value by using benchmark yields, reported trades, broker/dealer quotes and issuer spreads. We classify U.S. government-sponsored agency bonds, U.S. treasury securities, corporate bonds, commercial paper, and asset-backed securities as Level 2. In certain cases, where there is limited activity or less transparency around inputs to valuation, securities or derivative liabilities, such as the 2022 Exit Fee, as defined and discussed in Note 9. Derivative Liabilities , are classified as Level 3.
The carrying amounts reflected in the condensed balance sheets for accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values at both March 31, 2024 and December 31, 2023, due to their short-term nature.
Based on our procedures under the expected credit loss model, including an assessment of unrealized losses in our portfolio, we concluded that any unrealized losses on our marketable securities were not attributable to credit and, therefore, we have no t recorded an allowance for credit losses for these securities as of March 31, 2024 and December 31, 2023.
Fair Value of Debt
The principal amount outstanding under our term loan facilities is subject to a variable interest rate. Therefore, we believe the carrying amount of the term loan facility approximates fair value as of March 31, 2024 and December 31, 2023. See Note 8. Borrowing for a description of the Level 2 inputs used to estimate the fair value of the liability.
The carrying value of the deferred royalty obligation related to the sale of future royalties approximates its fair value as of March 31, 2024 and December 31, 2023 and is based on our current estimates of future royalties and commercialization milestones expected to be paid to us by Kyowa Kirin Co., Ltd. (Kyowa Kirin) over the life of the agreement. See Note 7. Deferred Royalty Obligation Related to the Sale of Future Royalties for a description of the Level 3 inputs used to estimate the fair value of the liability.
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NOTE 4. INVENTORY
Inventory as of March 31, 2024 and December 31, 2023 consisted of the following (in thousands):
March 31, 2024 December 31, 2023
Raw materials $ 20,906 $ 22,920
Work in process 54,206 24,582
Finished goods 3,746 1,985
Total $ 78,858 $ 49,487
Reported as:
Inventory $ 9,813 $ 12,448
Inventory, non-current 69,045 37,039
Total $ 78,858 $ 49,487
In addition to inventory, we had prepaid commercial manufacturing of $ 9.8 million and $ 23.2 million as of March 31, 2024 and December 31, 2023, respectively, which consisted of prepayments to third party contract manufacturing organizations, including prepayments of $ 4.2 million as of both March 31, 2024 and December 31, 2023 that are expected to be converted into inventory after 12 months.
NOTE 5. REVENUE
Total revenues during the three months ended March 31, 2024 and 2023 were as follows (in thousands):
Three Months Ended March 31,
2024 2023
Product sales, net:
IBSRELA $ 28,361 $ 11,355
XPHOZAH 15,151 —
Total product sales, net 43,512 11,355
Product supply revenue 2,126 2
Licensing revenue 17 12
Non-cash royalty revenue related to the sale of future royalties 368 —
Total revenues $ 46,023 $ 11,369
Revenue from Customers who contributed greater than 10% of our total gross product revenue during the three months ended March 31, 2024 and 2023 was as follows (as a percentage of total gross product revenue):
Three Months Ended March 31,
2024 2023
BioRidge Pharma, LLC 39.9 % 17.6 %
AmerisourceBergen Drug Corporation 18.3 % 21.6 %
Cardinal Health 16.2 % 22.2 %
McKesson Corporation 13.5 % 20.8 %
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The activities and ending reserve balances for each significant category of discounts and allowances, which constitute variable consideration, were as follows (in thousands):
Discounts and Chargebacks Rebates, Wholesaler and GPO Fees Copay and Returns Total
Balance as of December 31, 2023 $ 478 $ 4,234 $ 3,916 $ 8,628
Provisions 2,644 9,525 6,846 19,015
Credits/payments ( 2,467 ) ( 7,211 ) ( 3,852 ) ( 13,530 )
Balance as of March 31, 2024 $ 655 $ 6,548 $ 6,910 $ 14,113
Adjustments to prior period provisions recorded in the current period were not material.
NOTE 6. COLLABORATION AND LICENSING AGREEMENTS
Kyowa Kirin Co., Ltd. (Kyowa Kirin)
In November 2017, we entered into an exclusive license agreement with Kyowa Kirin (2017 Kyowa Kirin Agreement), under which we granted Kyowa Kirin an exclusive license to develop and commercialize certain NHE3 inhibitors including tenapanor in Japan for the treatment of cardiorenal diseases and conditions, excluding cancer. We retained the rights to tenapanor outside of Japan, and also retained the rights to tenapanor in Japan for indications other than those stated above. Pursuant to the 2017 Kyowa Kirin Agreement, Kyowa Kirin is responsible for all costs and expenses incurred in the development and commercialization of tenapanor for all licensed indications in Japan. We are responsible for supplying the tenapanor drug substance for Kyowa Kirin’s use in development and commercialization throughout the term of the 2017 Kyowa Kirin Agreement, provided that Kyowa Kirin may exercise an option to manufacture the tenapanor drug substance under certain conditions. In October 2022, we entered into a Commercial Supply Agreement with Kyowa Kirin to further define the obligations of the parties with respect to the commercial supply of tenapanor drug substance (2022 Kyowa Kirin Supply Agreement). As detailed below under the heading Deferred Revenue we have received advanced payments from Kyowa Kirin for the manufacturing of tenapanor drug substance that will be used to satisfy Kyowa Kirin needs.
