ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

OVERVIEW

We are a specialized biopharmaceutical company focused on developing first-in-class medicines to improve treatment for people with kidney and cardiorenal diseases. This includes patients with chronic kidney disease (“CKD”) on dialysis suffering from elevated serum phosphorus, or hyperphosphatemia; and CKD patients and/or heart failure patients with elevated serum potassium, or hyperkalemia. Our lead product candidate, tenapanor, is a first-in-class medicine for which we submitted a New Drug Application (“NDA”) to the U.S. Food and Drug Administration (“FDA”) in June 2020 for the control of serum phosphorus in adult patients with CKD on dialysis. In September 2020 the FDA accepted the filing of our NDA and set a Prescription Drug User Fee Act (“PDUFA”) date of April 29, 2021. Tenapanor has a unique mechanism of action and acts locally in the gut to inhibit the sodium hydrogen exchanger 3, or NHE3. This results in the tightening of the epithelial cell junctions, thereby significantly reducing paracellular uptake of phosphate, the primary pathway of phosphate absorption.

OUR PRODUCT PIPELINE

Tenapanor: A New Approach for The Control of Serum Phosphorus in CKD Patients on Dialysis

Our portfolio is led by the development of tenapanor, a first-in-class medicine for the control of serum phosphorus in adult patients with CKD on dialysis. Tenapanor for the control of serum phosphorus has a unique mechanism of action and acts locally in the gut to inhibit the sodium hydrogen exchanger 3 (“NHE3”). This results in the tightening of the epithelial cell junctions, thereby significantly reducing paracellular uptake of phosphate, the primary pathway of phosphate absorption. In September 2020 we announced that the FDA accepted the filing of our NDA for tenapanor for the control of serum phosphorus in adult patients with CKD on dialysis. The acceptance of our NDA represents the next critical step toward bringing to market a completely new approach to the management of hyperphosphatemia. The FDA has set a PDUFA date of April 29, 2021. We continue to advance our commercial preparations for the launch of tenapanor. The NDA is supported by three successful Phase 3 trials involving over 1,000 patients that evaluated the use of tenapanor for the control of serum phosphorus in CKD patients on dialysis, with two trials evaluating tenapanor as monotherapy and one trial evaluating tenapanor as part of a dual mechanism approach with binders.

We have established agreements with Kyowa Kirin Co., Ltd. (“KKC”) in Japan, Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd. (“Fosun Pharma”) in China and Knight Therapeutics, Inc. (“Knight“) in Canada for the development and commercialization of tenapanor for certain indications in their respective territories.

In December 2019, we reported statistically significant topline efficacy results from our second monotherapy Phase 3 clinical trial, the PHREEDOM trial, which evaluated tenapanor for the control of serum phosphorus in CKD patients on dialysis. The PHREEDOM trial followed a successful monotherapy Phase 3 clinical trial completed in 2017, the BLOCK trial, which achieved statistical significance for the primary endpoint. The only adverse event reported in these Phase 3 trials in less than 5% of patients was diarrhea, with an incidence rate of 52% in the PHREEDOM trial and 39% in the BLOCK trial, with most incidences in each trial being mild to moderate in nature. PHREEDOM is a one-year study with a 26-week open-label treatment period and a 12-week double-blind, placebo-controlled randomized withdrawal period

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followed by a 14-week open-label safety extension period. An active safety control group, for safety analysis only, received sevelamer, open-label, for the entire 52-week study period. Patients completing the PHREEDOM trial from both the tenapanor arm and the sevelamer active safety control arm had the option to participate in NORMALIZE, an ongoing open-label 18-month extension study.

In June 2020, we announced positive results from a planned interim data analysis from our ongoing NORMALIZE extension study evaluating tenapanor, as monotherapy or in combination with sevelamer, to achieve serum phosphorus levels in the normal range (2.5 – 4.5 mg/dL) in patients with CKD on dialysis. The NORMALIZE extension study allowed patients from our PHREEDOM study to continue therapy with tenapanor and enabled those patients in the PHREEDOM safety control arm receiving sevelamer carbonate to transition to tenapanor. The data from the planned interim analysis demonstrated that the foundational use of tenapanor as monotherapy or in combination with sevelamer carbonate produces a significant phosphorus-lowering effect with a mean serum phosphorous reduction of 2. 33 mg/dL, from a mean baseline phosphorus of 7. 27 mg/dL at the beginning of the PHREEDOM trial to a mean of 4. 94 mg/dL at the time of this analysis. Of the 171 patients in this interim analysis who completed up to 9 months of treatment in this extension study, up to 47. 4% achieved a normal serum phosphorus level, and of those, the majority were on tenapanor alone or tenapanor with low dose sevelamer of three or fewer sevelamer tablets per day. These data represent a 58% improvement in the rate of patients who achieve a normal serum phosphorus level, as compared to current treatment practice data as reported in the April 2020 Dialysis Outcomes Practice Patterns Study (“DOPPS”) Practice Monitor. The DOPPS data demonstrate that, with currently available treatments, only 30% of patients have serum phosphorous levels less than 4.6 mg/dL. The only adverse event reported in greater than 5% of patients in NORMALIZE was diarrhea, with an incidence rate of 23.3%.

In September 2019, we reported positive results from the AMPLIFY trial, a Phase 3 study evaluating tenapanor in patients with CKD on dialysis who had uncontrolled hyperphosphatemia despite phosphate binder treatment. In this trial, approximately twice the number of patients achieved the serum phosphorus treatment goal of less than 5.5 mg/dL with tenapanor and phosphate binders versus phosphate binders alone. The only adverse event with a placebo-adjusted rate greater than 3% was diarrhea, with an incidence rate of 43%, with most being mild to moderate in nature.

In June 2020, our partner Kyowa Kirin Co., Ltd., a Japan-based global specialty pharmaceutical company exclusively developing tenapanor in Japan, presented results from a Phase 2 trial of tenapanor at the European Renal Association-European Dialysis and Transplant Association annual meeting (“ERA-EDTA 2020”). The trial was designed to evaluate if, with tenapanor, patients with hyperphosphatemia undergoing hemodialysis could achieve at least a 30% decrease in mean pill burden while maintaining their serum phosphorus level. The study results were statistically significant, with 71.6% (p<0.001) of patients achieving at least a 30% reduction in mean pill burden. The overall mean reduction in phosphate binder usage was 80% (reduction from 14.7 to 3.0 pills per day), while maintaining serum phosphorus control. The mean phosphorus level of patients entering the study on treatment with binders was 5.2 mg/dL at baseline and 4.7 mg/dL at the end of the 26-week study.

