News Column

AKEBIA THERAPEUTICS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 11, 2014

The following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in the prospectus that was filed with the SEC on March 21, 2014.

This report contains forward-looking statements that are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the PSLRA") with the intention of obtaining the benefits of the "safe harbor" provisions of the PSLRA. Forward-looking statements involve risks and uncertainties. In this Quarterly Report on Form 10-Q, words such as "may," "will," "expect," "anticipate," "estimate," "intend," and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements.

Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution our readers that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those expressed or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q.

The following information, including all forward-looking statements, should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q, including those risks identified under Part II, Item 1A. Risk Factors.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are a biopharmaceutical company focused on the development of novel proprietary therapeutics based on hypoxia inducible factor, or HIF, biology and the commercialization of these products for patients with kidney disease. HIF is the primary regulator of the production of red blood cells, or RBCs, in the body and potentially a novel mechanism of treating anemia. Our lead product candidate, AKB-6548, is being developed as a once-daily oral therapy that has successfully completed a Phase 2a proof of concept study demonstrating that AKB-6548 safely and predictably raised hemoglobin levels in patients with anemia secondary to chronic kidney disease, or CKD, not requiring dialysis.

Our preclinical candidate, AKB-6899, is a small molecule with minor structural differences from our lead compound AKB-6548. However, AKB-6899 has distinctive biochemical and physiological properties that may be beneficial for treatment of certain cancers. In several preclinical mouse models, AKB-6899 has been active in reducing tumor growth and development of metastases. Therefore, Investigational New Drug, or IND, enabling studies are being performed in the hope of bringing this compound into Phase 1 during the second half of 2015.

We are conducting a Phase 2b trial for AKB-6548 in patients with anemia secondary to CKD who are not dependent on dialysis, and we expect data to be available in the fourth quarter of 2014. If the results of our Phase 2b trial are positive, we would expect to initiate Phase 3 trials for anemia secondary to CKD in 2015 and would anticipate submitting an NDA for AKB-6548 in the United States by 2018 if the Phase 3 data are favorable. We have also initiated a development program for patients dependent on dialysis and will begin an efficacy study for AKB-6548 in dialysis patients with anemia, the second indication we will pursue.

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We own worldwide rights to our HIF-based product candidates, including AKB-6548. If approved by regulatory authorities, we plan to commercialize AKB-6548 in the United States ourselves and intend to seek one or more collaborators to commercialize the product candidate in additional markets.

Since our inception in 2007, we have devoted the largest portion of our resources to our development efforts relating to AKB-6548, including preparing for and conducting clinical studies of AKB-6548, providing general and administrative support for these operations and protecting our intellectual property. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations primarily through our IPO and the private placement of preferred stock, common stock and convertible notes.

In December 2011, we spun out our programs focused on the treatment of diabetic eye disease and inflammatory bowel disease into Aerpio which has since operated as a stand-alone company. We currently have administrative services agreements with Aerpio under which we obtain from, and provide to, Aerpio certain services including consulting services and use of premises.

We have never been profitable and have incurred net losses in each year since inception. Our net losses were $17.3 million and $3.5 million for the six months ended June 30, 2014 and 2013, respectively. Substantially all of our net losses resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations.

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

continue our Phase 2b trial and prepare for a potential global Phase 3 development program of AKB-6548 for the treatment of anemia secondary to CKD; seek regulatory approvals for our product candidates that successfully complete clinical trials; have our product candidates manufactured for clinical trials and for commercial sale; establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval; initiate additional preclinical, clinical or other studies for AKB-6548, AKB-6899 and other product candidates that we may develop or acquire; seek to discover and develop additional product candidates; acquire or in-license other commercial products, product candidates and technologies; make royalty, milestone or other payments under any future in-license agreements; maintain, protect and expand our intellectual property portfolio; attract and retain skilled personnel; and create additional infrastructure to support our operations as a public company.



We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. We have no manufacturing facilities, and all of our manufacturing activities are contracted out to third parties. Additionally, we currently utilize third-party CROs to carry out our clinical development activities, and we do not yet have a sales organization. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we will seek to fund our operations through public or private equity or debt financings or other sources. However, we may be unable to raise additional funds or enter into other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our products.