We assessed these arrangements in accordance with Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments (ASC 606) and concluded that the contract counterparty, Kyowa Kirin, is a customer. Under the terms of the 2017 Kyowa Kirin Agreement, we received $ 30.0 million in upfront license fees, which was recognized as revenue when the agreement was executed. Based on our assessment, management determined that the license and the manufacturing supply services were its material performance obligations at the inception of the 2017 Kyowa Kirin Agreement, and as such, each of the performance obligations is distinct.
We may be entitled to receive up to $ 55.0 million in total development and regulatory milestones, of which $ 35.0 million has been received and recognized as revenue as of March 31, 2024. We may also be eligible to receive approximately ¥ 8.5 billion for commercialization milestones, or approximately $ 56.2 million at the currency exchange rate on March 31, 2024, as well as reimbursement of costs plus a reasonable overhead for the supply of product and royalties on net sales throughout the term of the agreement. As discussed in Note 7. Deferred Royalty Obligation Related to the Sale of Future Royalties , the future royalties and commercial milestone payments we may receive under the 2017 Kyowa Kirin Agreement will be remitted to HealthCare Royalty Partners IV, L.P. pursuant to a Royalty and Sales Milestone Interest Acquisition Agreement. The variable consideration related to the remaining milestone payments was fully constrained at March 31, 2024.
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In April 2022, we entered into a second amendment to the 2017 Kyowa Kirin Agreement (2022 Amendment). Under the terms of the 2022 Amendment, we and Kyowa Kirin agreed to a reduction in the royalty rate payable to us by Kyowa Kirin upon net sales of tenapanor for hyperphosphatemia in Japan. The royalty rate will be reduced from the high teens to low double digits for a two-year period of time following the first commercial sale in Japan, and then to mid-single digits for the remainder of the royalty term. As discussed in Note 7. Deferred Royalty Obligation Related to the Sale of Future Royalties , the future commercial milestones and royalties we may receive under the 2017 Kyowa Kirin Agreement will be remitted to HealthCare Royalty Partners IV, L.P. (HCR) pursuant to a Royalty and Sales Milestone Interest Acquisition Agreement (HCR Agreement). As consideration for the reduction in the royalty rate, Kyowa Kirin agreed to pay us up to an additional $ 40.0 million payable in two tranches, with the first payment due following Kyowa Kirin's filing with the Japanese Ministry of Health, Labour and Welfare (MHLW) of its application for marketing approval for tenapanor and the second payment due following Kyowa Kirin’s receipt of regulatory approval to market tenapanor for hyperphosphatemia in Japan, both of which occurred as of September 30, 2023.
In October 2022, we announced that Kyowa Kirin submitted a New Drug Application (NDA) to the Japanese MHLW for tenapanor for the improvement of hyperphosphatemia in adult patients with CKD on dialysis, which resulted in payment to us from Kyowa Kirin for an aggregate of $ 35.0 million for milestone payments and payments under the 2022 Amendment. We received these payments during the fourth quarter of 2022 and recorded them as licensing revenue on our condensed statement of operations and comprehensive loss.
In September 2023, we announced that Kyowa Kirin received approval from the Japanese MHLW for the NDA for tenapanor for the improvement of hyperphosphatemia in adult patients with CKD on dialysis, which resulted in payment to us from Kyowa Kirin for an aggregate of $ 30.0 million for milestone payments and payments under the 2022 Amendment. We received these payments in October 2023 and recorded them as licensing revenue on our condensed statement of operations and comprehensive loss when earned during the three months ended September 30, 2023. In February 2024, Kyowa Kirin announced the launch of tenapanor, marketed as PHOZEVEL ® , for patients in Japan. During the first quarter of 2024, we recognized $ 0.4 million of non-cash royalty revenue related to the sale of future royalties, which will be remitted to HCR in accordance with the HCR Agreement.
During the three months ended March 31, 2024, we recognized $ 2.1 million of product supply revenue pursuant to the 2017 Kyowa Kirin Agreement. During the three months ended March 31, 2023, we recognized $ 2 thousand of product supply revenue pursuant to the 2017 Kyowa Kirin Agreement.
During the three months ended March 31, 2024 and 2023, we did not recognize a material amount of licensing revenue pursuant to the 2017 Kyowa Kirin Agreement.
Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd. (Fosun Pharma)
In December 2017, we entered into an exclusive license agreement with Fosun Pharma (Fosun Agreement) for the development, commercialization and distribution of tenapanor in China for both hyperphosphatemia and IBS-C. We assessed these arrangements in accordance with ASC 606 and concluded that the contract counterparty, Fosun Pharma, is a customer. Under the terms of the Fosun Agreement, we received $ 12.0 million in upfront license fees which was recognized as revenue when the agreement was executed. Based on our assessment, we determined that the license and the manufacturing supply services represented the material performance obligations at the inception of the agreement and, as such, each of the performance obligations are distinct.
We may be entitled to receive development and commercialization milestones of up to $ 113.0 million, of which $ 8.0 million has been received and recognized as revenue as of March 31, 2024, 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 was fully constrained at March 31, 2024.