Tenapanor, if approved, would be the first therapy for phosphate management that blocks phosphorus absorption at the primary pathway of uptake. It is not a phosphate binder. Tenapanor is a novel, potent, small molecule, that has been shown in phase 3 studies to treat hyperphosphatemia as monotherapy and as a dual mechanism approach.

IBSRELA® (tenapanor) for Irritable Bowel Syndrome with Constipation (IBS-C)

In addition to the development of tenapanor for hyperphosphatemia, we have developed tenapanor for the treatment of patients with irritable bowel syndrome with constipation (“IBS-C”). In September 2019, we received FDA approval of IBSRELA® (tenapanor) for the treatment of IBS-C in adults. IBS-C is a burdensome gastrointestinal (“GI”) disorder. It is characterized by significant abdominal pain, constipation, straining during bowel movements, bloating and/or gas.

RDX013 Program: Small Molecule for Treating Hyperkalemia

We are also advancing a small molecule potassium secretagogue program, RDX013, for the potential treatment of hyperkalemia. Hyperkalemia is a common problem in patients with heart and kidney disease, particularly in patients taking common blood pressure medications known as renin-angiotensin-aldosterone system (“RAAS”) inhibitors. Similar to what we have done with tenapanor in developing a non-binder approach for the treatment of elevated serum phosphate levels,

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RDX013 is designed to target the underlying biological mechanisms of potassium secretion to lower elevated potassium. While currently available therapies are all ion exchange agents, RDX013 is a first in class approach that exerts its effects by amplifying the underlying pathways of potassium secretion in the colon.

Since commencing operations in October 2007, substantially all our efforts have been dedicated to our research and development (“R&D”) activities, including developing our clinical product candidate tenapanor and developing our proprietary drug discovery and design platform. We have not generated any revenues from product sales. As of December 31, 2020, we had an accumulated deficit of $554.8 million.

We expect to continue to incur substantial operating losses for the foreseeable future as a result of costs associated with the following activities: our continued development of tenapanor for the control of serum phosphorus in CKD patients on dialysis; our preparations for, and if approved, the commercialization of tenapanor in the United States for the control of serum phosphorus in CKD patients on dialysis, including significantly increased personnel costs associated with our commercial team; the performance of certain activities required as a result of our NDA approval of tenapanor for IBS-C; the continued development of RDX013 and the advancement of our research programs into the preclinical stage. To date, we have funded our operations from the sale and issuance of common stock and convertible preferred stock, funds from our collaboration partnerships, which includes license fees, milestones and product supply revenue, as well as funds from our Loan Agreement with Solar Capital Ltd. and Western Alliance Bank.

RDX020 Program: Small molecule for Treating Metabolic Acidosis

We have an ongoing discovery program targeting the inhibition of bicarbonate exchange inhibitor for the treatment of metabolic acidosis, a highly prevalent comorbidity in CKD patients that is strongly correlated with disease progression and adverse outcomes. We have identified lead compounds that are potent, selective and proprietary inhibitors of bicarbonate secretion.

FINANCIAL OPERATIONS OVERVIEW

Revenue

Our revenue to date has been generated primarily through license, research and development collaborative agreements with various collaboration partners. We have not generated any revenue from commercial product sales. In the future, we may generate revenue from a combination of our own product sales, if regulatory approval is received, and payments in connection with our current or future collaborative partnerships, including license fees, other upfront payments, milestone payments, royalties and payments for drug product and/or drug substance. We expect that any revenue we generate will fluctuate in future periods as a result of, among other factors: whether we receive regulatory approval for tenapanor for the control of serum phosphorus in CDK patients on dialysis, and if such approval is received, the timing of such approval and the extent to which we are successful in our efforts to commercialize tenapanor for such indication; the timing and progress of goods and services provided pursuant to our current or future collaborative partnerships; our or our collaborators’ achievement of preclinical, clinical, regulatory or commercialization milestones, to the extent achieved; the timing and amount of any payments to us relating to the aforementioned milestones; and the extent to which any of our product candidates are approved and successfully commercialized by a collaboration partner. If we, our current collaboration partners or any future collaboration partners fail to obtain regulatory approval for tenapanor, our ability to generate future revenue from our product sales or from our collaborative arrangements, and our results of operations and financial position, would be materially and adversely affected. Our past revenue performance is not necessarily indicative of results to be expected in future periods. See Note 2, Summary of Significant Accounting Policies, in the notes to our financial statements, included in Part II, Item 8, of this Annual Report on Form 10-K, for further details.

Cost of Revenue

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

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rights to develop and commercialize tenapanor or certain other NHE3 inhibitors. We have agreed to pay AstraZeneca up to a maximum of $75.0 million in the aggregate for (i) and (ii). We recognize these expenses as cost of revenue when we recognize the corresponding revenue that gives rise to payments due to AstraZeneca. To date, we recognized an aggregate of $10.6 million as cost of revenue under the AZ Termination Agreement since 2017. See details in Note 12, Collaboration and Licensing Agreements, under AstraZeneca, in the notes to our financial statements, included in Part II, Item 8, of this Annual Report on Form 10-K.

Research and Development

We recognize all research and development expenses as they are incurred to support the discovery, research, development and manufacturing of our product candidates. Research and development expenses include, but are not limited to, the following:

We expect to continue to make substantial investments in research and development activities as we further progress the development of tenapanor, RDX013 and our other product candidates as we advance our research programs into the preclinical stage and as we continue our early stage research. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming. We may not succeed in achieving marketing approval for our product candidates, including tenapanor for the control of serum phosphorus in adult patients with CKD on dialysis. The probability of success of each of the product candidates may be affected by numerous factors, including preclinical data, clinical data, the regulatory process, market acceptance, sufficient third-party coverage or reimbursement, our ability to access capital on acceptable terms, competition, manufacturing capability and commercial viability.

We anticipate that we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate, ongoing assessment as to each product candidate’s commercial potential, and our ability to access capital on acceptable terms. We will need to raise additional capital to complete the development and commercialization of tenapanor. If we are unable to access capital on a timely basis and on terms that are acceptable to us, we may be forced to restructure certain aspects of our business or identify and complete one or more strategic collaborations or other transactions in order to fund the development or commercialization of tenapanor, the development of RDX013 or certain of our product candidates through the use of alternative structures.