On March 6, 2014, we effected a 1.75-for-1 stock split of our outstanding common stock. Our historical share and per share information have been retroactively adjusted to give effect to this stock split. Shares of common stock underlying outstanding stock options and other equity instruments were proportionately increased and the respective exercise prices, if applicable, were proportionately reduced in accordance with the terms of the agreements governing such securities. Shares of common stock reserved for issuance upon the conversion of our Series A Redeemable Convertible Preferred Stock, Series B Redeemable Convertible Preferred Stock and Series C Redeemable Convertible Preferred Stock were proportionately increased, and the respective conversion prices were proportionately reduced.

On March 25, 2014, we completed our IPO whereby we sold 6,762,000 shares of common stock, including 879,647 shares of common stock pursuant to the full exercise of an over-allotment option granted to the underwriters, at a price of $17.00 per share. The shares began trading on the Nasdaq Global Market on March 20, 2014. The aggregate net proceeds received by us from the offering were $104,364,560, net of underwriting discounts and commissions and estimated offering expenses. Upon the closing of the IPO, outstanding shares of convertible redeemable preferred stock converted into 12,115,183 shares of common stock. Additionally, we are now authorized to issue 175,000,000 shares of common stock and 25,000,000 shares of preferred stock.

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Financial Operations Overview

Revenue

To date, we have not generated any revenue from the sales of products or other means.

Our ability to generate product revenue and become profitable depends upon our ability to successfully develop and commercialize products. We expect to incur losses for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for, our product candidates and begin to commercialize any approved products. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from the sale of our products, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:

employee-related expenses, including salaries, benefits, travel and stock-based compensation expense; expenses incurred under agreements with the CROs and investigative sites that conduct our clinical studies; the cost of acquiring, developing and manufacturing clinical study materials; facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies; and costs associated with preclinical and clinical activities.



Research and development costs are expensed as incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.

We cannot determine with certainty the duration and completion costs of the current or future clinical studies of our product candidates or if, when, or to what extent we will generate revenue from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of clinical studies and development of our product candidates will depend on a variety of factors, including:

the rate of progress, results and cost of completing our Phase 2b clinical

trial of AKB-6548;



assuming AKB-6548 advances to Phase 3, the scope, size, rate of progress,

results and costs of initiating and completing our Phase 3 development program of AKB-6548;



the scope, progress, results and costs of preclinical development, laboratory

testing and clinical trials for AKB-6899 and any other product candidates that we may develop or acquire; the cost of having our product candidates manufactured for clinical trials; difficulties or delays in enrolling patients in our clinical trials; unanticipated changes to laws or regulations applicable to our clinical

trials; and



the timing of, and the costs involved in, obtaining regulatory approvals for

AKB-6548 and any other product candidates, if clinical trials are successful.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA, EMA or another regulatory authority were to require us to conduct clinical studies beyond those that we currently anticipate, or if we experience significant delays in enrollment in any of our clinical studies, we could be required to expend significant additional financial resources and time on the completion of clinical development.

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From inception through June 30, 2014, we have incurred $63.4 million in research and development expenses. We plan to increase our research and development expenses for the foreseeable future as we continue the development of AKB-6548. Our current and planned research and development activities include the following:

We plan to complete a Phase 2b clinical study during 2014 to examine the safety and efficacy of AKB-6548 in patients with anemia secondary to CKD. We plan to initiate a Phase 3 development program for AKB-6548 in 2015 for anemia secondary to CKD. We expect to begin an efficacy study for AKB-6548 in dialysis patients with anemia, the second indication we will pursue. We intend to conduct a Phase 2 clinical trial of AKB-6548 in idiopathic anemia of aging, or IAA. We intend to file an IND and begin Phase 1 trials, for AKB-6899 and explore its use in oncology and ophthalmology.



Our direct research and development expenses consist principally of external costs, such as startup fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical studies, and costs related to acquiring and manufacturing clinical study materials.