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In July 2023, we announced that an NDA for tenapanor had been accepted for review by China’s Center for Drug Evaluation of the National Medical Products Administration (NMPA) for the control of serum phosphorus in adult patients with CKD on hemodialysis. This acceptance triggered a $ 2.0 million milestone payment to us under the terms of the Fosun Agreement. We received this payment during the third quarter of 2023 and recorded it as licensing revenue on our condensed statement of operations and comprehensive loss when earned during the three months ended September 30, 2023. In October 2023, we announced that the U.S. FDA had approved XPHOZAH to reduce serum phosphorus in adults with CKD on dialysis as add-on therapy in patients who have an inadequate response to phosphate binders or who are intolerant of any dose of phosphate binder therapy. This triggered an additional $ 3.0 million milestone payment to us under the terms of the Fosun Agreement, which was received during the first quarter of 2024. Also, in October 2023, we announced that Fosun Pharma received approval from the Hong Kong Department of Health for the marketing application for tenapanor for the treatment of irritable bowel syndrome with constipation (IBS-C).
During the three months ended March 31, 2024 and 2023, we did not recognize a material amount of revenue pursuant to the Fosun Agreement.
Knight Therapeutics, Inc. (Knight)
In March 2018, we entered into an exclusive license agreement with Knight Therapeutics, Inc., (Knight Agreement) for the development, commercialization and distribution of tenapanor in Canada for hyperphosphatemia and IBS-C. We assessed this arrangement in accordance with ASC 606 and concluded that the contract counterparty, Knight, is a customer. Based on our assessment, we determined that the license and the manufacturing supply services were the material performance obligations at the inception of the agreement and, as such, each of the performance obligations are distinct.
Under the terms of the Knight Agreement, we received a $ 2.3 million non-refundable, one-time upfront payment in March 2018 and may be eligible to receive additional development and commercialization milestone payments worth up to CAD 22.2 million, or approximately $ 16.3 million at the currency exchange rate on March 31, 2024, of which $ 0.7 million has been received and recognized as revenue as of March 31, 2024. We are also eligible to receive royalties ranging from the mid-single digits to the low twenties throughout the term of the agreement, and a transfer price for manufacturing services. The variable consideration related to the remaining development milestone payments was fully constrained at March 31, 2024.
During the three months ended March 31, 2024 and 2023, we did not recognize a material amount of revenue pursuant to the Knight Agreement.
AstraZeneca AB (AstraZeneca)
In June 2015, we entered into a termination agreement with AstraZeneca (AstraZeneca Termination Agreement) pursuant to which we have agreed to pay AstraZeneca (i) future royalties at a royalty rate of 10 % of net sales of tenapanor or other NHE3 products by us or our licensees, and (ii) 20 % of non-royalty revenue received from a new collaboration partner should we elect to license, or otherwise provide rights to develop and commercialize tenapanor or other NHE3 products, up to a maximum of $ 75.0 million in aggregate for (i) and (ii). As of March 31, 2024, to date in aggregate, we have recognized $ 32.4 million of the $ 75.0 million, which has been recorded as other cost of revenue on our condensed statements of operations and comprehensive loss. During the three months ended March 31, 2024, we recognized $ 4.7 million as other cost of revenue related to the AstraZeneca Termination Agreement. During the three months ended March 31, 2023 we recognized $ 1.2 million as other cost of revenue related to the AstraZeneca Termination Agreement.
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Deferred Revenue
The following tables present changes in our current and non-current deferred revenue balances during the reporting period, which are all attributable to the 2017 Kyowa Kirin Agreement (in thousands):
2024 2023
Current Non-Current Current Non-Current
Balance at January 1, $ 7,182 $ 8,644 $ 4,211 $ 9,025
Amounts invoiced as prepayments for product supply 732 3,459 525 3,282
Decrease for revenue recognized for product supply ( 1,328 ) — — —
Reclassify amounts to be recognized in the next twelve months — — 809 ( 809 )
Balance at March 31, $ 6,586 $ 12,103 $ 5,545 $ 11,498
NOTE 7. DEFERRED ROYALTY OBLIGATION RELATED TO THE SALE OF FUTURE ROYALTIES
In June 2022, we and HealthCare Royalty Partners IV, L.P. (HCR) entered into a Royalty and Sales Milestone Interest Acquisition Agreement (HCR Agreement). Under the terms of the HCR Agreement, HCR has agreed to pay us up to $ 20.0 million in exchange for the royalty payments and commercial milestone payments (collectively the Royalty Interest Payments) that we may receive under our 2017 License Agreement with Kyowa Kirin based upon Kyowa Kirin's net sales of tenapanor in Japan for hyperphosphatemia. As consideration for the sale of the Royalty Interest Payments, HCR paid to us a $ 10.0 million upfront payment in June 2022 and a $ 5.0 million payment, which we received in October 2023, as a result of Kyowa Kirin's receipt of regulatory approval to market tenapanor for hyperphosphatemia in Japan. We are eligible to receive another $ 5.0 million payment in the event net sales by Kyowa Kirin in Japan exceed a certain annual target level by the end of 2025.
