| Basis of Presentation and Summary of Significant Accounting Policies | NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with U.S. generally accepted accounting
principles, or GAAP, for interim financial information and with the
instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they may not include all of the
information and footnotes required by GAAP for complete financial
statements. All adjustments that are, in the opinion of management,
of a normal recurring nature and are necessary for a fair
presentation of the consolidated financial statements have been
included. Nevertheless, these unaudited consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements contained in our Annual Report on
Form 10-K for the year ended December 31, 2015. The results of
operations for the three months ended March 31, 2016, are not
necessarily indicative of the results that may be expected for the
entire fiscal year or any other interim period.
Principles of Consolidation
The consolidated financial statements include our financial
statements and those of our wholly-owned subsidiaries. Intercompany
transactions and balances have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and judgments that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of these consolidated
financial statements and the reported amounts of revenues and
expenses during the applicable reporting period. Actual results
could differ from those estimates. Such differences could be
material to these consolidated financial statements.
Cash and Cash Equivalents
We consider liquid investments with original maturities of three
months or less when purchased to be cash and cash equivalents. At
March 31, 2016 and December 31, 2015, all of our cash and
cash equivalents were held in either commercial bank accounts or
money market funds.
Inventory
Inventory is stated at the lower of cost or estimated realizable
value. We determine the cost of our inventory, which includes
amounts related to materials, third-party contract manufacturing
and packaging services, and manufacturing overhead, on a first-in,
first-out basis. We capitalize inventory costs at our suppliers
when, based on management’s judgment, the realization of
future economic benefit is probable at each given supplier. We
received FDA approval for Auryxia on September 5, 2014, and on
that date began capitalizing inventory purchases of saleable
product from certain suppliers. Prior to FDA approval, all saleable
product purchased from such suppliers was included as a component
of research and development expense.
Accounts Receivable, Net
We extend credit to our customers for U.S. Auryxia product sales
resulting in accounts receivable. Customer accounts are monitored
for past due amounts. Past due accounts receivable, determined to
be uncollectible, are written off against the allowance for
doubtful accounts. Allowances for doubtful accounts are estimated
based upon past due amounts, historical losses and existing
economic factors, and are adjusted periodically. We offer cash
discounts to certain of our customers, generally 2% of the sales
price, as an incentive for prompt payment. The estimate of cash
discounts is recorded at the time of sale. We account for the cash
discounts by reducing revenue and accounts receivable by the amount
of the discounts we expect our customers to take. The accounts
receivable are reported in the consolidated balance sheets, net of
the allowances for doubtful accounts and cash discounts. There was
no allowance for doubtful accounts at March 31, 2016 and
December 31, 2015.
Revenue Recognition
Our commercial launch of our only product, Auryxia, in the United
States occurred in late December 2014. We sell product to a
limited number of major wholesalers, our Distributors, as well as
certain pharmacies, or collectively, our Customers. Our
Distributors resell the product to retail pharmacies for purposes
of the pharmacies reselling the product to fill patient
prescriptions. In accordance with GAAP, our revenue recognition
policy requires that: (i) there is persuasive evidence that an
arrangement exists between us and the Customer, (ii) delivery
has occurred, (iii) collectability is reasonably assured, and
(iv) the price is fixed or determinable. Until we have the
ability to reliably estimate returns of Auryxia from our Customers,
revenue will be recognized based on the resale of Auryxia for the
purposes of filling patient prescriptions, and not based on initial
sales from us to our Customers. Consistent with industry practice,
once we achieve sufficient history such that we can reliably
estimate returns based on sales to our Customers, we anticipate
that our revenues will be recognized based on sales to our
Customers. We currently defer Auryxia revenue recognition until the
earlier of the product being resold for purposes of filling patient
prescriptions and the expiration of the right of
return (twelve months after the expiration date of the
product). The deferred revenue is recorded net of discounts,
rebates, and chargebacks. We also defer the related cost of product
sales and record such amounts as finished goods inventory held by
others, which is included in inventory on our consolidated balance
sheet, until revenue related to such product sales is
recognized.
We have written contracts with our Customers and delivery occurs
when a Customer receives Auryxia. We evaluate the creditworthiness
of each of our Customers to determine whether revenues can be
recognized upon delivery, subject to satisfaction of the other
requirements, or whether recognition is required to be delayed
until receipt of payment. In order to conclude that the price is
fixed or determinable, we must be able to (i) calculate our
gross product sales from the sales to Customers and
(ii) reasonably estimate our net product sales. We calculate
gross product sales based on the wholesale acquisition cost that we
charge our Customers for Auryxia. We estimate our net product sales
by deducting from our gross product sales (a) trade
allowances, such as invoice discounts for prompt payment and
distributor fees, (b) estimated government and private payor
rebates, chargebacks and discounts, such as Medicaid
reimbursements, (c) reserves for expected product returns,
upon our ultimate transition to a sell-in revenue recognition model
and (d) estimated costs of incentives offered to certain
indirect customers, including patients.