We currently have one program to which our research and development costs are attributable. Historically, we have not accumulated and tracked our research and development costs or our personnel and personnel-related costs on a program-by-program basis. Our employee and infrastructure resources, and many of our costs, were directed to broadly applicable research endeavors. As a result, we are unable to specify precisely the historical costs incurred for each of our programs on a program-by-program basis.

General and Administrative Expenses

We obtain from, and provide to, Aerpio services under the terms of administrative services agreements between the two companies. See "Certain Relationships and Related Party Transactions." General and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation and travel expenses for our employees in executive, operational, finance and human resource functions. Other general and administrative expenses include facility-related costs, fees for directors, accounting and legal services, recruiting fees and expenses associated with obtaining and maintaining patents.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development and potential commercialization of our product candidates. We also anticipate increased expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums, and investor relations costs associated with being a public company. Additionally, we anticipate an increase in payroll and related expenses if and when we prepare for commercial operations, especially in sales and marketing.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Accrued Research and Development Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed. 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 confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include expenses for:

CROs in connection with clinical studies; 19



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We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical studies 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. The scope of services under these contracts can be modified and the agreements can be cancelled by either party upon written notice. 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 clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical study milestones. In accruing service fees, we estimate the time period over which services will be performed 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 our estimate, we adjust the accrual or prepaid 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. To date, there have been no material differences between our estimates and the amount actually incurred.

Stock-Based Compensation Stock-Based Awards



We issue stock-based awards to employees and non-employees, generally in the form of stock options, restricted stock and shares of common stock. We account for our stock-based compensation awards in accordance with FASB ASC Topic 718, Compensation-Stock Compensation, or ASC 718. ASC 718 requires all stock-based payments to employees, including grants of employee stock options and restricted stock and modifications to existing stock awards, to be recognized in the statements of operations and comprehensive loss based on their fair values. We account for stock-based awards to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based-Payments to Non-Employees, or ASC 505-50, which requires the fair value of the award to be re-measured at fair value until a performance commitment is reached or counterparty performance is complete. Described below is the methodology we have utilized in measuring stock-based compensation expense. Following the consummation of our IPO, stock option, common stock and restricted stock values are determined based on the quoted market price of our common stock.

We estimate the fair value of our stock-based awards of options to purchase shares of common stock to employees and non-employees using the Black-Scholes option pricing model, which requires the input of highly subjective assumptions, including (a) the expected stock price volatility, (b) the calculation of the expected term of the award, (c) the risk-free interest rate and (d) expected dividends. Due to the lack of a public market for the trading of our common stock and a lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to our company, including stage of product development and life science industry focus. We are a company in a very early stage of product development with no revenue and the representative group of companies has certain similar characteristics. We believe the group selected has sufficient similar economic and industry characteristics, and includes companies that are most representative of our company. We performed a sensitivity analysis to determine the impact a 30% increase or decrease in the volatility rate would have on the fair value of each stock-based award, and determined that such a rate change would be immaterial to the calculation of stock-based compensation. We use the simplified method as prescribed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term for options granted to employees as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The expected term is applied to the stock option grant group as a whole, as we do not expect substantially different exercise or post-vesting termination behavior among our employee population. For options granted to non-employees, we utilize the contractual term of the arrangement as the basis for the expected term assumption. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock, similar to our peer group. We estimate grant date fair value of restricted stock awards with corresponding promissory notes using the Black-Scholes option pricing model. Post IPO, the grant date fair value of restricted stock award grants without a promissory note and awards of common stock has been based on the estimated value of our common stock at the date of grant.

Our stock-based awards are subject to either service or performance-based vesting conditions. Compensation expense related to awards to employees with service-based vesting conditions is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award, which is generally the vesting term. Consistent with the guidance in ASC 505-50, compensation expense related to awards to non-employees with service-based vesting conditions is recognized on a straight-line basis based on the then-current fair value at each financial reporting date prior to the measurement date over the associated service period of

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the award, which is generally the vesting term. Compensation expense related to awards to employees with performance-based vesting conditions is recognized based on the grant date fair value over the requisite service period using the accelerated attribution method to the extent achievement of the performance condition is probable. Consistent with the guidance in ASC 505-50, compensation expense related to awards to non-employees with performance-based vesting conditions is recognized based on the then-current fair value at each financial reporting date prior to the measurement date over the requisite service period using the accelerated attribution method to the extent achievement of the performance condition is probable.