The HCR Agreement is effective until terminated by the mutual agreement of the parties and contains customary representations and warranties and customary affirmative and negative covenants, including, among others, requirements as to prosecution, maintenance, defense and enforcement of certain patent rights in Japan, restrictions regarding our ability to forgive, release or reduce any Royalty Interest Payments due to us under the 2017 Kyowa Kirin Agreement, to create or incur any liens with respect to the Royalty Interest Payments, the 2017 Kyowa Kirin Agreement or certain patents, or to sell, license or transfer certain patents in the field and territory described in the 2017 Kyowa Kirin Agreement.
In addition, the HCR Agreement contains customary events of default with respect to which we may incur indemnification obligations to HCR for any losses incurred by HCR and related parties as a result of the event of default, subject to a specified limitation of liability cap. Under the HCR Agreement, an event of default will occur if, among other things, any of the representations and warranties included in the HCR Agreement proves not to have been true and correct in all material respects, at the time it was made, we breach any of our covenants under the HCR Agreement, subject to specified cure periods with respect to certain breaches, we are in breach or default under the 2017 Kyowa Kirin Agreement in any manner which is likely to cause a material adverse effect on the Royalty Interest Payments, the occurrence of a termination of the 2017 Kyowa Kirin Agreement under certain circumstances or we or our assets become subject to certain legal proceedings, such as bankruptcy proceedings, or we are unable to pay our debts as they become due.
The $ 10.0 million upfront payment from HCR received in June 2022 and the $ 5.0 million payment received in October 2023 have been recorded as a deferred royalty obligation related to the sale of future royalties (deferred royalty obligation) on our balance sheets. Due to our ongoing manufacturing obligations under the 2017 Kyowa Kirin Agreement, we account for the proceeds as imputed debt and therefore will recognize royalties earned under the arrangement as non-cash royalty revenue. Non-cash interest expense will be recognized over the life of the HCR Agreement using the effective interest method based on the imputed interest rate derived from estimated amounts and timing of future royalty payments to be received from Kyowa Kirin. As part of the sale, we incurred approximately $ 0.4 million in transaction costs, which, along with the deferred royalty obligation, are being amortized to non-cash interest expense over the estimated life of the HCR Agreement using the effective interest method. As future royalties are remitted to us by Kyowa Kirin, and subsequently from us to HCR, the balance of the deferred royalty obligation will be effectively repaid over the life of the HCR Agreement. There are a number of factors that could materially affect the fair value of the deferred royalty obligation. Such factors include, but are not limited to, the amount and timing of potential future royalty payments to be received from Kyowa Kirin under the 2017 Kyowa Kirin agreement, changing standards of care, the introduction of competing products, manufacturing or other delays, intellectual property matters, adverse events that result in governmental health authority imposed restrictions on the use of the drug products, significant changes in foreign exchange rates as the royalties remitted to HCR are made in U.S. dollars while the underlying
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sales of the products by Kyowa Kirin are made in Japanese yen, and other events or circumstances that could result in reduced royalty payments from Kyowa Kirin, which are not within our control, and all of which would result in a reduction of non-cash royalty revenues and the non-cash interest expense over the life of the deferred royalty obligation. We periodically assess the estimated royalty payments from Kyowa Kirin and, to the extent that the amount or timing of such payments is materially different than our original estimates, we prospectively adjust the imputed interest rate and the related amortization of the deferred royalty obligation. As of March 31, 2024, our effective interest rate used to amortize the liability is 33.7 %. During the three months ended March 31, 2024, we recognized approximately $ 1.7 million of non-cash interest expense related to the deferred royalty obligation. During the three months ended March 31, 2023, we recognized approximately $ 1.0 million of non-cash interest expense related to the deferred royalty obligation. As of March 31, 2024, we have received no royalty payments from Kyowa Kirin and, therefore, the deferred royalty obligation has not begun to be reduced.
NOTE 8. BORROWING
Solar Capital and Western Alliance Bank Loan Agreement
In May 2018, we entered into a loan and security agreement (as amended on October 9, 2020, March 1, 2021, May 5, 2021, and July 29, 2021) (2018 Loan Agreement) with Solar Capital Ltd. and Western Alliance Bank (collectively, the 2018 Lenders). The 2018 Loan Agreement provided for a loan facility for up to $ 50.0 million with a maturity date of November 1, 2022 (2018 Loan). As of the Closing Date for the 2022 Loan, as discussed below, we owed $ 25.0 million in principal payments from the 2018 Loan, which we repaid in full at that time.
As discussed in Note 9. Derivative Liabilities , in connection with entering into the 2018 Loan Agreement, we entered into an agreement pursuant to which we agreed to pay $ 1.5 million in cash upon the occurrence of certain conditions (2018 Exit Fee). Our obligations for the 2018 Exit Fee remained outstanding following the full repayment of the 2018 Loan in February 2022 until October 2023 when we received approval from the U.S. FDA for XPHOZAH to reduce serum phosphorus in adults with CKD on dialysis as add-on therapy in patients who have an inadequate response to phosphate binders or who are intolerant of any dose of phosphate binder therapy. This triggered our obligation to pay the 2018 Exit Fee to the 2018 Lenders and we subsequently paid the 2018 Exit Fee in October 2023.