Trade Allowances:
Rebates, Chargebacks and Discounts:
Product Returns:
Other Incentives:
Our U.S. Auryxia product sales for the three months ended
March 31, 2016 and 2015 were offset by provisions for
allowances and accruals as set forth in the tables below.
(in thousands) Three months ended Percent of gross product sales
Three months ended March 31, 2015 Percent of gross product sales
Gross Auryxia product sales $ 8,625 $ 964
Less provision for product sales allowances and accruals
Trade allowances 1,146 13% 100 10%
Rebates, chargebacks and discounts 1,678 20% 30 3%
Product returns — — — —
Other incentives (1) 185 2% 412 43%
Total 3,009 35% 542 56%
Net U.S. Auryxia product sales $ 5,616 $ 422
(1) Includes co-pay mitigation and
voucher rebates.
The following table summarizes U.S. Auryxia product sales
recognized and deferred during the three months ended
March 31, 2016 and 2015, and the year ended December 31,
2015:
(in thousands) March 31, 2016 March 31, 2015 December 31, 2015
Net U.S. Auryxia sales recognized $ 5,616 $ 422 $ 10,141
Deferred product sales 3,718 714 3,526
$ 9,334 $ 1,136 $ 13,667
We recognize license revenue in accordance with Accounting
Standards Codification 605, Revenue Recognition
For arrangements for which royalty revenue information becomes
available and collectability is reasonably assured, we recognize
revenue during the applicable period earned. When
collectability is reasonably assured but a reasonable estimate of
royalty revenue cannot be made, the royalty revenue is recognized
in the quarter that the licensee provides the written report and
related information to us.
Cost of Goods Sold
Cost of goods sold includes the cost of active pharmaceutical
ingredient for Auryxia on which product sales were recognized
during the period, as well as the associated costs for tableting,
packaging, shipment, insurance and quality assurance. Cost of goods
sold also includes expenses due to the licensor of Auryxia related
to the manufacturing of product and product sales recognized during
the period.
In conjunction with our recognition and deferral of U.S. Auryxia
product sales, we expensed and capitalized the associated cost of
goods, as follows, during the three months ended March 31,
2016 and 2015, and the year ended December 31, 2015:
(in thousands) March 31, 2016 March 31, 2015 December 31, 2015
Cost of goods sold expensed $ 1,071 $ 76 $ 4,520
Finished goods inventory held by others 803 107 231
$ 1,874 $ 183 $ 4,751
Finished goods inventory held by others as of March 31, 2016
and 2015 represents the cost of goods sold that has been deferred
to align with our deferral of U.S. Auryxia product sales.
License Expenses
License expenses include royalty and other expenses due to the
licensor of Auryxia related to our license agreement with JT and
Torii. With regard to royalty expense, such expense is directly
related to the royalty revenue received from JT and Torii and is
recognized in the same period as the revenue is recorded. Other
expenses are recognized in the period they are incurred.
Research and Development Costs
Research and development costs are expensed as incurred.
Pre-approval inventory expenditures are recorded as research and
development expense as incurred. The capitalization of inventory
for our product candidate(s) commence when it is probable that the
product will be approved for commercial marketing. Nonrefundable
advance payments for goods or services that will be used or
rendered for future research and development activities are
deferred and amortized over the period that the goods are delivered
or the related services are performed, subject to an assessment of
recoverability. We make estimates of costs incurred in relation to
external clinical research organizations, or CROs, and clinical
site costs. We analyze the progress of clinical trials, including
levels of patient enrollment, invoices received and contracted
costs when evaluating the adequacy of the amount expensed and the
related prepaid asset and accrued liability. Significant judgments
and estimates must be made and used in determining the accrued
balance and expense in any accounting period. We review and accrue
CRO expenses and clinical trial study expenses based on work
performed and rely upon estimates of those costs applicable to the
stage of completion of a study. Accrued CRO costs are subject to
revisions as such trials progress to completion. Revisions are
charged to expense in the period in which the facts that give rise
to the revision become known. With respect to clinical site costs,
the financial terms of these agreements are subject to negotiation
and vary from contract to contract. Payments under these contracts
may be uneven, and depend on factors such as the achievement of
certain events, the successful recruitment of patients, the
completion of portions of the clinical trial or similar conditions.
The objective of our policy is to match the recording of expenses
in our consolidated financial statements to the actual services
received and efforts expended. As such, expense accruals related to
clinical site costs are recognized based on our estimate of the
degree of completion of the event or events specified in the
specific clinical study or trial contract.
Stock-Based Compensation
We recognize all share-based payments to employees and to
non-employee directors for service on our Board of Directors as
compensation expense in the consolidated financial statements based
on the grant date fair values of the awards. Stock-based
compensation expense recognized each period is based on the value
of the portion of awards that is ultimately expected to vest.
Forfeitures are estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from
those estimates.
For share-based payments to consultants and other third-parties,
compensation expense is determined at the “measurement
date.” The expense is recognized over the vesting period of
the award. Until the measurement date is reached, the total amount
of compensation expense remains uncertain. We record compensation
expense based on the fair value of the award at the reporting date.