We are also required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from our estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. To the extent that actual forfeitures differ from our estimates, the difference is recorded as a cumulative adjustment in the period the estimates were revised. Stock-based compensation expense recognized in the financial statements is based on awards that are ultimately expected to vest.

In June 2011, certain of our employees purchased shares of our restricted stock in exchange for promissory notes. Although these notes are 50% recourse to the employees, we have accounted for the promissory notes as nonrecourse in their entirety since the promissory notes are not aligned with a corresponding percentage of the underlying shares. Accordingly, we have accounted for the combination of the promissory note and restricted stock as a grant of an option, as the substance is similar to the grant of an option. The exercise price of this stock option is the principal and interest due on the promissory note. The fair value of the stock option is recognized over the requisite service period (not the term of the promissory note) through a charge to compensation cost. The maturity date of the promissory notes reflects the legal term of the stock option for purposes of valuing the award.

Stock-based compensation totaled approximately $1.4 million and $51,401 for the three months ended June 30, 2014 and 2013, respectively, and approximately $3.9 million and $107,793 for the six months ended June 30, 2014 and 2013, respectively.

We expect the impact of our stock-based compensation expense for stock options and restricted stock granted to employees and non-employees to grow in future periods due to the potential increases in the fair value of our common stock and the increase in the number of grants as a result of an increase in headcount.

Emerging Growth Company Status

The JOBS Act permits an "emerging growth company" to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We chose to "opt out" of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Results of Operations

Comparison of the Three Months Ended June 30, 2014 and 2013

Three Months Ended June 30, Increase 2014 2013 (Decrease) (In Thousands) Revenue $ - $ - $ - Expenses: Research and development 5,525 2,453 3,072 General and administrative 2,315 668 1,647 Total expenses (7,840 ) (3,121 ) (4,719 ) Loss from operations (7,840 ) (3,121 ) (4,719 ) Other income, net 222 291 (69 ) Net loss $(7,618 )$(2,830 )$(4,788 )



Research and Development Expenses. Research and development expenses were $5.5 million for the three months ended June 30, 2014, compared to $2.5 million for the three months ended June 30, 2013, an increase of $3.1 million. The increase was primarily due to an increase in AKB-6548 clinical trial costs of approximately $1.0 million due to the initiation of our Phase 2b study in July 2013 and its continued enrollment, an increase of approximately $0.5 million in other non-clinical costs, increased patent costs of approximately $0.2 million, increased stock-based compensation costs of approximately $1.0 million and an increase of approximately $0.4 million in wage and personnel related costs.

General and Administrative Expenses. General and administrative expenses were $2.3 million for the three months ended June 30, 2014, compared to $0.7 million for the three months ended June 30, 2013. The increase of $1.6 million was primarily due to an

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increase in stock-based compensation expense of $0.5 million, increased professional fees of $0.1 million, increase in wage and personnel related costs of approximately $0.3 million, increase of approximately $0.2 million in insurance related costs, increase of approximately $0.1 million in both facility costs and public relations costs and an increase of approximately $0.3 million in other costs including recruiting fees, public company related fees and consulting fees.

Other Income, Net. Other income, net, was $0.2 million for the three months ended June 30, 2014, compared to $0.3 million for the three months ended June 30, 2013, a decrease of approximately $0.1 million. Other income, net for both the three months ended June 30, 2014 and the three months ended June 30, 2013, is primarily related to reimbursements from Aerpio for employee-related costs. Under the terms of the administrative services agreements entered into upon disposition of Aerpio in 2011, we and Aerpio obtain from, and provide to, each other certain services.