SLR Investment Corp. Loan Agreement
On February 23, 2022 (Closing Date), we entered into a loan and security agreement (2022 Loan Agreement) with SLR Investment Corp. as collateral agent (Agent), and the lenders listed in the 2022 Loan Agreement (collectively, the 2022 Lenders). The 2022 Loan Agreement was subsequently amended in August 2022 (the First Amendment) and February 2023 (the Second Amendment). We concluded that the First Amendment and the Second Amendment were modifications to the 2022 Loan Agreement. The 2022 Loan Agreement, as amended by the First Amendment and the Second Amendment, provided for a senior secured loan facility, with $ 27.5 million (Term A Loan) funded on the Closing Date and an additional $ 22.5 million which was funded upon our election in October 2023 (Term B Loan, and together with the Term A Loan, the 2022 Original Loans). The 2022 Term A Loan funds were used to repay the 2018 Loan with the 2018 Lenders.
On October 17, 2023, we entered into a Third Amendment (the Third Amendment) to the 2022 Loan Agreement by and between us and the 2022 Lenders. The Third Amendment, among other things, (1) provided us with the option to draw an additional $ 50.0 million of committed capital by March 15, 2024 (the Term C Loan) provided we have drawn the Term B Loan; and (2) provides us with the option to draw up to an additional $ 50.0 million of uncommitted capital by December 31, 2026, subject to approval by the Agent’s investment committee (the Term D Loan and together with the Term A, B, and C Loans, the Four 2022 Loans). In February 2024, we provided the Agent with notice of our decision to draw the Term C Loan to support the commercial launch of XPHOZAH and received the proceeds of the Term C Loan in March 2024.
We concluded that the Third Amendment was a modification to the 2022 Original Loan Agreement.
Under the Third Amendment, the maturity date for the Four 2022 Loans is March 1, 2027. The interest rate for each of the Term A Loan and the Term B Loan is 7.95 % plus a SOFR value equal to 0.022 % plus the 1-month CME Term SOFR reference rate as published by the CME Term SOFR Administrator on the CME Term SOFR Administrator’s Website, subject to a SOFR floor of one percent. The interest rate for each of the Term C Loan and the Term D Loan is 4.25 % plus a SOFR value equal to 0.022 % plus the 1-month CME Term SOFR reference rate as published by the CME Term SOFR Administrator on the CME Term SOFR Administrator’s Website, subject to a SOFR floor of 4.7 %.
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In addition, pursuant to the Third Amendment, the period under which we are permitted to make interest-only payments on the Four 2022 Loans was extended to December 31, 2026, effective upon our decision to draw the Term B Loan in the amount of $ 22.5 million.
We were obligated to pay $ 0.2 million, upon the closing of the Term A Loan, $ 0.1 million on the funding date of the Term B Loan, and $ 0.3 million on the funding date of the Term C Loan. In addition, we will be obligated to pay 0.5 % of the aggregate original principal amount of the Term D Loan commitment, if requested by us and approved by the Agent’s investment committee, which shall be due on the earliest of (1) the funding of the Term D Loan, (2) if we request and the 2022 Lenders provide the Term D Loan commitment, the day immediately preceding the amortization date, and (3) if we request and the 2022 Lenders provide the Term D Loan commitment, the prepayment, refinancing, substitution or replacement of the Term C Loan on or prior to the date immediately preceding the amortization date.
We are obligated to pay a final fee equal to 4.95 % of the aggregate original principal amount of the Four 2022 Loans, to the extent such loans are funded, upon the earliest to occur of the maturity date, the acceleration of the Four 2022 Loans, and the prepayment, refinancing, substitution, or replacement of the Four 2022 Loans.
We may voluntarily prepay all amounts outstanding under the Four 2022 Loans, subject to a prepayment premium of (i) 3 % of the outstanding principal amount of the Four 2022 Loans if prepaid prior to or on October 17, 2024, (ii) 2 % of the outstanding principal amount of the Four 2022 Loans if prepaid after October 17, 2024 through and including October 17, 2025, or (iii) 1 % of the outstanding principal amount of the Four 2022 Loans if prepaid after October 17, 2025 and prior to the maturity date. The Four 2022 Loans are secured by substantially all of our assets, except for our intellectual property and certain other customary exclusions. Additionally, as discussed in Note 9. Derivative Liabilities , in connection with the 2022 Original Loans, we entered into an agreement whereby we agreed to pay an exit fee in the amount of 2 % of the 2022 Original Loans funded (2022 Exit Fee). Notwithstanding the prepayment or termination of the 2022 Loan, the 2022 Exit Fee will expire 10 years from the Closing Date.
The 2022 Loan Agreement, as amended, contains customary representations and warranties and customary affirmative and negative covenants, including, among others, requirements as to financial reporting and insurance and restrictions on our ability to dispose of our business or property, to change our line of business, to liquidate or dissolve, to enter into any change in control transaction, to merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, to incur additional indebtedness, to incur liens on our property, to pay any dividends or other distributions on capital stock other than dividends payable solely in capital stock or to redeem capital stock. We have agreed to not allow our cash, cash equivalents and available-for-sale investments to be less than the eighty percent ( 80 %) of the outstanding Four 2022 Term Loan balance for any period in which our net revenue from the sale of any products, calculated on a trailing six ( 6 ) month basis and tested monthly, is less than sixty percent ( 60 %) of the outstanding Four 2022 Loan balance.
