phat-10q_20190930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                   .

Commission File Number: 001-39094

 

PHATHOM PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

82-4151574

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

2150 E. Lake Cook Road, Suite 800

Buffalo Grove, Illinois

 

60089

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (650) 325-5156

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

 

PHAT

 

Nasdaq Global Select Market

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes           No      

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes           No      

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 

As of November 23, 2019, the registrant had 24,526,537 shares of common stock ($0.0001 par value) outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Item 1

 

Combined Financial Statements (unaudited)

F-1

 

 

Combined Balance Sheets as of September 30, 2019 and December 31, 2018

F-1

 

 

Combined Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2019, for the Three and Nine Months Ended September 30, 2018

F-2

 

 

Combined Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Nine Months ended September 30, 2019 and 2018

F-3

 

 

Combined Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018

F-5

 

 

Notes to Unaudited Combined Financial Statements

F-6

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4

 

Controls and Procedures

31

 

PART II. OTHER INFORMATION

 

Item 1

 

Legal Proceedings

33

Item 1A

 

Risk Factors

33

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

78

Item 3

 

Defaults Upon Senior Securities

78

Item 4

 

Mine Safety Disclosures

78

Item 5

 

Other Information

78

Item 6

 

Exhibits

79

 

 

Exhibit Index

 

 

 

Signatures

81

 

 

 

US-DOCS\111623708.4

2

 

 


 

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements (unaudited)

PHATHOM PHARMACEUTICALS, INC.

Combined Balance Sheets

(Unaudited)

(in thousands, except share and par value amounts)

 

 

 

September 30,

2019

 

 

December 31,

2018

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

74,484

 

 

$

879

 

Prepaid expenses and other current assets (including related party amounts

   of $36 and $19, respectively)

 

 

3,169

 

 

 

23

 

Total current assets

 

 

77,653

 

 

 

902

 

Property, plant and equipment, net

 

 

40

 

 

 

 

Other assets

 

 

2,013

 

 

 

 

Total assets

 

$

79,706

 

 

$

902

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable (including related party amounts of $57 and $45,

   respectively)

 

$

439

 

 

$

55

 

Accrued expenses (including related party amounts of $176 and $2,

   respectively)

 

 

2,120

 

 

 

170

 

Accrued interest (including related party amounts of $483 and $13,

   respectively)

 

 

2,332

 

 

 

13

 

Convertible promissory notes payable at fair value (including related party

   amounts of $21,103 and $1,950, respectively)

 

 

95,229

 

 

 

1,950

 

Warrant liabilities (including related party amounts of ($106,925

   and $0, respectively)

 

 

107,373

 

 

 

 

Total current liabilities

 

 

207,493

 

 

 

2,188

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of discount

 

 

22,611

 

 

 

 

Other long-term liabilities

 

 

2,063

 

 

 

 

Total liabilities

 

 

232,167

 

 

 

2,188

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Common stock, Common stock, $0.0001 par value; authorized shares

   —50,000,000 at September 30, 2019 (unaudited); issued shares—

   11,876,518 at September 30, 2019 (unaudited); outstanding shares—

   7,420,989 at September 30, 2019 (unaudited);

 

 

 

 

 

 

Additional paid-in capital

 

 

5,952

 

 

 

2

 

Accumulated deficit

 

 

(158,413

)

 

 

(1,288

)

Total stockholders’ deficit

 

 

(152,461

)

 

 

(1,286

)

Total liabilities and stockholders’ deficit

 

$

79,706

 

 

$

902

 

 

See accompanying notes.

 

 

US-DOCS\111623708.4

F-1

 

 


 

PHATHOM PHARMACEUTICALS, INC.

Combined Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except share and per share amounts)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

(unaudited)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development (includes related party amounts of $207,

   $0, $207 and $0, respectively)

 

$

4,469

 

 

$

6

 

 

$

7,670

 

 

$

6

 

In-process research and development

 

 

 

 

 

 

 

 

78,897

 

 

 

 

General and administrative (includes related party amounts of $156,

   $72, $174 and $196, respectively)

 

 

1,813

 

 

 

262

 

 

 

3,955

 

 

 

768

 

Total operating expenses

 

 

6,282

 

 

 

268

 

 

 

90,522

 

 

 

774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(6,282

)

 

 

(268

)

 

 

(90,522

)

 

 

(774

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

429

 

 

 

 

 

 

530

 

 

 

 

Interest expense (includes related party amounts of $(302), $(4),

   $(498) and $(8), respectively)

 

 

(1,990

)

 

 

(4

)

 

 

(3,138

)

 

 

(8

)

Change in fair value of warrant liabilities (includes related party

   amounts of $(57,754), ($0), ($59,031) and ($0), respectively)

 

 

(57,776

)

 

 

 

 

 

(59,060

)

 

 

 

Change in fair value of convertible promissory notes (includes related

   party amounts of $(732), $(18), $(1,053) and $(22), respectively)

 

 

(2,486

)

 

 

(18

)

 

 

(4,928

)

 

 

(22

)

Other income (expense)

 

 

(7

)

 

 

 

 

 

(7

)

 

 

 

Total other income (expense)

 

 

(61,830

)

 

 

(22

)

 

 

(66,603

)

 

 

(30

)

Net loss

 

$

(68,112

)

 

$

(290

)

 

$

(157,125

)

 

$

(804

)

Net loss per share, basic and diluted

 

$

(9.30

)

 

$

(0.04

)

 

$

(22.87

)

 

$

(0.14

)

Weighted-average shares of common stock outstanding, basic and diluted

 

 

7,326,090

 

 

 

6,760,334

 

 

 

6,871,471

 

 

 

5,812,860

 

 

See accompanying notes

 

 

 

US-DOCS\111623708.4

F-2

 

 


 

PHATHOM PHARMACEUTICALS, INC.