General and Administrative

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, for certain of our executives, our board members, and our finance, legal, business development, market development, commercial and support staff. Other general and administrative expenses include facility related costs and

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

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

Interest Expense

Interest expense represents the interest paid on our loan payable.

Other Income, net

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

Provision for Income Taxes

Our provision for income taxes includes current and deferred tax, including foreign withholding taxes paid on payments received from certain collaboration partners. Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Our deferred tax assets continue to be fully offset by a valuation allowance, including deferred tax assets related to our net operating loss carryforwards, which may be subject to annual limitations as a result of ownership changes that may have occurred or could occur in the future.

CRITICAL ACCOUNTING POLICES AND ESTIMATES

A detailed discussion of our significant accounting policies can be found in Note 2, Summary of Significant Accounting Policies, in the notes to our financial statements, included in Part II, Item 8, of this Annual Report on Form 10-K. Critical accounting policies are those that require significant judgment and/or estimates by management at the time that financial statements are prepared such that materially different results might have been reported if other assumptions had been made. These estimates form the basis for making judgments about the carrying values of assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates.

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

Revenue Recognition

We generate revenue primarily from research and collaboration and license agreements with customers. Goods and services in the agreements may include the grant of licenses for the use of our technology, the provision of services associated with the research and development of product candidates, manufacturing services, and participation in joint steering committees. The terms of these arrangements typically include payment to us of one or more of the following: non-refundable, up-front license fees; research, development, regulatory and commercial milestone payments; reimbursement of research and development services; option payments; reimbursement of certain costs; payments for manufacturing supply services; and future royalties on net sales of licensed products.

When two or more contracts are entered into with the same customer at or near the same time, we evaluate the contracts to determine whether the contracts should be accounted for as a single arrangement. Contracts are combined and accounted for as a single arrangement if one or more of the following criteria are met: (i) the contracts are negotiated as a package

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with a single commercial objective; (ii) the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or (iii) the goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation.

In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements, management performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including any constraints on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation. As part of the accounting for contracts with customers, we develop assumptions that require judgment to determine whether promised goods and services represent distinct performance obligations and the standalone selling price for each performance obligation identified in the contract. This evaluation is subjective and requires us to make judgments about the promised goods and services and whether those goods and services are separable from other aspects of the contract. Further, determining the standalone selling price for performance obligations requires significant judgment, and when an observable price of a promised good or service is not readily available, we consider relevant assumptions to estimate the standalone selling price, including, as applicable, market conditions, development timelines, probabilities of technical and regulatory success, reimbursement rates for personnel costs, forecasted revenues, potential limitations to the selling price of the product and discount rates.

We apply judgment in determining whether a combined performance obligation is satisfied at a point in time or over time, and, if over time, concluding upon the appropriate method of measuring progress to be applied for purposes of recognizing revenue. We evaluate the measure of progress each reporting period and, as estimates related to the measure of progress change, related revenue recognition is adjusted accordingly. Changes in our estimated measure of progress are accounted for prospectively as a change in accounting estimate. We recognize collaboration revenue by measuring the progress toward complete satisfaction of the performance obligation using an input measure. In order to recognize revenue over the research and development period, we measure actual costs incurred to date compared to the overall total expected costs to satisfy the performance obligation. Revenues are recognized as the program costs are incurred. We will re-evaluate the estimate of expected costs to satisfy the performance obligation each reporting period and make adjustments for any significant changes. Amounts received prior to satisfying the revenue recognition criteria are recorded as contract liabilities in our balance sheets. If the related performance obligation is expected to be satisfied within the next twelve months, this will be classified in current liabilities. Amounts recognized as revenue prior to receipt are recorded as contract assets in our balance sheets. If we expect to have an unconditional right to receive the consideration in the next twelve months, this will be classified in current assets. A net contract asset or liability is presented for each contract with a customer.

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

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

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

Licenses of intellectual property: If a license granted to a customer to use our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from consideration allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, we apply judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, to conclude upon the appropriate method of measuring progress for purposes of recognizing revenue related to consideration allocated to the performance obligation.

Options: Customer options, such as options granted to allow a licensee to choose to research, develop and commercialize licensed compounds are evaluated at contract inception in order to determine whether those options provide a material right (i. e. , an optional good or service offered for free or at a discount) to the customer. If the customer options represent a material right, the material right is treated as a separate performance obligation at the outset of the arrangement. We allocate the transaction price to material rights based on the standalone selling price, and revenue is recognized when or as the future goods or services are transferred or when the option expires. Customer options that are not material rights do not give rise to a separate performance obligation, and as such, the additional consideration that would result from a customer exercising an option in the future is not included in the transaction price for the current contract. Instead, the option is deemed a marketing offer, and additional option fee payments are recognized or being recognized as revenue when the licensee exercises the option. The exercise of an option that does not represent a material right is treated as a separate contract for accounting purposes.

Contract modifications: Contract modifications, defined as changes in the scope or price (or both) of a contract that are approved by the parties to the contract, such as a contract amendment, exist when the parties to a contract approve a modification that either creates new or changes existing enforceable rights and obligations of the parties to the contract. Depending on facts and circumstances, we account for a contract modification as one of the following: (i) a separate contract; (ii) a termination of the existing contract and a creation of a new contract; or (iii) a combination of the preceding treatments. A contract modification is accounted for as a separate contract if the scope of the contract increases because of the addition of promised goods or services that are distinct and the price of the contract increases by an amount of consideration that reflects our standalone selling prices of the additional promised goods or services. When a contract modification is not considered a separate contract and the remaining goods or services are distinct from the goods or services transferred on or before the date of the contract modification, we account for the contract modification as a termination of the existing contract and a creation of a new contract. When a contract modification is not considered a separate contract and the remaining goods or services are not distinct, we account for the contract modification as an add-on to the existing contract and as an adjustment to revenue on a cumulative catch-up basis.

We receive payments from our licensees as established in each contract. Upfront payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements. Where applicable, amounts are recorded as unbilled revenue when our right to consideration is unconditional. We do not assess whether a contract with a customer has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less.

Accrued Research and Development Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service

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providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:

● CROs in connection with clinical studies;

● investigative sites in connection with clinical studies;

● collaborator entities in connection with our collaboration agreements; and

● vendors in connection with preclinical development activities.

We record expenses related to clinical studies and manufacturing development activities based on our estimates of the services received and efforts expended pursuant to contracts with our CROs and manufacturing vendors that conduct and manage these activities on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which each component of a service will be performed, and estimate, with vendor input if appropriate, the resulting level of completion of each component of the service, with such estimates often involving drivers that provide a surrogate measurement of completion such as number of enrolled subjects and/or number of sites activated in the calculation of clinical trial fee accruals. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrued or prepaid expense balance accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, we may report amounts that are too high or too low in any particular period.

Stock-Based Compensation

We estimate the fair value of stock options and Employee Stock Purchase Plan (“the ESPP”) shares using the Black-Scholes valuation model. The Black-Scholes model requires the input of highly subjective assumptions which determine the fair value of stock-based awards. These assumptions include:

Expected Term—We have limited historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for our stock-option grants. As such, the expected term is estimated using the simplified method whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option.

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

Risk-Free Interest Rate—The risk-free interest rate assumption is based on zero-coupon U.S. Treasury instruments on the date of grant with a maturity date consistent with the expected term of our stock option grants.

Expected Dividend— To date, we have not declared or paid any cash dividends and do not have any plans to do so in the future. Therefore, we use an expected dividend yield of zero.

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

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based compensation costs are to be recognized over the vesting period of the award, and we have elected to use the straight-line attribution method. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimate forfeitures based on historical experience.

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

Performance-based RSUs, or PRSUs, are valued at grant-date fair market value. The vesting of the PRSUs is based on performance conditions. Performance conditions include: (i) a specific performance criteria and (ii) the employee’s continuous employment by the company for a stated period of time in order to earn the right to the related PRSUs to vest. The Company recognizes compensation cost with respect to the vesting of the PRSUs on a ratable basis over the requisite service period, upon the performance conditions being deemed probable of achievement.

RESULTS OF OPERATIONS

Comparison of the Years Ended December 31, 2020 and 2019

Revenue

Below is a summary of our total revenue (dollars in thousands):

Year Ended December 31,

The increase in our revenue was primarily attributable to $4.9 million higher collaborative development revenue recognized in connection with the 2019 KKC Agreement, which was entered into in November 2019, a $0.7 million licensing revenue recognized upon Knight’s achievement of a development milestone pursuant to the Knight Agreement and a $1.4 million increase in manufacturing supply of tenapanor and other materials sold to KKC in accordance with the 2017 KKC Agreement, partially offset by $3.0 million revenue related to achievement of a milestone pursuant to the Fosun agreement during the year ended December 31, 2019.

Operating Expenses

Below is a summary of our operating expenses (dollars in thousands):

Year Ended December 31,

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Cost of Revenue

Cost of revenue was $0.1 million for the year ended December 31, 2020, a decrease of $0.5 million, or 75.8%, compared to $0.6 million for the year ended December 31, 2019. Cost of revenue in both periods is the portion of tenapanor-related upfront and milestone payment from our collaboration partners that we are required to make to AstraZeneca under the AstraZeneca Termination Agreement.

Research and Development

Below is a summary of our research and development expenses (dollars in thousands):

Year Ended December 31,

The decrease in our external R&D expenses for the year ended December 31, 2020 primarily includes a $9.7 million decrease in our tenapanor-related expenses, partially offset by $3.0 million of higher expenses attributable to KKC Research Agreement-related research and general R&D expenses. Of the overall tenapanor-related decrease, approximately $11.0 million relates to lower clinical study costs due to the winding down of expenses associated with our Phase 3 program for tenapanor for the control of hyperphosphatemia, offset by an out-of-period adjustment recorded during 2019 that reduced clinical trial expenses by $3.6 million related to our tenapanor clinical trials for the nine months ended September 30, 2019; and approximately $2.9 million relates to lower manufacturing expenses due to reduced validation related expenses for tenapanor in 2020 as compared to 2019; offset by an increase of $3.1 million related to regulatory expenses that includes $2.9 million paid to the FDA for the filing of a NDA for tenapanor for the control of serum phosphorus in CKD patients on dialysis in June 2020.

General and Administrative

The increase in general and administrative expenses for the year ended December 31, 2020 was primarily due to an increase in costs associated with building and staffing our commercial infrastructure and teams as we prepare for the anticipated U.S. launch of tenapanor for the control of serum phosphorus in CKD patients on dialysis. The increase consisted of headcount and related personnel costs and an increase in external spending for disease awareness initiatives, commercial infrastructure and strategy.

Other Income (Expense), net

Below is a summary of our other income (expense), net (dollars in thousands):

Year Ended December 31,

The decrease in interest expense for the year ended December 31, 2020 was primarily due to lower interest rates on our variable-rate term loan.

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The decrease in other income, net for the year ended December 31, 2020 was primarily due to a decrease in investment income, a lower exit fee revaluation adjustment related to our loan agreement and a decrease in currency exchange losses.

Comparison of the Years Ended December 31, 2019 and 2018

Revenue

Below is a summary of our operating expenses (dollars in thousands):

Year Ended December 31,

Collaborative development revenue $ 459 $ — $ 459 n/m

Total revenues for the year ended December 31, 2019 were $5.3 million, which represents an increase of $2.7 million, or 102.6%, as compared to total revenues of $2.6 million for the year ended December 31, 2018. The licensing revenue of $4.5 million is attributable to the achievement of a milestone, which amounted to $3.0 million, pursuant to our exclusive license agreement with Fosun Pharma, entered into in December 2017 for the development, commercialization and distribution of tenapanor in China for both hyperphosphatemia and IBS-C, and the full recognition of the $1.5 million license fee related to the XuanZhu Agreement, as discussed in Note 12, Collaboration and Licensing Agreements, to our financial statements, included in Part II, Item 8 of this Annual Report on Form 10-K.

The increase in collaborative development revenue is attributed to revenue recognized during the fourth quarter of 2019 related to the 2019 KKC Agreement. We expect to recognize the remaining $9.5 million of the initial transaction price over the research and development period of the program, which we currently expect to extend through the end of 2021. We will revisit our current estimates and timing of performance at the end of each future reporting period and adjust as necessary.