Comparison of the Six Months Ended June 30, 2014 and 2013

Six Months Ended June 30, Increase 2014 2013 (Decrease) (In Thousands) Revenue $ - $ - $ - Expenses: Research and development 11,683 4,351 7,332 General and administrative 6,066 1,347 4,719 Total expenses (17,749 ) (5,698 ) (12,051 ) Loss from operations (17,749 ) (5,698 ) (12,051 ) Other income, net 434 2,247 (1,813 ) Net loss $ (17,315 )$ (3,451 )$ (13,864 )



Research and Development Expenses. Research and development expenses were $11.7 million for the six months ended June 30, 2014, compared to $4.4 million for the six months ended June 30, 2013, an increase of $7.3 million. The increase was primarily due to an increase in AKB-6548 clinical trial costs of approximately $3.5 million due to the initiation of our Phase 2b study in July 2013 and its continued enrollment, an increase of approximately $0.4 million in other non-clinical costs, increased patent costs of approximately $0.6 million, increased wage and personnel related costs of $0.7 million and increased stock-based compensation costs of approximately $2.0 million.

General and Administrative Expenses. General and administrative expenses were $6.1 million for the six months ended June 30, 2014, compared to $1.3 million for the six months ended June 30, 2013. The increase of $4.8 million was primarily due to an increase in stock-based compensation expense of $2.0 million, increased professional fees of $0.6 million related to the IPO, increase in wage and personnel related costs of approximately $0.7 million, increase of approximately $0.5 million in consulting related costs, increase of approximately $0.2 million in insurance costs, increase of approximately $0.2 million in facility costs and approximately $0.3 million of severance related costs.

Other Income, Net. Other income, net, was $0.4 million for the six months ended June 30, 2014, compared to $2.2 million for the six months ended June 30, 2013, a decrease of approximately $1.8 million. Other income, net for the six months ended June 30, 2014 is primarily related to reimbursements from Aerpio for employee-related costs. Other income, net for the six months ended June 30, 2013 included $0.6 million in reimbursements from Aerpio for employee-related costs and a $2.4 million gain on the extinguishment of debt, partially offset by net interest expense of $0.8 million. The decrease in reimbursements from Aerpio for employee-related costs is principally the result of reduced time spent by our employees on Aerpio related activities. Under the terms of the administrative services agreements entered into upon disposition of Aerpio in 2011, we and Aerpio obtain from and provide to each other certain services.

Liquidity and Capital Resources

We have incurred losses and cumulative negative cash flows from operations since our inception in February 2007, and as of June 30, 2014, we had an accumulated deficit of $81.0 million. We anticipate that we will continue to incur losses for at least the next several years. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings, other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements.

We have funded our operations principally from the sale of common stock, preferred stock and convertible notes. As of June 30, 2014, we had cash and cash equivalents of approximately $95.4 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Investments, consisting principally of corporate and government debt securities and stated at fair value, are also available as a source of liquidity.

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Cash Flows

The following table sets forth the primary sources and uses of cash for each of the periods set forth below:

Six Months Ended June 30, 2014 2013 (In Thousands) Net cash provided by (used in): Operating activities $ (12,677 )$ (3,487 ) Investing activities (17,717 ) - Financing activities 104,573 42,587 Net increase in cash and cash equivalents $ 74,179$ 39,100



Operating Activities. The net cash used in operating activities was $12.7 million for the six months ended June 30, 2014 and consisted primarily of a net loss of $17.3 million adjusted for non-cash items, including stock-based compensation expense of $3.9 million and a net increase in operating assets and liabilities of $0.7 million. The significant items in the change in operating assets and liabilities include increases in accounts payable and accrued expenses of $1.6 million, offset by a decrease in prepaid expenses, other current assets and other assets of $0.9 million. The increase in accounts payable and accrued expenses is driven by professional fees and other public company related costs incurred in connection with our IPO and the decrease in prepaid expenses, other current assets and other assets is primarily related to clinical trial costs related to the initiation of the Phase 2b study in July 2013.

The net cash used in operating activities was $3.5 million for the six months ended June 30, 2013, and consisted primarily of a net loss of $3.5 million adjusted for non-cash items including gain on extinguishment of debt of $2.4 million, amortization of debt issue costs of $0.8 million, and stock-based compensation of $0.1 million and a net increase in operating assets and liabilities of $1.5 million. The significant items in the change in operating assets and liabilities include an increases in accounts payable and accrued expenses of $1.3 million.

Investing Activities. Net cash used in investing activities consisted of purchases of property and equipment, purchases of investments, and proceeds from the maturity of marketable securities. Net cash used in investing activities for the six months ended June 30, 2014 was $17.7 million and was comprised primarily of purchases of investments of $24.3 million and purchases of equipment of $0.2 million, offset by proceeds from the maturities of short-term investments of $6.8 million. There was no cash provided by or used in investing activities for the six months ended June 30, 2013.

Financing Activities. Net cash provided by financing activities for the six months ended June 30, 2014 was $104.6 million and consisted primarily of $115.0 million of proceeds from the issuance of common stock in connection with our IPO partially offset by IPO related costs of $10.4 million. Net cash provided by financing activities for the six months ended June 30, 2013 was $42.6 million and consisted primarily of $40.1 million of net proceeds from the issuance of Series C preferred stock and $2.5 million of net proceeds from the sale of shares of our Series X preferred stock.

Operating Capital Requirements

To date, we have not generated any revenue from product sales. We do not know when, or if, we will generate revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and commercialize one of our current or future product candidates. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. We are subject to all risks incident to the development and commercialization of novel therapeutics, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Following the closing of our IPO, we expect to incur additional costs associated with operating as a public company. We anticipate that we will need substantial additional funding in connection with our continuing operations.

We believe that the net proceeds from our IPO and our existing cash and cash equivalents will be sufficient to fund our projected operating requirements through the first half of 2016. However, we may require additional capital for the further development of our existing product candidates and may also need to raise additional funds sooner to pursue other development activities related to additional product candidates.

If and until we can generate a sufficient amount of revenue from our products, we expect to finance future cash needs through public or private equity or debt offerings. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing stockholders or increased fixed payment obligations, and any such securities may have rights senior to those of our common stock. If we incur indebtedness, we could become subject to

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covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may be substantially different than actual results, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements, both near- and long-term, will depend on many factors, including, but not limited to:

the rate of progress, results and cost of completing our Phase 2b clinical trial of AKB-6548 and our operating costs incurred as we conduct these trials and through our end of Phase 2 meeting with the FDA, and equivalent meetings with the EMA and other regulatory authorities; assuming positive results from our current Phase 2b trial, the scope, size, rate of progress, results and costs of initiating and completing our Phase 3 development program of AKB-6548; assuming favorable clinical results, the cost, timing and outcome of our efforts to obtain marketing approval for AKB-6548 in the United States and in other jurisdictions, including to fund the preparation and filing of regulatory submissions for AKB-6548 with the FDA, the EMA and other regulatory authorities and the guidance provided by and decisions made by such regulatory authorities; the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for AKB-6899 and any other product candidates that we may develop or acquire; the timing of, and the costs involved in, obtaining regulatory approvals for AKB-6899 if clinical trials are successful, and the outcome of regulatory review of AKB-6899; the cost and timing of future commercialization activities for our products, if any of our product candidates are approved for marketing, including product manufacturing, marketing, sales and distribution costs; the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval; the cost of having our product candidates manufactured for clinical trials in preparation for regulatory approval and in preparation for commercialization; our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements; the costs involved in preparing, filing, prosecuting patent applications, maintaining, defending and enforcing our intellectual property rights, including litigation costs, and the outcome of such litigation and decisions by the United States Patent and Trademark Office, or US PTO, and patent offices of other countries; the efforts and activities of competitors and potential competitors; the costs associated with legal compliance, including addressing changes in policies and laws adopted by the U.S. and governmental authorities of other countries; the timing, receipt, and amount of sales of, or royalties on, our future products, if any; the need to implement additional infrastructure and internal systems; and the extent to which we acquire or in-license other products or technologies.



If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition and results of operations could be materially adversely affected.

Contractual Obligations and Commitments

There have been no material changes to our contractual obligations from those described in our prospectus that was filed with the SEC on March 21, 2014.

Off-Balance Sheet Arrangements

As of June 30, 2014 we did not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC.

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