In addition, the 2022 Loan Agreement, as amended, contains customary events of default that entitle the Agent to cause our indebtedness under the 2022 Loan Agreement to become immediately due and payable, and to exercise remedies against us and the collateral securing the Four 2022 Term Loans, including our cash. Under the 2022 Loan Agreement, an event of default will occur if, among other things, we fail to make payments under the 2022 Loan Agreement, we breach any of our covenants under the 2022 Loan Agreement, subject to specified cure periods with respect to certain breaches, certain Lenders determine that a material adverse change has occurred, we or our assets become subject to certain legal proceedings, such as bankruptcy proceedings, we are unable to pay our debts as they become due or we default on contracts with third parties which would permit the holder of indebtedness to accelerate the maturity of such indebtedness or that could have a material adverse change on us. Upon the occurrence and for the duration of an event of default, an additional default interest rate equal to 4 % per annum will apply to all obligations owed under the 2022 Loan Agreement. We have classified the 2022 Original Loan balance as a non-current liability as of March 31, 2024 due to principal repayments beginning in January 2027. We have concluded that the provisions that could cause acceleration of the principal repayments are remote.
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As of March 31, 2024, our future payment obligations related to the 2022 Loan, excluding interest payments and the 2022 final fee, were as follows (in thousands):
Total repayment obligations $ 104,950
Less: Unamortized discount and debt issuance costs ( 1,111 )
Less: Unaccreted value of final fee ( 4,005 )
Long-term debt 99,834
Less: Current portion of long-term debt —
Long-term debt, net of current portion $ 99,834
NOTE 9. DERIVATIVE LIABILITIES
2018 Exit Fee
In May 2018, in connection with entering into the 2018 Loan Agreement, we entered into an agreement pursuant to which we agreed to pay $ 1.5 million in cash (2018 Exit Fee) upon any change of control transaction in respect of the Company or if we obtain both (i) U.S. FDA approval of XPHOZAH and (ii) U.S. FDA approval of IBSRELA, which was obtained on September 12, 2019 (2018 Exit Fee Agreement). Notwithstanding the February 2022 prepayment of the 2018 Loan, our obligation to pay the 2018 Exit Fee would have expired on May 16, 2028. We concluded that the 2018 Exit Fee was a freestanding derivative which should be accounted for at fair value on a recurring basis.
In October 2023, we received approval from the U.S. FDA for XPHOZAH to reduce serum phosphorus in adults with chronic kidney disease (CKD) on dialysis as add-on therapy in patients who have an inadequate response to phosphate binders or who are intolerant of any dose of phosphate binder therapy. This triggered our obligation to pay the 2018 Exit Fee to the 2018 Lenders. Prior to our subsequent payment of the 2018 Exit Fee in October 2023, the estimated fair value of the 2018 Exit Fee was recorded as a derivative liability and included in accrued expense and other current liabilities on the accompanying condensed balance sheets.
2022 Exit Fee
In February 2022, in connection with entering into the 2022 Original Loans, we entered into an agreement, whereby we agreed to pay an exit fee in the amount of 2 % of the 2022 Original Loan funded (2022 Exit Fee) upon (i) any change of control transaction or (ii) our achievement of net revenue from the sale of any products equal to or greater than $ 100.0 million, measured on a six (6) months basis (Revenue Milestone), tested monthly at the end of each month. The Term C and Term D Loans do not result in payment of an additional exit fee. Notwithstanding the prepayment or termination of the 2022 Loan, the 2022 Exit Fee will expire on February 23, 2032. We concluded that the 2022 Exit Fee is a freestanding derivative which should be accounted for at fair value on a recurring basis. The estimated fair value of the 2022 Exit Fee is recorded as a derivative liability and included in accrued expenses and other current liabilities on the accompanying condensed balance sheets. As of March 31, 2024 and December 31, 2023, the estimated fair value of the 2022 Exit Fee was $ 0.8 million and $ 0.7 million, respectively.
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 our valuation utilized significant unobservable inputs. Specifically, the key assumptions included in the calculation of the estimated fair value of the 2022 Exit Fee derivative liability include: (i) our estimates of both the probability and timing of achieving the Revenue Milestone and (ii) the probability and timing of funding the Term B Loan, which was dependent upon (a) approval by the U.S. FDA for our NDA for the control of serum phosphorus in adult patients with CKD on dialysis by November 30, 2023, and (b) achievement of certain product revenue milestone targets. As of March 31, 2024, uncertainty around two of the noted valuation estimates had been removed, as the Term B Loan had been funded and the U.S. FDA had approved our NDA for the control of serum phosphorus in adult patients with CKD on dialysis prior to November 30, 2023. Generally, increases or decreases in the probability of occurrence would result in a directionally similar impact in the fair value measurement of the derivative liability and it is estimated that a 10 % increase (decrease) in the probability of occurrence would not result in a material fair value fluctuation.