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

Operating Expenses

Below is a summary of our operating expenses (dollars in thousands):

Year Ended December 31,

Cost of Revenue

Cost of revenue was $0.6 million for the year ended December 31, 2019, an increase of $0.1 million, or 28.8%, compared to $0.5 million for the year ended December 31, 2018. Cost of revenue in both periods is the portion of tenapanor-related up front and milestone payment from our collaboration partners that we are required to make to AstraZeneca under the AstraZeneca Termination Agreement.

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Research and Development

Below is a summary of our research and development expenses (dollars in thousands):

Year Ended December 31,

Research and development expenses were $71.7 million for the year ended December 31, 2019, an increase of $2.3 million, or 3.3%, compared to $69.4 million for the year ended December 31, 2018. The increase consisted of a $3.7 million increase to advance our internal pipeline programs and a $1.4 million decrease in our collaboration program costs.

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

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

General and Administrative

General and administrative expenses were $24.3 million for the year ended December 31, 2019, an increase of $0.6 million, or 2.3%, compared to $23.7 million for the year ended December 31, 2018. The increase was primarily due to an increase in personnel costs, stock-based compensation expense, audit expenses and recruiting expenses, partially offset by a decrease in other professional services.

Other Income (Expense), net

Below is a summary of our other income (expense), net (dollars in thousands):

Year Ended December 31,

Interest expense, net was $5.7 million for the year ended December 31, 2019, an increase of $2.2 million, or 62.0%, compared to $3.5 million for the year ended December 31, 2018. The increase in interest expense in 2019 compared to 2018 was because the interest expense during 2018 represents only part of the year related to the loan agreement entered in May 2018, as compared with a full year of interest expense in 2019.

Other income, net, was $2.4 million for the year ended December 31, 2019, which represents a decrease of $0.8 million, or 26.2%, compared to $3.2 million for the year ended December 31, 2018. The decrease was primarily due to a decrease in treasury-related income and revaluation adjustments related to our loan agreement.

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LIQUIDITY AND CAPITAL RESOURCES

Below is a summary of our cash, cash equivalents and marketable securities (in thousands):

December 31, December 31,

Marketable securities - current 95,452 66,379

Marketable securities - non-current 2,114 —

As of December 31, 2020, we had cash, cash equivalents and marketable securities totaling $188.6 million compared to $247.5 million as of December 31, 2019.

In July 2020, we 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 our common stock that may be issued and sold, from time to time, under a sales agreement with Jefferies LLC, deemed to be “at the market offerings.” As of December 31, 2020, we have received net proceeds of $21.2 million through the sale of approximately 3.3 million shares pursuant to this sales agreement.

On December 9, 2019, we completed an underwritten public offering of 20.0 million shares of common stock at a price of $6.25 per sharebefore underwriting discounts and commissions (“the 2019 Offering”). In connection with the 2019 Offering, we entered into an underwriting agreement (“the 2019 Underwriting Agreement”) with Citigroup Global Markets Inc., Cowen and Company LLC, SVB Leerink LLC and Piper Jaffray & Co., collectively “the 2019 Underwriters”) pursuant to which we granted to the 2019 Underwriters a 30-day option to purchase up to an additional 3.0 million shares of our common stock (“the 2019 Overallotment”). We completed the sale of 23.0 million shares, inclusive of the 2019 Overallotment, and that sale resulted in our receipt of aggregate gross proceeds of approximately $143.8 million, less underwriting discounts, commissions and offering expenses totaling approximately $8.9 million, which resulted in net proceeds of approximately $134.9 million.

On November 22, 2019, we and KKC entered into a stock purchase agreement, pursuant to which we sold an aggregate of 2.9 million shares of our common stock at $6.96 per share for aggregate net proceeds of approximately $20.0 million, or the Private Placement. The Private Placement closed on November 25, 2019.

On May 25, 2018, we completed an underwritten public offering of 12.5 million shares of common stock at a price of $4.00 per sharebefore underwriting discounts and commissions (“the 2018 Offering”). In connection with the 2018 Offering, we entered into an underwriting agreement (“the 2018 Underwriting Agreement”) with Jefferies LLC and SVB Leerink (formerly known as Leerink Partners LLC), or together the 2018 Underwriters, pursuant to which we granted to the 2018 Underwriters a 30-day option to purchase up to an additional 1.9 million shares of our common stock (“the 2018 Overallotment”). We completed the sale of 14.4 million, inclusive of the 2018 Overallotment, to the 2018 Underwriters. That sale resulted in our receipt of aggregate gross proceeds of approximately $57.5 million, less underwriting discounts, commissions and offering expenses totaling approximately $3.7 million, which resulted in net proceeds of approximately $53.8 million.

On May 16, 2018, we entered into a loan and security agreement (“the Loan Agreement”) with Solar Capital Ltd. 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 full amount of the loan was funded on May 16, 2018. We received net proceeds from the loan of $49.3 million, after deducting the closing fee, legal expenses and issuance cost. On October 9, 2020, we and the Lenders entered into an amendment to the Loan Agreement, as defined and discussed in Note 6, Borrowings, to extend the date through which we are permitted to make interest-only payments on the Term Loan from December 1, 2020 to December 1, 2021. See Note 6, Borrowings, in the notes to our financial statements, included in Part II, Item 8, for details on our Loan Agreement.

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Our primary sources of cash have been from the sale and issuance of common stock (in both public offerings and private placements) and private placements of convertible preferred stock, funds from our collaboration partnerships and funds from our loan agreement. Our primary uses of cash are to fund operating expenses, primarily research and development expenditures and pre-commercial expenses. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.

We believe that our existing capital resources as of December 31, 2020 will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months following our financial statement issuance date. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. In particular, our operating plan can change, and we may require significant additional capital to fund our operations, including to support the development, commercialization and manufacturing efforts for tenapanor. We may seek to obtain such additional capital through debt financings, credit facilities, additional equity offerings and/or strategic collaborations. We currently have no unutilized credit facility or committed sources of capital, and there can be no assurances that such sources of capital will be available to us when needed or on acceptable terms. There are numerous risks and uncertainties associated with research, development and commercialization initiatives, and actual results could vary materially as a result of a number of factors, many of which are outside of our control. Our future capital requirements are difficult to forecast and will depend on many factors, including:

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CASH FLOW ACTIVITIES

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

Year Ended December 31,

Cash (used in) provided by investing activities (31,442) 23,373 (29,894)

Cash Flows from Operating Activities

2020 compared to 2019

Net cash used in operating activities during the year ended December 31, 2020 was $81.4 million, as compared to $76.5 million for the year ended December 31, 2019. The most significant factors that contributed to the $5.0 million increase in net cash used in operating activities for the year ended December 31, 2020, as compared to 2019 was primarily a $6.2 million decrease to changes in operating assets and liabilities, primarily driven by cash received in 2019 and reported as deferred revenue for the KKC Research Agreement that was recognized as revenue in 2020, offset by a $0.6 million increase in non-cash charges and $0.6 million decrease to the net loss.

2019 compared to 2018

Net cash used in operating activities during the year ended December 31, 2019, was $76.5 million, as compared to $70.3 million of net cash used in operating activities during the year ended December 31, 2018. The $6.2 million increase in net cash used in operating activities is predominantly attributable toa $1.9 million decrease in payments made to AstraZeneca during 2019 in connection with the AZ Termination Agreement, as compared to payments made in 2018; a $0.4 million increase in cash R&D expenses (excluding working capital-related fluctuations) in 2019, as compared to 2018;

Cash Flows from Investing Activities

2020 compared to 2019

Net cash provided by investing activities decreased by $54.8 million during the year ended December 31, 2020, as compared to the year ended December 31, 2019. This decrease was attributable to a $48.2 million increase in purchases of available-for-sale investments and a decrease in proceeds from maturities and redemptions of short-term investments of $6.6 million.

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2019 compared to 2018

Net cash provided by investing activities increased by $53.3 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018. This increase was attributable to a $66.3 million decrease in purchases of short-term available-for-sale investments and a $1.2 million increase in sales and redemptions of investments, partially offset by a decrease in proceeds from maturities and redemptions of short-term investments of $13.1 million.

Cash Flows from Financing Activities

2020 compared to 2019

Net cash provided by financing activities decreased by $132.7 million during the year ended December 31, 2020, as compared to the year ended December 31, 2019. This decrease was predominantly attributable to $134.9 million in net proceeds received in connection with underwritten public offering initiatives that was received in 2019 but did not recur in 2020. This decrease was partially offset by $2.4 million net additional proceeds received in 2020 as compared to 2019 from sales of our common stock pursuant to our at-the-market sales agreement with Jefferies LLC, employee stock plan purchases and option exercises, and the 2019 sale of common stock in the Private Placement with KKC..

2019 compared to 2018

Net cash provided by financing activities increased by $51.9 million during the year ended December 31, 2019, as compared to the year ended December 31, 2018. This increase was predominantly attributable to an $81.2 million increase in net proceeds received in connection with underwritten public offering initiatives and a $20.0 million increase in net proceeds received in connection with the Private Placement, partially offset by a net $49.3 million decrease in proceeds received in connection with a long-term loan borrowing.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2020 and 2019, respectively, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K as promulgated by the SEC.

SMALLER REPORTING COMPANY AND NON-ACCELERATED FILER STATUS

On June 28, 2018, the SEC adopted amendments that raise the thresholds in the smaller reporting company, or SRC, definition, whereby we were determined to qualify as an SRC. We elected to reflect that determination and avail ourselves with most of the SRC scaled disclosure accommodations in our filings subsequent to the adoption.On March 12, 2020, the SEC amended its rules to allow SRCs that have less than $100.0 million in annual revenue and a public float of less than $700.0 million to qualify as a non-accelerated filer. As a non-accelerated filer, we are not required to obtain an opinion of our independent auditors with respect to our internal controls over financial reporting for the period ended December 31, 2020.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

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

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As of December 31, 2020, we had cash, cash equivalents and marketable securities of $188.6 million, which consist of bank deposits and money market funds, as well as high quality fixed income instruments including corporate bonds, commercial paper, and asset-backed securities collateralized by non-mortgage consumer receivables. The credit rating of our short-term investments must be rated A-1/P-1, or better by Standard and Poor’s and Moody’s Investors Service. Asset-backed securities must be rated AAA/Aaa. Money Market funds must be rated AAAm/Aaa. Such interest-earning instruments carry a degree of interest rate risk. However, because our investments are high quality and short-term in duration, we believe that our exposure to interest rate risk is not significant and that a 10% movement in market interest rates would not have a significant impact on the total value of our portfolio, as noted above. We do not enter into investments for trading or speculative purposes.

We are subject to interest rate fluctuation exposure through our borrowings under the Loan Agreement and our investment in money market accounts which bear a variable interest rate. Borrowings under the Loan Agreement bear interest at a rate equal to one-month London Interbank Offered Rate, or LIBOR, plus 7.45% per annum. A hypothetical increase in one-month LIBOR of 100 basis points above the current one-month LIBOR rates would have increased our interest expense by approximately $0.5 million for the year ended December 31, 2020. As of December 31, 2020, we had an aggregate principal amount of $50.0 million outstanding pursuant to our Loan Agreement.

Foreign Currency Exchange Risk

The majority of our transactions are denominated in U.S. dollars. However, we do have certain transactions that are denominated in currencies other than the U.S. dollar, primarily Swiss francs and the euro, and we therefore are subject to foreign exchange risk. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of expenses, assets and liabilities associated with a limited number of manufacturing activities.

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

As of December 31, 2020, we had no open forward foreign currency exchange contracts.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ARDELYX, INC.

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm 79

Balance Sheets 81

Statements of Operations and Comprehensive Loss 82

Statements of Stockholders’ Equity 83

Statements of Cash Flows 84

Notes to Financial Statements 85

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Ardelyx, Inc.

Opinion on the Financial Statements

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

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. 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. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. 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. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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.

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Accrued clinical and contract manufacturing expenses

/s/ Ernst & Young LLP

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

Redwood City, California

March 8, 2021

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ARDELYX, INC.

BALANCE SHEETS

(in thousands, except share and per share amounts)

December 31,

Assets

Current assets:

Unbilled revenue — 750

Prepaid expenses and other current assets 8,202 3,800

Property and equipment, net 1,936 3,436

Long-term investments 2,114 —

Liabilities and stockholders’ equity

Current liabilities:

Accrued compensation and benefits 5,672 4,453

Current portion of operating lease liability 2,117 2,608

Loan payable, current portion 4,167 1,183

Accrued expenses and other current liabilities 6,657 7,248

Operating lease liability, net of current portion 413 2,076

Loan payable, net of current portion 46,621 48,831

Commitments and contingencies (Note 16)

Stockholders’ equity:

Accumulated other comprehensive income (4) 20

Total liabilities and stockholders’ equity $ 201,562 $ 259,782

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

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ARDELYX, INC.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share amounts)

Year Ended December 31,

Revenues:

Collaborative development revenue $ 5,364 $ 459 $ —

Operating expenses:

Provision for income taxes 2 303 4

Net loss per common share, basic and diluted $ (1.05) $ (1.47) $ (1.62)

Comprehensive loss:

Unrealized (losses) gains on available-for-sale securities (24) 58 9

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

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ARDELYX, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

Accumulated

Additional Other Total

Common Stock Paid-In Accumulated Comprehensive Stockholders'

Shares Amount Capital Deficit (Loss) Income Equity

Issuance of common stock for services 75,183 — 303 — — 303

Issuance of common stock upon exercise of options — — — — — —

Stock-based compensation — — 9,226 — — 9,226

Unrealized gains on available-for-sale securities — — — — 9 9

Issuance of common stock for services 113,136 — 312 — — 312

Stock-based compensation — — 9,936 — — 9,936

Net loss — — — (94,940) — (94,940)

Issuance of common stock for services 42,403 — 310 — — 310

Stock-based compensation — — 10,583 — — 10,583

Net loss — — — (94,313) — (94,313)

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

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ARDELYX, INC.

STATEMENTS OF CASH FLOWS

(in thousands)

Operating activities

Amortization of deferred financing costs 496 670 236

Amortization of deferred compensation for services 313 309 253

Amortization of premium on investment securities (92) (698) (1,136)

Non-cash lease expense 2,147 1,839 —

Change in derivative liabilities 407 436 111

Changes in operating assets and liabilities:

Accounts receivable — 85 10,711

Prepaid expenses and other assets (4,653) 93 525

Accrued compensation and benefits 1,219 1,730 (506)

Lease liabilities (2,604) (1,892) —

Deferred revenue (364) 4,541 —

Investing activities

Purchases of property and equipment (324) (325) (311)

Financing activities

Supplementary disclosure of cash flow information:

Cash paid for income taxes $ 1 $ 2 $ 4

Supplementary disclosure of non-cash activities:

Issuance of common stock for services $ 310 $ 312 $ 303

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

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ARDELYX, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

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

2. 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”).

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. 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. 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.

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. On an ongoing basis, management evaluates its estimates, including those related to recognition of revenue, clinical trial accruals, contract manufacturing accruals, fair value of assets and liabilities, income taxes and stock-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could materially differ from those estimates.

Liquidity

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.

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Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity date of 90 days or less on the date of purchase to be cash equivalents.

Short-Term Investments

Short-term investments consist of debt securities classified as available-for-sale and have maturities greater than 90 days, but less than one year, from the date of acquisition. Short-term investments are carried at fair value based upon quoted market prices. Unrealized gains and losses on available-for-sale securities are excluded from earnings and are reported as a component of accumulated other comprehensive loss. The cost of available-for-sale securities sold is based on the specific-identification method.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. 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 U.S.

Foreign Currency and Forward Contracts

The Company manages its foreign currency exposures with the use of foreign currency purchases as well as currency spot and forward contracts. The Company primarily conducts its business in U.S. dollars; 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. There are generally two methods by which the Company manages the cash flow risk of foreign exchange fluctuations when a contract is signed (i) it can purchase the foreign funds, in full or in part, upon the execution of the contract, or (ii) it can obtain the right to purchase such funds, in full or in part, at the execution of the contract, i.e., obtain a forward contract from an appropriate bank, that can be exercised to obtain the currency of interest at a particular point in time. The derivative instruments that the Company uses to hedge the exposure shall generally not be designated as cash flow hedges, and as a result, changes in their fair value will be 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 the current creditworthiness of the counterparties is taken into consideration.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, with ranges generally from three to five years. Leasehold improvements are amortized over the lesser of the estimated useful lives or the related remaining lease term.

Impairment of Long-Lived Assets

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. For the years ending December 31, 2020, 2019 and 2018 there have been no impairment losses.

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Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

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. 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.

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: non-refundable, up-front license fees; research, development, regulatory and commercial milestone payments; reimbursement of research and development services; option payments; reimbursement of certain costs; payments for manufacturing supply services; and future royalties on net sales of licensed products.

When two or more contracts are entered into with the same customer at or near the same time, the Company evaluates the contracts to determine whether the contracts should be accounted for as a single arrangement. Contracts are combined and accounted for as a single arrangement if one or more of the following criteria are met: (i) the contracts are negotiated as a package with a single commercial objective; (ii) the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or (iii) the goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation.

In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, management performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraints on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for contracts with customers, the Company develops assumptions that require judgment to determine whether promised goods and services represent distinct performance obligations and the standalone selling price for each performance obligation identified in the contract. This evaluation is subjective and requires the Company to make judgments about the promised goods and services and whether those goods and services are separable from other aspects of the contract. Further, determining the standalone selling price for performance obligations requires significant judgment, and when an observable price of a promised good or service is not readily available, the Company considers relevant assumptions to estimate the standalone selling price, including, as applicable, market conditions, development timelines, probabilities of technical and regulatory success, reimbursement rates for personnel costs, forecasted revenues, potential limitations to the selling price of the product and discount rates.

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The Company applies judgment in determining whether a combined performance obligation is satisfied at a point in time or over time, and, if over time, concluding upon the appropriate method of measuring progress to be applied for purposes of recognizing revenue. 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. In order to recognize revenue over the research and development period, the Company measures actual costs incurred to date compared to the overall total expected costs to satisfy the performance obligation. Revenues are recognized as the program costs are incurred. 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. Amounts recognized as revenue prior to receipt are recorded as contract assets in the Company's balance sheets. If the Company expects to have an unconditional right to receive the consideration in the next twelve months, this will be classified in current assets. A net contract asset or liability is presented for each contract with a customer.

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

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

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and 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). 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.