The awards to consultants and other third-parties are then
revalued, or the total compensation is recalculated based on the
then current fair value, at each subsequent reporting date.
Basic and Diluted Net Loss Per Common Share
Basic net loss per share is computed by dividing the losses
allocable to common stockholders by the weighted average number of
shares of common stock outstanding for the period. Diluted net loss
per share does not reflect the effect of shares of common stock to
be issued upon the exercise of stock options and warrants, as their
inclusion would be anti-dilutive. The options outstanding as of
March 31, 2016 and 2015, which are not included in the
computation of net loss per share amounts, were 6,491,921 and
6,257,851, respectively. No warrants were outstanding during each
of these periods.
Acquisitions
We account for acquired businesses using the acquisition method of
accounting, which requires that assets acquired and liabilities
assumed be recognized at their estimated fair values as of the
acquisition date. Acquisition-related costs are expensed as
incurred. Any excess of the consideration transferred over the
estimated fair values of the identifiable net assets acquired is
recorded as goodwill.
Impairment
Long lived assets are reviewed for an impairment loss when
circumstances indicate that the carrying value of long-lived
tangible and intangible assets with finite lives may not be
recoverable. Management’s policy in determining whether an
impairment indicator exists, a triggering event, comprises
measurable operating performance criteria as well as qualitative
measures. If an analysis is necessitated by the occurrence of a
triggering event, we make certain assumptions in determining the
impairment amount. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future undiscounted cash flows expected to be generated by the
asset or used in its disposal. If the carrying amount of an asset
exceeds its estimated future undiscounted cash flows, an impairment
charge is recognized.
Goodwill is reviewed for impairment annually, or when events arise
that could indicate that an impairment exists. We test for goodwill
impairment using a two-step process. The first step compares the
fair value of the reporting unit with the unit’s carrying
value, including goodwill. When the carrying value of the reporting
unit is greater than fair value, the unit’s goodwill may be
impaired, and the second step must be completed to measure the
amount of the goodwill impairment charge, if any. In the second
step, the implied fair value of the reporting unit’s goodwill
is compared with the carrying amount of the unit’s goodwill.
If the carrying amount is greater than the implied fair value, the
carrying value of the goodwill must be written down to its implied
fair value. As of December 31, 2015, management concluded that
there was no impairment of our goodwill. We will continue to
perform impairment tests annually, at December 31, and
whenever events or changes in circumstances suggest that the
carrying value of an asset may not be recoverable. For the period
ending March 31, 2016, management determined that there were
no impairment indicators that would trigger a goodwill impairment
analysis.
Concentrations of Credit Risk
We do not have significant off-balance-sheet risk or credit risk
concentrations. We maintain our cash and cash equivalents and
held-to-maturity investments, when applicable, with multiple
financial institutions that invest in investment-grade securities
with average maturities of less than twelve months. See Note 3
– Fair Value Measurements.
Our accounts receivable, net at March 31, 2016 and
December 31, 2015 represent amounts due to the Company from
customers. We perform ongoing credit evaluations of our customers
and generally do not require collateral. The following table sets
forth customers who represented 10% or more of our total accounts
receivable, net as of March 31, 2016 and December 31,
2015:
March 31, 2016 December 31, 2015
Davita Rx 24 % 19 %
AmerisourceBergen Drug Corporation 21 % 17 %
McKesson Corporation 21 % 23 %
Cardinal Health, Inc. 19 % 24 %
Fresenius Medical Care Rx 13 % 15 %
We currently depend on a single supply source for Auryxia drug
product. If any of our suppliers, including the source of Auryxia
drug product, were to limit or terminate production, or otherwise
fail to meet the quality or delivery requirements needed to supply
Auryxia at levels to meet market demand, we could experience a loss
of revenue, which could materially and adversely impact our results
of operations.
Leases
In April 2015, we signed a lease agreement for approximately 27,300
square feet in Boston, Massachusetts, for a 94 month term that
commenced on May 1, 2015. In order to make the space usable
for our operations, substantial improvements were made. Our
landlord agreed to pay for up to approximately $1.9 million of the
improvements, and we bore all additional costs that were incurred.
As such, we have determined that we are the owner of the
improvements and account for tenant improvements paid by our
landlord as a lease incentive. On May 1, 2015, in accordance
with ASC 840-20, we recorded a deferred lease incentive, and an
associated receivable from our landlord, for the total amount to be
paid by the landlord for improvements. The deferred lease incentive
is being amortized as a partial offset to rent expense over the
term of the lease. We began occupying the space in November 2015.
Improvements made to our leased space have been recorded as fixed
assets and will be amortized over the assets’ useful lives or
the remaining lease term, whichever is shorter.
The lease for our New York City office will expire on
September 30, 2016 and we have notified our landlord that we
will not renew our lease.
Recently Issued and Proposed Accounting
Pronouncements
In May 2014, the FASB issued Accounting Standards Update (ASU)
No. 2014-09, Revenue from Contracts with
Customers Revenue from Contracts with
Customers (Topic 606): Principal versus Agent Considerations
In February 2016, the FASB issued ASU No. 2016-02, Leases
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting |