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Changes in the fair value of recurring measurements included in Level 3 of the fair value hierarchy are presented as other income, net in our condensed statements of operations and comprehensive loss and were as follows for the three months ended March 31, 2024 and 2023 (in thousands):
2024 2023
Fair value of exit fee derivative liabilities at January 1, $ 675 $ 1,656
Changes in estimated fair value:
2018 Exit Fee — 48
2022 Exit Fee 159 22
Fair value of exit fee derivative liabilities at March 31, $ 834 $ 1,726
NOTE 10. LEASES
All of our leases are operating leases and each contain customary rent escalation clauses. Certain of the leases have both lease and non-lease components. We have elected to account for each separate lease component and the non-lease components associated with that lease component as a single lease component for all classes of underlying assets.
The following table provides additional details of our facility leases presented in our condensed balance sheets (dollars in thousands):
Facilities March 31, 2024 December 31, 2023
Right-of-use assets $ 4,641 $ 5,589
Current portion of lease liabilities 4,314 4,435
Operating lease liability, net of current portion 778 1,725
Total lease liabilities $ 5,092 $ 6,160
Weighted-average remaining life (years) 1.3 1.6
Weighted-average discount rate 6.8 % 6.8 %
The lease costs, which are included in operating expenses in our condensed statements of operations and comprehensive loss, were as follows (in thousands):
Three Months Ended March 31,
2024 2023
Operating lease expense $ 1,046 $ 1,064
Cash paid for operating lease $ 1,166 $ 1,098
The following table summarizes our undiscounted cash payment obligations for our operating lease liabilities as of March 31, 2024 (in thousands):
Remainder of 2024 $ 3,550
2025 1,450
2026 329
Thereafter —
Total undiscounted operating lease payments 5,329
Imputed interest expenses ( 237 )
Total operating lease liabilities 5,092
Less: Current portion of operating lease liability ( 4,314 )
Operating lease liability, net of current portion $ 778
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NOTE 11. STOCKHOLDERS’ EQUITY
At the Market Offerings Agreement
In July 2020, we filed a Form S-3 registration statement, which became effective in August 2020 (2020 Registration Statement). In August 2021, we filed a prospectus supplement under the 2020 Registration Statement for the offering, issuance and sale by us of up to a maximum aggregate offering price of $ 150.0 million of our common stock that may be issued and sold, from time to time, under a sales agreement (2021 Open Market Sales Agreement) we entered into with Jefferies LLC (Jefferies), pursuant to which we may, from time to time, sell up to $ 150.0 million in shares of our common stock through Jefferies. Pursuant to the 2021 Open Market Sales Agreement, Jefferies, as our sales agent, receives a commission of up to 3.0 % of the gross sales price for shares of common stock sold under the 2021 Open Market Sales Agreement. As of March 2023, we had received the maximum gross proceeds of $ 150.0 million under the 2021 Open Market Sales Agreement at a weighted average share price of approximately $ 1.57 per share, which included 15.5 million shares of our common stock for which we received gross proceeds of $ 51.9 million at a weighted average share price of approximately $ 3.35 during the quarter ended March 31, 2023.
In January 2023, we filed a Form S-3 registration statement, which became effective in January 2023 (2023 Registration Statement), containing (i) a base prospectus for the offering, issuance and sale by us of up to a maximum aggregate offering price of $ 250.0 million of our 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 us of up to a maximum aggregate offering price of $ 150.0 million of our common stock that may be issued and sold, from time to time, under a sales agreement with Jefferies, deemed to be “at-the-market offerings” (2023 Open Market Sales Agreement). Pursuant to the 2023 Open Market Sales Agreement, Jefferies, as sales agent, may receive a commission of up to 3.0 % of the gross sales price for shares of common stock sold under the 2023 Open Market Sales Agreement. During the three months ended March 31, 2024 and 2023, we completed no sales pursuant to the 2023 Open Market Sales Agreement. As of March 31, 2024, we have sold 16.8 million shares of our common stock and received gross proceeds of $ 70.0 million at a weighted average sales price of approximately $ 4.17 per share under the 2023 Open Market Sales Agreement.
NOTE 12. EQUITY INCENTIVE PLANS
Stock-Based Compensation
Stock-based compensation expense recognized for stock options, restricted stock units (RSUs), and our employee stock purchase program (ESPP) are recorded as operating expenses in our condensed statements of operations and comprehensive loss, as follows (in thousands):
Three Months Ended March 31,
2024 2023
Selling, general and administrative $ 5,646 $ 2,088
Research and development 1,970 824
Total $ 7,616 $ 2,912
As of March 31, 2024, our total unrecognized stock-based compensation expense, net of estimated forfeitures, and average remaining vesting period, included the following (dollars in thousands):
Unrecognized Compensation Expense Average Remaining Vesting Period (Years)
Stock option grants $ 59,367 3.1
RSU grants $ 49,955 3.3
ESPP $ 522 0.4
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Stock Options
A summary of our stock option activity and related information for the three months ended March 31, 2024 is as follows (in thousands, except dollar amounts):
Number of Shares Weighted-Average
Exercise Price per
Share
Balance at December 31, 2023 22,168 $ 4.20
Options granted 6,502 $ 8.68
Options exercised ( 702 ) $ 3.11
Options forfeited or canceled ( 178 ) $ 2.83
Balance at March 31, 2024 27,790 $ 5.29
Exercisable at March 31, 2024 12,856 $ 5.29
Restricted Stock Units
A summary of our RSUs activity and related information for the three months ended March 31, 2024 is as follows (in thousands, except dollar amounts):
Number of
RSUs Weighted-Average
Grant Date Fair
Value Per Share
Non-vested restricted stock units at December 31, 2023 3,646 $ 3.09
Granted 4,901 $ 8.68
Vested ( 552 ) $ 5.62
Forfeited ( 60 ) $ 2.64
Non-vested restricted stock units at March 31, 2024 7,935 $ 6.37
Employee Stock Purchase Plan
During the three months ended March 31, 2024, we sold approximately 0.3 million shares of our common stock under the ESPP. The shares were purchased by employees at an average purchase price of $ 4.10 per share resulting in proceeds to us of approximately $ 1.0 million.
Issuance of Common Stock for Services
Under Our Amended and Restated Non-Employee Director Compensation Program, members of our board of directors may elect to receive shares of our stock in lieu of their cash fees. During the three months ended March 31, 2024, we issued no shares of our common stock to members of the board of directors in accordance with the program.
NOTE 13. NET LOSS PER SHARE
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period and excludes any dilutive effects of stock-based awards and warrants. Diluted net loss per common share is computed giving effect to all potential dilutive common shares, including common stock issuable upon exercise of stock options, and unvested restricted common stock and stock units. As we had net losses for the three months ended March 31, 2024 and 2023, all potential common shares were determined to be anti-dilutive.
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The following table sets forth the computation of net loss per common share (in thousands, except per share amounts):
Three Months Ended March 31,
Numerator: 2024 2023
Net loss $ ( 26,518 ) $ ( 26,773 )
Denominator:
Weighted average common shares outstanding - basic 233,066 207,023
Weighted average common shares outstanding - diluted 233,066 207,023
Net loss per share of common stock - basic and diluted $ ( 0.11 ) $ ( 0.13 )
For the periods presented, the total numbers of securities that could potentially dilute net income per share in the future that were not considered in the diluted net loss per share calculations because the effect would have been anti-dilutive were as follows (in thousands):
Three Months Ended March 31,
2024 2023
Options to purchase common stock 26,681 19,855
Restricted stock units 7,024 2,931
ESPP shares issuable 227 205
Total 33,932 22,991
NOTE 14. CONTINGENCIES
On July 30 and August 12, 2021, two putative securities class action lawsuits were commenced in the U.S. District Court for the Northern District of California naming as defendants Ardelyx and two current officers captioned Strezsak v. Ardelyx, Inc., et al. , Case No. 4:21-cv-05868-HSG, and Siegel v. Ardelyx, Inc., et al. , Case No. 5:21-cv-06228-HSG (together, the Securities Class Actions). The complaints allege that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder, by making false and misleading statements and omissions of material fact related to tenapanor. The plaintiffs seek damages and interest, and an award of costs, including attorneys’ fees. On July 19, 2022, the court consolidated the two putative class actions and appointed a lead plaintiff and lead counsel. The lead plaintiff filed a second amended complaint under which the plaintiffs seek to represent all persons who purchased or otherwise acquired Ardelyx securities between March 6, 2020 and July 19, 2021. Defendants filed a motion to dismiss the amended complaint on June 2, 2023. On March 22, 2024, the court granted defendants’ motion to dismiss. The court provided plaintiffs a third opportunity to amend and plaintiffs filed a third amended complaint on April 19, 2024. Defendant's motion to dismiss the third amended complaint is required to be filed by June 3, 2024. We believe the plaintiff’s claims are without merit and we have not recorded any accrual for a contingent liability associated with these legal proceedings.
On December 7, 2021 and March 29, 2022, two verified shareholders derivative lawsuits were filed in the U.S. District Court for the Northern District of California purportedly on behalf of Ardelyx against certain of Ardelyx’s executive officers and members of our board of directors, captioned Go v. Raab , et al., Case No. 4:21-cv-09455-HSG, and Morris v. Raab , et al., Case No. 4:22-cv-01988-JSC. The complaints allege that the defendants' violations of Section 14(a) of the Securities Exchange Act of 1934, as amended, breaches of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets for personally making and/or causing Ardelyx to make materially false and misleading statements regarding the Company’s business, operations and prospects. The complaint seeks contribution under Sections 10(b) and 21D of the Securities Exchange Act of 1934 from two executive officers. On January 19, and April 27, 2022, the court granted the parties’ stipulation to stay the Go and Morris actions, respectively, until resolution of the anticipated motion(s) to dismiss in the Securities Class Actions. On October 25, 2022, the parties filed a stipulation to consolidate and stay the Go and Morris actions, and on October 27, 2022, the court consolidated the Go and Morris action and stayed the consolidated action pending resolution of the anticipated motion(s) to dismiss in the Securities Class Action. We believe the plaintiff’s claims are without merit and we have not recorded any accrual for a contingent liability associated with these legal proceedings.
From time to time, we may be involved in legal proceedings arising in the ordinary course of business. As of March 31, 2024, there is no litigation pending that would reasonably be expected to have a material adverse effect on our results of operations and financial condition, and no contingent liabilities were accrued as of March 31, 2024.
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