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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. The Company allocates the transaction price to material rights based on the standalone selling price, and revenue is recognized when or as the future goods or services are transferred or when the option expires. Customer options that are not material rights do not give rise to a separate performance obligation, and as such, the additional consideration that would result from a customer exercising an option in the future is not included in the transaction price for the current contract. Instead, the option is deemed a marketing offer, and additional option fee payments are recognized or being recognized as revenue when the licensee exercises the option. The exercise of an option that does not represent a material right is treated as a separate contract for accounting purposes.

Contract modifications: Contract modifications, defined as changes in the scope or price (or both) of a contract that are approved by the parties to the contract, such as a contract amendment, exist when the parties to a contract approve a modification that either creates new or changes existing enforceable rights and obligations of the parties to the contract. Depending on facts and circumstances, the Company accounts for a contract modification as one of the following: (i) a separate contract; (ii) a termination of the existing contract and a creation of a new contract; or (iii) a combination of the preceding treatments. A contract modification is accounted for as a separate contract if the scope of the contract increases because of the addition of promised goods or services that are distinct and the price of the contract increases by an amount of consideration that reflects 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. When a contract modification is not considered a separate contract and the remaining goods or services are not distinct, the Company accounts for the contract modification as an add-on to the existing contract and as an adjustment to revenue on a cumulative catch-up basis.

The Company receives payments from its licensees as established in each contract. Upfront payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until 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. The Company periodically confirms the accuracy of its estimates with the service providers and makes adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:

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

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● investigative sites in connection with clinical studies;

● 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

The Company recognizes compensation expense for all stock-based payment awards made to employees, nonemployees and directors based on estimated fair values. 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

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

Leases

The Company determines if an arrangement is a lease at the inception of the arrangement. Operating leases are included in right-of-use assets, current portion of operating lease liability, and operating lease liability, net of current portion in our 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. In determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. 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. The Company has elected not to separate lease and non-lease components, such as common area maintenance charges, and instead it accounts for these as a single lease component.

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Comprehensive Loss

Comprehensive loss is composed of two components: 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.

Net Loss per Share

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration of potential common shares. Diluted net loss per common share in the periods presented is the same as basic net loss per common share, since the effects of potentially dilutive securities are antidilutive due to the net loss for all periods presented.

Recent Accounting Pronouncements

New Accounting Pronouncements - Recently Adopted

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 (“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”), 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 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.

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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. 2016-13, Financial Instruments - Credit Losses (Topic 326): 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” model. Accordingly, these financial assets will be presented at the net amount expected to be collected. The amendment also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. For smaller reporting companies the guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. Management is currently assessing the impact of this standard on the Company’s financial statements.

3. 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.

Gross Unrealized

Amortized Cost Gains Losses Fair Value

Cash and cash equivalents:

Money market funds $ 88,151 $ — $ — $ 88,151

Cash 781 — — 781

Total cash and cash equivalents 91,032 — — 91,032

Short-term investments:

U.S. government-sponsored agency bonds 9,277 2 — 9,279

U.S. treasury notes 1,000 — — 1,000

Long-term investments:

Corporate bonds $ 2,115 $ — $ (1) $ 2,114

Total cash equivalents and investments $ 188,602 $ 7 $ (11) $ 188,598

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Gross Unrealized

Amortized Cost Gains Losses Fair Value

Cash and cash equivalents:

Total cash and cash equivalents 181,130 3 — 181,133

Short-term investments

Asset-backed securities 8,005 — — 8,005

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.

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. When the Company evaluates an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, intent to sell, and whether it is more likely than not the Company will be required to sell the investment before the recovery of its cost basis. If an investment is other-than-temporarily impaired, the Company writes it down through the statement of operations to its fair value and establishes that value as a new cost basis for the investment. The Company did not identify any of its available-for-sale securities as other-than-temporarily impaired in any of the periods presented. As of 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 Fair Value

4. FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market

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

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

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

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

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

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

TotalFair Value Level 1 Level 2 Level 3

Assets:

Money market funds $ 88,151 $ 88,151 $ — $ —

U.S. government-sponsored agency bonds 9,279 — 9,279

U.S. treasury notes 1,000 — 1,000 —

Liabilities:

Derivative liability for Exit Fee $ 1,376 $ — $ — $ 1,376

TotalFair Value Level 1 Level 2 Level 3

Assets:

Asset-backed securities 8,005 — 8,005 —

Liabilities:

Derivative liability for Exit Fee $ 969 $ — $ — $ 969

Total $ 969 $ — $ — $ 969

Where quoted prices are available in an active market, securities are classified as Level 1. The Company classifies money market funds, U.S. treasury securities and U.S. treasury notes as Level 1. When quoted market prices are not available for the specific security, the Company estimates fair value by using benchmark yields, reported trades, broker/dealer quotes and issuer spreads. The Company classifies corporate bonds, commercial paper, asset-backed

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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.

5. DERIVATIVE LIABILITY

Exit Fee

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. 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), not to exceed 100%, in the probability of occurrence would result in a fair value fluctuation of no more than $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 years ended December 31, 2020, 2019 and 2018 (in thousands):

Fair value of Exit Fee derivative liability at January 1 $ 969 $ 533 —

Change in estimated fair value of derivative liability 407 436 533

6. BORROWINGS

Solar Capital and Western Alliance Bank Loan Agreement

On May 16, 2018, the Company entered into a loan and security agreement, or the Loan Agreement, with Solar Capital Ltd. and Western Alliance Bank (“the Lenders”). The Loan Agreement provides for a $50.0 million term loan facility with

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

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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 $ 52,475

Less: Unamortized discount and debt issuance costs (518)

Less: Unaccreted value of final fee (1,169)

Less: Loan payable, current portion (4,167)

Loan payable, net of current portion $ 46,621

7. 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 sharebefore 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 $134.9million.

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 12.5 million shares of common stock at a price of $4.00 per sharebefore 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.

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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.

8. EQUITY INCENTIVE PLANS

2008 Plan

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.

2014 Plan

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 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.

2016 Plan

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.

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Stock Plan Activity

The following table summarizes activity under the 2008 Plan and the 2014 Plan, including grants issued to nonemployees, in the year ended December 31, 2020:

Options Issued and Outstanding Weighted

Weighted-Average Average

Shares Available Exercise Price per Remaining Aggregate

for Grant Number of Shares Share Contractual Term Intrinsic Value

(in Years) (in thousands)

ARDX US Equity

ARDX · 10-K · period ended 2020-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ARDX US Equity☆

ARDX · 10-K · period ended 2020-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ARDX US Equity