Combined Statement of Stockholders’ Equity (Deficit)

(Unaudited)

(in thousands, except share amounts)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Deficit

 

Balance at January 1, 2019

 

 

 

 

 

 

 

 

2

 

 

 

(1,288

)

 

 

(1,286

)

Merger of entities under common control into the

   Company (unaudited)

 

 

6,760,334

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting restrictions placed on previously issued

   and outstanding common stock (unaudited)

 

 

(3,373,408

)

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock (unaudited)

 

 

1,491,072

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of restricted shares (unaudited)

 

 

1,054,192

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

(1,251

)

 

 

(1,251

)

Balance at March 31, 2019 (unaudited)

 

 

5,932,190

 

 

$

 

 

$

2

 

 

$

(2,539

)

 

$

(2,537

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock in connection with

   license agreement (unaudited)

 

 

1,084,000

 

 

 

 

 

 

5,885

 

 

 

 

 

 

5,885

 

Vesting of restricted shares (unaudited)

 

 

203,078

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation (unaudited)

 

 

 

 

 

 

 

 

29

 

 

 

 

 

 

29

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

(87,762

)

 

 

(87,762

)

Balance at June 30, 2019 (unaudited)

 

 

7,219,268

 

 

$

 

 

$

5,916

 

 

$

(90,301

)

 

$

(84,385

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of restricted shares (unaudited)

 

 

201,721

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation (unaudited)

 

 

 

 

 

 

 

 

36

 

 

 

 

 

 

36

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

(68,112

)

 

 

(68,112

)

Balance at September 30, 2019 (unaudited)

 

 

7,420,989

 

 

$

 

 

$

5,952

 

 

$

(158,413

)

 

$

(152,461

)

 

 

US-DOCS\111623708.4

F-3

 

 


 

PHATHOM PHARMACEUTICALS, INC.

Combined Statement of Stockholders’ Equity (Deficit)

(Unaudited)

(in thousands, except share amounts)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Deficit

 

Balance at January 1, 2018

 

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Issuance of common stock to founders (unaudited)

 

 

2,000

 

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

(254

)

 

 

(254

)

Balance at March 31, 2018 (unaudited)

 

 

2,000

 

 

$

 

 

$

2

 

 

$

(254

)

 

$

(252

)

Issuance of common stock to founders (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

(260

)

 

 

(260

)

Balance at June 30, 2018 (unaudited)

 

 

2,000

 

 

$

 

 

$

2

 

 

$

(514

)

 

$

(512

)

Issuance of common stock to founders (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

(290

)

 

 

(290

)

Balance at September 30, 2018 (unaudited)

 

 

2,000

 

 

$

 

 

$

2

 

 

$

(804

)

 

$

(802

)

 

See accompanying notes.

 

 

US-DOCS\111623708.4

F-4

 

 


 

PHATHOM PHARMACEUTICALS, INC.

Combined Statement of Cash Flows

(Unaudited)

(in thousands)

 

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(157,125

)

 

$

(804

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2

 

 

 

 

Stock-based compensation

 

 

66

 

 

 

 

Amortization of debt discount

 

 

243

 

 

 

 

Acquired in-process research and development

 

 

78,897

 

 

 

 

Change in fair value of warrant liabilities (includes related party amounts

   of $59,031 and $0, respectively)

 

 

59,060

 

 

 

 

Change in fair value of convertible promissory notes (includes related party

   amounts of $1,053 and $22, respectively)

 

 

4,928

 

 

 

22

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets (includes related party amounts

   of $17, and $8, respectively)

 

 

(3,147

)

 

 

(36

)

Accounts payable and accrued expenses (includes related party amounts of

   $186, and $32, respectively)

 

 

1,603

 

 

 

89

 

Accrued interest (includes related party amounts of $483 and $13,

   respectively)

 

 

2,347

 

 

 

8

 

Net cash used in operating activities

 

 

(13,126

)

 

 

(721

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Cash paid for purchased in-process research and development

 

 

(25,118

)

 

 

 

Cash paid for property, plant and equipment

 

 

(26

)

 

 

 

Net cash used in investing activities

 

 

(25,144

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

 

 

 

2

 

Proceeds from issuance of convertible promissory notes

 

 

88,324

 

 

 

850

 

Net proceeds from issuance of long-term debt

 

 

24,850

 

 

 

 

 

Issuance costs associated with Initial Public Offering (IPO)

 

 

(1,299

)

 

 

 

Net cash provided by financing activities

 

 

111,875

 

 

 

852

 

Net increase in cash

 

 

73,605

 

 

 

131

 

Cash and cash equivalents – beginning of period

 

 

879

 

 

 

 

Cash and cash equivalents – end of period

 

$

74,484

 

 

$

131

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

549

 

 

$

 

Supplemental disclosure of noncash investing and financing activities

 

 

 

 

 

 

 

 

Exchange of accrued interest for convertible promissory notes

 

$

27

 

 

$

 

Issuance of Takeda Warrants in connection with Takeda License

 

$

47,894

 

 

$

 

Issuance of common stock in connection with Takeda License

 

$

5,885

 

 

$

 

Issuance of common stock warrants in connection with long-term debt

 

$

419

 

 

$

 

Unpaid initial public offering costs

 

$

714

 

 

$

 

Final interest payment fee

 

$

2,063

 

 

$

 

 

See accompanying notes.

 

 

 

US-DOCS\111623708.4

F-5

 

 


 

PHATHOM PHARMACEUTICALS, INC.

Notes to Unaudited Combined Financial Statements

 

1. Organization, Basis of Presentation and Summary of Significant Accounting Policies

Organization

Phathom Pharmaceuticals, Inc. (the “Company” or “Phathom”) was incorporated in the state of Delaware in January 2018 under the name North Bridge IV, Inc. On March 13, 2019, the Company changed its name to Phathom Pharmaceuticals, Inc. and merged with YamadaCo IIA, Inc. (“YamadaCo”), a Delaware corporation formed in September 2017, with Phathom being the surviving entity (the “Merger”). All activities of YamadaCo prior to 2018 related to formation and were insignificant. The Company is a late clinical-stage biopharmaceutical company focused on developing and commercializing novel treatments for gastrointestinal diseases.

On October 29, 2019, the Company completed its initial public offering (the “IPO”) and issued 10,997,630 shares of common stock for net proceeds of approximately $191.4 million.  Upon the closing of the IPO, the convertible promissory notes payable were converted into 6,107,918 shares of common stock.  See Note 7 to these financial statements for additional details.

Stock Split and Conversion

During 2018, without consideration of the forward stock split described immediately below, both the Company and YamadaCo issued 1,000 shares of common stock at a purchase price of $1.00 per share, and had no other capital transactions prior to the Merger. Immediately prior to the Merger, the Company effected a 1,559.1183-for-1 forward stock split for each outstanding share of its common stock and, effective upon the closing of the Merger, each issued and outstanding share of YamadaCo was converted into 1,559.1183 shares of the Company’s common stock. Upon completion of the Merger, the Company had 6,760,334 shares of common stock outstanding, with the prior stockholders of each YamadaCo and Phathom holding an equal number of shares. The accompanying combined financial statements and notes to the combined financial statements give retroactive effect to the forward stock split and conversion for all periods presented.

On October 11, 2019, the Company effected a 2.168-for-1 forward stock split of its common stock (the “Forward Stock Split”). The par value of the common stock was not adjusted as a result of the Forward Stock Split and the authorized shares were increased to 50,000,000 shares of common stock in connection with the Forward Stock Split. The accompanying combined financial statements and notes to the combined financial statements give retroactive effect to the Forward Stock Split for all periods presented, unless otherwise indicated.

Basis of Presentation

The Company’s combined financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The accompanying combined financial statements include the accounts of the Company (the receiving entity) and YamadaCo, prior to the Merger. The Company and YamadaCo were entities under the common control of Frazier Life Sciences IX, L.P. (“Frazier”) as a result of, among others, Frazier’s; (i) ownership of a majority of the outstanding capital stock of both companies, (ii) financing of both companies, (iii) control of board of directors of both companies, and (iv) management of both companies. Both the Company and YamadaCo were formed for the purpose of identifying potential assets around which to form an operating company. As the merged entities were under common control, the combined financial statements report the financial position, results of operations and cash flows of the Company and YamadaCo as though the transfer of net assets and equity interests had occurred at the beginning of 2018. All intercompany accounts and transactions have been eliminated in combination.

Liquidity and Capital Resources

From inception to September 30, 2019, the Company has devoted substantially all of its efforts to organizing and staffing the Company, business planning, raising capital, in-licensing its initial product candidate, vonoprazan, meeting with regulatory authorities, and preparing for the planned Phase 3 clinical trials of vonoprazan. The Company has a limited operating history, has never generated any revenue, and the sales and income potential of its business is unproven. The Company has incurred net losses and negative cash flows from operating activities since its inception and expects to continue to incur net losses into the foreseeable future as it continues the development and commercialization of vonoprazan. From inception to September 30, 2019, the Company has funded its operations through the issuance of convertible promissory notes and commercial bank debt.  Additionally, on October 29, 2019, the Company completed its IPO and issued 10,997,630 shares of common stock for net proceeds of approximately $191.4 million.

 

 

US-DOCS\111623708.4

F-6

 

 


Phathom Pharmaceuticals, Inc.

Notes to Combined Financial Statements − (Continued)

(Information as of September 30, 2019 and thereafter and for the nine months ended September 30, 2018 and 2019 is unaudited)

 

The accompanying combined financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result from the outcome of this uncertainty. Management is required to perform a two-step analysis over the Company’s ability to continue as a going concern. Management must first evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern (Step 1). If management concludes that substantial doubt is raised, management is also required to consider whether its plans alleviate that doubt (Step 2).

Upon the initial public filing that took place on October 29, 2019, management believes that it has sufficient working capital on hand to fund operations through at least the next twelve months from the date these combined financial statements were available to be issued. There can be no assurance that the Company will be successful in acquiring additional funding, that the Company’s projections of its future working capital needs will prove accurate, or that any additional funding would be sufficient to continue operations in future years.

Use of Estimates

The preparation of the Company’s combined financial statements requires it to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in the Company’s combined financial statements and accompanying notes. The most significant estimates in the Company’s combined financial statements relate to accruals for research and development expenses, and the valuation of convertible promissory notes, warrant liabilities and various other equity instruments. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results could differ materially from those estimates and assumptions.

Unaudited Interim Financial Information

The accompanying interim balance sheet as of September 30, 2019, the combined statements of operations and cash flows for the three and nine months ended September 30, 2019 and 2018 and the combined statement of stockholders’ deficit for the three and nine months ended September 30, 2019 and 2018 and the related footnote disclosures are unaudited. In management’s opinion, the unaudited interim financial statements have been prepared on the same basis as the audited combined financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of September 30, 2019 and its results of operations and cash flows for the three and nine months ended September 30, 2019 and 2018 in accordance with GAAP. The results for the nine months ended September 30, 2019 are not necessarily indicative of the results expected for the full fiscal year or any other interim period.

Fair Value Option

As permitted under Accounting Standards Codification (“ASC”) 825, Financial Instruments, (“ASC 825”), the Company has elected the fair value option to account for its convertible promissory notes issued since inception. In accordance with ASC 825, the Company records these convertible promissory notes at fair value with changes in fair value recorded in the combined statements of operations. As a result of applying the fair value option, direct costs and fees related to the convertible promissory notes were recognized in earnings as incurred and not deferred.

Fair Value Measurements

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets.

Level 2: Inputs, other than the quoted prices in active markets that are observable either directly or indirectly.

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

US-DOCS\111623708.4

F-7

 

 


Phathom Pharmaceuticals, Inc.

Notes to Combined Financial Statements − (Continued)

(Information as of September 30, 2019 and thereafter and for the nine months ended September 30, 2018 and 2019 is unaudited)

 

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents classified within the Level 1 designation discussed above, prepaid and other current assets, accounts payable, and accrued liabilities, approximate fair value due to their short maturities. Warrant liabilities and convertible promissory notes are recorded at fair value on a recurring basis.

The Company has no financial assets measured at fair value on a recurring basis. None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented.

Liabilities measured at fair value on a recurring basis are as follows (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at

Reporting Date Using:

 

 

 

Total

 

 

Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

As of December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible promissory notes

 

$

1,950

 

 

$

 

 

$

 

 

$

1,950

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liabilities

 

$

107,373

 

 

$

 

 

$

 

 

$

107,373

 

Convertible promissory notes

 

 

95,229

 

 

 

 

 

 

 

 

 

95,229

 

Total

 

$

202,602

 

 

$

 

 

$

 

 

$

202,602

 

 

The warrant liabilities consist of an issued and outstanding common stock warrant (the “Takeda Warrant”) and a right to receive an additional common stock warrant (the “Takeda Warrant Right”, and together with the Takeda Warrant, the “Takeda Warrants”) issued to Takeda Pharmaceutical Company Limited (“Takeda”) in connection with a May 2019 license agreement (see Note 3) and warrants (the “Lender Warrants”) issued in connection with a loan and security agreement for commercial bank debt (see Note 5). The Takeda Warrants are accounted for as liabilities as they do not meet all the conditions for equity classification due to (i) insufficient authorized shares for the Takeda Warrant and (ii) the Takeda Warrant Right is not indexed to the Company’s own stock. The Lender Warrants are accounted for as liabilities as they contain a holder put right under which the lenders could require the Company to pay cash in exchange for the warrants. The fair value of the Takeda Warrants is derived from the model used to estimate the fair value the Company’s common stock (see Note 6). The fair value of the Lender Warrants is estimated using a probability-weighted model considering IPO and non-IPO scenarios. The IPO scenarios utilize a binomial lattice model to estimate a distribution of total equity values as of a projected IPO date. The non-IPO scenario utilizes the repurchase price associated with the warrant put right discounted to present value based on venture capital rates of return and the term associated with the put right. As of September 30, 2019, the fair value of the Takeda Warrants was $107.0 million and the fair value of the Lender Warrants was $0.4 million.

As further described in Note 4, the Company issued convertible promissory notes to Frazier (the “Frazier Notes”) from January 2018 to April 2019 and issued convertible promissory notes in May 2019 (the “May 2019 Notes”) to investors including Frazier. The Company has elected the fair value option for each of its convertible promissory note issuances. The fair value of the Frazier Notes was estimated using a scenario-based analysis that estimated the fair value of the convertible promissory notes based on the probability-weighted present value of expected future investment returns, considering possible outcomes available to the noteholders, including conversions in subsequent equity financings, change of control transactions, settlement and dissolution. The fair value of the May 2019 Notes is estimated using a scenario-based analysis that estimates the fair value of the convertible promissory notes based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to the noteholders, including various IPO, settlement, equity financing, corporate transaction and dissolution scenarios. As of December 31, 2018, the fair value of the Frazier Notes was $2.0 million and the Frazier Notes were exchanged for May 2019 Notes in May 2019. As of September 30, 2019, the fair value of the May 2019 Notes was $95.2 million.

 

US-DOCS\111623708.4

F-8

 

 


Phathom Pharmaceuticals, Inc.

Notes to Combined Financial Statements − (Continued)

(Information as of September 30, 2019 and thereafter and for the nine months ended September 30, 2018 and 2019 is unaudited)

 

The Company adjusts the carrying value of its warrant liabilities and convertible promissory notes to their estimated fair value at each reporting date, with any related increases or decreases in the fair value recorded as change in fair value of warrant liabilities and change in fair value of convertible promissory notes, respectively, in the combined statements of operations.

 

Liability

 

At initial

valuation

date

 

 

Fair value

as of

September 30,

 

 

Fair value method

at initial

valuation date

(and relative weighting)

 

Fair value

method at as of

September 30, 2019 (and

relative weighting)

 

KEY unobservable inputs

 

Range

Takeda Warrants

 

 

47,894

 

 

 

107,373

 

 

Financing transactions (40%)

Income approach (60%)

 

Financing transactions (70%)

Income approach (30%)

 

Transaction prices per share

Estimated time to liquidity

Discount rate

 

$9.33 - $18.56

0.09 - 1.77 years

7.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 2019 Notes

 

 

90,250

 

 

 

95,229

 

 

Financing transactions (40%)

Income approach (60%)

 

Financing transactions (70%)

Income approach (30%)

 

Estimated time to liquidity

Volatility

Discount rate

 

0.09 - 1.77 years

65%

22.6% - 25%

 

The following table provides a reconciliation of all liabilities measured at fair value using Level 3 significant unobservable inputs (in thousands):

 

 

 

Warrant

Liabilities

 

 

Convertible

Promissory

Notes

 

Balance at January 1, 2018

 

$

 

 

$

 

Issuance of convertible promissory notes

 

 

 

 

 

1,900

 

Change in fair value

 

 

 

 

 

50

 

Balance at December 31, 2018

 

 

 

 

 

1,950

 

Issuance of convertible promissory notes

 

 

 

 

 

90,750

 

Exchange of convertible promissory notes (Note 4)

 

 

 

 

 

(2,399

)

Issuance of warrants

 

 

48,313

 

 

 

 

Change in fair value

 

 

59,060

 

 

 

4,928

 

Balance at September 30, 2019

 

$

107,373

 

 

$

95,229

 

 

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents include cash in readily available checking accounts and money market funds.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

Deferred Offering Costs

The Company has deferred offering costs consisting of legal, accounting and other fees and costs directly attributable to its planned IPO. The deferred offering costs will be offset against the proceeds received upon the completion of the planned IPO. In the event the planned IPO is terminated, all of the deferred offering costs will be expensed within the Company’s statements of operations. As of September 30, 2019, $2.0 million of deferred offering costs were recorded within other long-term assets on the balance sheet. No such costs were included on the combined balance sheet as of December 31, 2018.

Research and Development Expenses and Accruals

All research and development costs are expensed in the period incurred and consist primarily of salaries, payroll taxes, employee benefits, stock-based compensation charges for those individuals involved in research and development efforts, external research and development costs incurred under agreements with contract research organizations and consultants to conduct and support the Company’s planned clinical trials of vonoprazan, and costs related to manufacturing vonoprazan for clinical trials.

 

US-DOCS\111623708.4

F-9

 

 


Phathom Pharmaceuticals, Inc.

Notes to Combined Financial Statements − (Continued)

(Information as of September 30, 2019 and thereafter and for the nine months ended September 30, 2018 and 2019 is unaudited)

 

The Company has entered into various research and development contracts with clinical research organizations, clinical manufacturing organizations and other companies. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and payments made in advance of performance are reflected in the accompanying balance sheets as prepaid expenses or accrued liabilities. The Company records accruals for estimated costs incurred for ongoing research and development activities. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the services, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates may be made in determining the prepaid or accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates.

In-Process Research and Development

The Company evaluates whether acquired intangible assets are a business under applicable accounting standards.  Additionally, the Company evaluates whether the acquired assets have a future alternative use. Intangible assets that do not have future alternative use are considered acquired in-process research and development.  When the acquired in-process research and development assets are not part of a business combination, the value of the consideration paid is expensed on the acquisition date.  Future costs to develop these assets are recorded to research and development expense as they are incurred.

Stock-Based Compensation

Stock-based compensation expense represents the cost of the grant date fair value of equity awards recognized over the requisite service period of the awards (generally the vesting period) on a straight-line basis. The Company recognizes forfeitures as they occur.

Comprehensive Loss

Comprehensive loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s comprehensive loss was the same as its reported net loss for all periods presented.

Segment Reporting

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment.

Net Loss Per Share

For the three and nine months ended September 30, 2018 and 2019, the net loss per share was recast to include in the numerator the net losses of both the Company and YamadaCo and include in the denominator the combined weighted-average outstanding shares of both the Company and YamadaCo. Basic net loss per share is computed by dividing the combined net loss by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. The Company has excluded weighted-average unvested shares of 4,550,428 and 3,342,544 shares from the weighted-average number of common shares outstanding for the three and nine months ended September 30, 2019. No shares of common stock were unvested during the year ended September 30, 2018. Diluted net loss per share is computed by dividing the combined net loss by the weighted-average number of common shares and dilutive common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods. Dilutive common stock equivalents are comprised of unvested common stock, options, warrants and convertible promissory notes. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding as inclusion of the potentially dilutive securities would be antidilutive.

The following potentially dilutive securities were excluded from the computation of diluted net loss per share for the periods presented because their inclusion would have been antidilutive:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Warrants

 

 

7,588,000

 

 

 

 

 

 

7,588,000

 

 

 

 

Stock options

 

 

1,400,528

 

 

 

 

 

 

1,400,528

 

 

 

 

Shares subject to repurchase

 

 

4,550,428

 

 

 

 

 

 

3,342,544

 

 

 

 

 

 

US-DOCS\111623708.4

F-10

 

 


Phathom Pharmaceuticals, Inc.

Notes to Combined Financial Statements − (Continued)

(Information as of September 30, 2019 and thereafter and for the nine months ended September 30, 2018 and 2019 is unaudited)

 

Recently Adopted Accounting Pronouncements

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This guidance expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments to employees, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees and is effective for public companies for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted as long as ASU No. 2014-09 has been adopted by the Company. The Company adopted this guidance effective January 1, 2018, and the adoption did not have a material impact on the Company's financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires a lessee to recognize a lease liability and a right-of-use asset for all leases with lease terms of more than 12 months. Additionally, certain qualitative and quantitative disclosures will be required in the financial statements. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. Companies may adopt this guidance using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company adopted this guidance effective January 1, 2018, and the adoption did not have any impact on the Company’s financial statements as the Company did not have any leases at the time of adoption. As the Company enters into future, material lease agreements, the adoption of this guidance is expected to result in a significant increase in the total assets and liabilities reported on the balance sheets.

Recently Issued Accounting Pronouncements

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, which eliminates, modifies and adds disclosure requirements on fair value measurements. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU No. 2018-13 will have on the Company’s financial statements.

2. Related Party Transactions

Frazier is a principal stockholder of the Company and is represented on the Company’s board of directors. For the year ended December 31, 2018 and the nine months ended September 30, 2019, the Company conducted its operations within office space controlled by Frazier and Frazier allocated a portion of the costs associated with this office to the Company. In addition, Frazier paid for various goods and services, such as employee wages, insurance and expense reimbursements and various administrative services associated with the operations of the Company and charged the Company for those expenses. As of September 30, 2019, and December 31, 2018, the Company had outstanding accounts payable balances due to Frazier of $71,000 and $45,000, respectively, related to these shared operating expenses. For the three months ended September 30, 2019 and 2018, the Company incurred $0.2 million and $66,000, respectively, of shared operating expenses. For the nine months ended September 30, 2019 and 2018, the Company incurred $0.3 million and $0.2 million, respectively, of shared operating expenses. In addition to the shared operating expenses, the Company issued convertible promissory notes to Frazier during 2018 and 2019 (see Note 4).

Frazier is a principal stockholder in PCI Pharma Services (“PCI”).  In the third quarter of 2019, the Company engaged PCI for clinical manufacturing services.  As of September 30, 2019, the Company had $0.1 million in prepaid services and $0.2 million outstanding accounts payable and accrued expenses related to these manufacturing services.  For the three and nine months ended September 30, 2019, the Company incurred $0.2 million of expenses related to services performed by PCI.

Mountain Field LLC (“Mountain Field”) is an entity owned by the chairman of the Company’s board of directors. During the year ended December 31, 2018 and the nine months ended September 30, 2019, the Company charged Mountain Field for certain rent and payroll related expenses. These shared expenses were allocated based on usage of the related facilities and time incurred by personnel. As of September 30, 2019, and December 31, 2018, the Company had an outstanding accounts receivable balance from Mountain Field of $0 and $19,000, respectively, related to shared operating expenses. For the three months ended September 30, 2019 and 2018, the Company incurred $0 and $5,000, respectively, for shared expenses. For the nine months ended September 30, 2019 and 2018, the Company charged Mountain Field $0.1 million and $2,000, respectively, for shared expenses.

Takeda became a common stockholder of the Company as of May 7, 2019 in connection with the May 2019 license agreement (see Note 3).

 

US-DOCS\111623708.4

F-11

 

 


Phathom Pharmaceuticals, Inc.

Notes to Combined Financial Statements − (Continued)

(Information as of September 30, 2019 and thereafter and for the nine months ended September 30, 2018 and 2019 is unaudited)

 

3. Commitments and Contingencies

License Agreement

On May 7, 2019, the Company entered into a license agreement with Takeda pursuant to which it was granted an exclusive license to commercialize vonoprazan fumarate in the United States, Canada and Europe (the “Takeda License”). The Company also has the right to sublicense its rights under the agreement, subject to certain conditions. The agreement will remain in effect, on a country-by-country and product-by-product basis, until the later of (i) the expiration of the last to expire valid patent claim covering vonoprazan fumarate alone or in combination with at least one other therapeutically active ingredient, (ii) the expiration of the applicable regulatory exclusivity and (iii) 15 years from the date of first commercial sale, unless earlier terminated. The Company may terminate the Takeda License upon six months’ written notice. The Company and Takeda may terminate the Takeda License in the case of the other party’s insolvency or material uncured breach. Takeda may terminate the Takeda License if the Company challenges, or assists in challenging, licensed patents.

In consideration of the Takeda License, the Company (i) paid Takeda $25.0 million in cash, (ii) issued Takeda 1,084,000 shares of its common stock at a fair value of $5.9 million, (iii) issued the Takeda Warrant to purchase 7,588,000 shares of its common stock at an exercise price of $0.00004613 per share at an initial fair value of $47.9 million, and (iv) issued the Takeda Warrant Right to receive an additional common stock warrant should Takeda’s fully-diluted ownership of the Company represent less than a certain specified percentage of the fully-diluted capitalization, including shares issuable upon conversion of outstanding convertible promissory notes, calculated immediately before the closing of the Company’s IPO, with a nominal initial fair value due to the low probability of issuance. The Takeda Warrant Right expired upon completion of our IPO, and no additional warrant was issued. In addition, the Company is obligated to pay Takeda up to an aggregate of $250.0 million in sales milestones upon the achievement of specified levels of product sales, and a low double-digit royalty rate on aggregate net sales of licensed products, subject to certain adjustments. The Company incurred $0.1 million of transaction costs in connection with the Takeda License. The Takeda Warrant has an exercise price of $0.00004613 per share, expires on May 7, 2029 and becomes exercisable upon (i) certain change of control transactions of the Company or (ii) the consummation of an IPO by the Company.

The transaction has been accounted for as an asset acquisition as substantially all of the fair value is concentrated in a group of similar assets. The $78.9 million fair value of the consideration paid for these research and development assets, which have no alternative future use, was recorded as in-process research and development in the Company’s combined statement of operations for the nine months ended September 30, 2019.

Contingencies

In the event the Company becomes subject to claims or suits arising in the ordinary course of business, the Company would accrue a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

4. Convertible Promissory Notes

Frazier Convertible Note Financing

From January 2018 to April 2019, the Company issued the Frazier Notes for an aggregate of $2.4 million and bearing interest at per annum rates ranging from 1.68% to 2.55%. Of the Frazier Notes, $1.9 million were issued in 2018 and $0.5 million were issued in April 2019. Due to certain embedded features within the Frazier Notes, the Company elected to account for these notes and all their embedded features under the fair value option. The Company recorded changes in the fair value of the Frazier Notes in the combined statements of operations until May 2019, when the Frazier Notes and related accrued interest were exchanged, at their then fair value of $2.4 million, for the May 2019 Notes. For the three and nine months ended September 30, 2018, and the nine months ended September 30, 2019, the Company recognized $18,000 of expense, $22,000 of expense, and $50,000 of income, respectively, in change in fair value of convertible promissory notes in the combined statements of operations related to changes in the fair value of the Frazier Notes. For the three and nine months ended September 30, 2018 and the nine months ended September 30, 2019, the Company recognized $4,000, $8,000 and $15,000, respectively, of interest expense in connection with the Frazier Notes. No interest expense or changes in fair value related to the Frazier Notes were recorded in the three months ended September 30, 2019, as the Frazier Notes were exchanged in May 2019.

 

US-DOCS\111623708.4

F-12

 

 


Phathom Pharmaceuticals, Inc.

Notes to Combined Financial Statements − (Continued)

(Information as of September 30, 2019 and thereafter and for the nine months ended September 30, 2018 and 2019 is unaudited)

 

May 2019 Convertible Note Financing

In May 7, 2019, the Company entered into a note purchase agreement under which it issued the unsecured May 2019 Notes for an aggregate of $90.3 million, resulting in gross proceeds to the Company of $87.8 million in cash and $2.4 million related to the exchange of the Frazier Notes and related accrued interest for the May 2019 Notes. Including the conversion of the Frazier Notes, Frazier purchased $20.0 million of the May 2019 Notes. The May 2019 Notes bear interest at a rate of 6% per annum and are subordinated to borrowings under the Company’s loan and security agreement (see Note 5). The May 2019 Notes become payable upon demand of the holders of at least 60% of the outstanding principal amount of the May 2019 Notes, including Frazier, on May 7, 2020 (the “Maturity Date”), and become due and payable on May 7, 2022, subject to earlier conversion or repayment in the event the Company completes certain equity financings or a change of control. The May 2019 Notes can be converted/redeemed as follows (i) automatically converted upon a qualified equity financing, with a conversion price of the lesser of 80% of the price paid per share in such financing or the conversion cap price per share, (ii) optionally converted upon a non-qualified equity financing with a conversion price of 80% of the price paid per share in such financing, (iii) optionally converted any time after the Maturity Date, with a conversion price per share of the conversion cap price per share, (iv) automatically upon an IPO with a conversion price per share of the lesser of 80% of the IPO price per share, or the conversion cap price per share, and (v) upon certain corporate transactions, receive cash equal to the greater of (A) two times the then outstanding principal and accrued interest and (B) an amount equal to the amount that would be received as if the May 2019 Notes were converted with a conversion price of the conversion cap price per share. The conversion cap price per share is defined as $500.0 million less the outstanding principal and accrued interest divided by the total of (1) the total number of common shares outstanding immediately prior to conversion, (2) the number of common shares issuable upon exercise or conversion of exercisable or convertible securities, and (3) the number of shares of capital stock reserved for issuance under the Company’s equity incentive plan.

The note purchase agreement includes, among others, covenants related to delivery of certain financial reports, certain registration rights, voting provisions regarding the composition of the Company’s board of directors, and limitations on the Company’s ability to pay dividends, incur additional indebtedness or consummate certain changes of control. The note purchase agreement also contains customary events of default, including bankruptcy, the failure to make payments when due, and certain material adverse changes. Upon the occurrence of an event of default, subject to any specified cure periods, all amounts owed by the Company may be declared immediately due and payable. As of September 30, 2019, the Company was in compliance with all applicable covenants under the note purchase agreement.

Due to certain embedded features within the May 2019 Notes, the Company elected to account for these notes and all their embedded features under the fair value option. For the three and nine months ended September 30, 2019, the Company recognized $2.5 million and $4.9 million respectively, of other expense in the combined statements of operations related to increases in the fair value of the May 2019 Notes. For the three and nine months ended September 30, 2019, the Company recognized $1.4 million and $2.2 million, respectively, of interest expense in connection with the May 2019 Notes. As of September 30, 2019, the outstanding principal and accrued interest on the May 2019 Notes was $90.3 million and $2.2 million, respectively. The principal and accrued interest of the May 2019 Notes automatically converted upon the IPO on October 29, 2019, converting into 6,107,918 shares of common stock; refer to Note 7 for further information.

5. Long-Term Debt

Long-term debt consists of the following (in thousands):

 

 

 

September 30,

2019

 

Long-term debt

 

$

25,000

 

Unamortized debt discount

 

 

(2,389

)

Long-term debt, net of debt discount

 

$

22,611

 

 

On May 14, 2019, the Company entered into a loan and security agreement (the “Loan Agreement”, and all amounts borrowed thereunder the “Term Loans”) with Silicon Valley Bank (“SVB”), as administrative and collateral agent, and lenders including SVB and WestRiver Innovation Lending Fund VIII, L.P. (“WestRiver”). The Company borrowed $25.0 million (“Term Loan A”) at the inception of the Loan Agreement and has the right to borrow an additional $25.0 million (“Term Loan B”). Term Loan B is available through March 31, 2020, provided that (i) the Company has received at least $150.0 million of net cash proceeds in connection with the issuance and sale, subsequent to April 1 2019, of its equity securities and subordinated debt, (ii) the Company has initiated Phase 3 clinical trials for vonoprazan, and (iii) no event of default has occurred.

 

US-DOCS\111623708.4

F-13

 

 


Phathom Pharmaceuticals, Inc.

Notes to Combined Financial Statements − (Continued)

(Information as of September 30, 2019 and thereafter and for the nine months ended September 30, 2018 and 2019 is unaudited)

 

The Term Loans bear interest at a floating rate of the higher of the Wall Street Journal Prime rate plus 1.75% (7.25% at September 30, 2019) or 7.25%. The monthly payments consist of interest-only through June 1, 2021 or, in the event of positive data with respect to the Company’s Phase 3 clinical trial in both indications for vonoprazan sufficient to file an NDA with the FDA, through June 1, 2022. Subsequent to the interest-only period, the Term Loans will be payable in equal monthly installments of principal, plus accrued and unpaid interest through the maturity date of May 1, 2024. In addition, the Company is obligated to pay a final payment fee of 8.25% of the original principal amount of the Term Loans. As of September 30, 2019, the final payment fee of $2.1 million has been recorded as an other long-term liability.

The Company may elect to prepay all or a portion of the Term Loans prior to maturity, subject to a prepayment fee of up to 2.0% of the then outstanding principal balance and payment of a pro rata portion of the final payment fee. After repayment, no Term Loan amounts may be borrowed again.

The borrowings under the Loan Agreement are collateralized by substantially all of the Company’s assets, excluding intellectual property and certain other assets. The Loan Agreement includes affirmative and negative covenants. The affirmative covenants include, among others, covenants requiring the Company to maintain its legal existence and governmental approvals, deliver certain financial reports, maintain insurance coverage and satisfy certain requirements regarding its operating accounts. The negative covenants include, among others, limitations on the Company’s ability to incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter into various specified transactions. The Loan Agreement also contains customary events of default, including bankruptcy, the failure to make payments when due, and a material adverse change. Upon the occurrence of an event of default, subject to any specified cure periods, all amounts owed by the Company would begin to bear interest at a rate that is 4.00% above the rate effective immediately before the event of default and may be declared immediately due and payable by SVB, as collateral agent. As of September 30, 2019, the Company was in compliance with all applicable covenants under the Loan Agreement.

In connection with the Loan Agreement, the Company issued the Lender Warrants to purchase stock of the Company. The Lender Warrants become exercisable only if the Company borrows Term Loan B, and the number, class and per share price of the shares subject to the warrants is dependent on the terms of certain future equity financing transactions of the Company, including an IPO. The Lender Warrants expire ten years from the date of issuance, subject to earlier termination on September 30, 2020 if the Company does not draw down Term Loan B on or before March 31, 2020. The Lender Warrants include a put option pursuant to which, in the event that the Company does not draw down Term Loan B on or before March 31, 2020, the warrant holders may require that the Company repurchase the warrants for a total aggregate repurchase price of $0.5 million. The put right is exercisable through September 30, 2020.

The initial $0.4 million fair value of the Lender Warrants, the $2.1 million final payment fee and $0.2 million of debt issuance costs have been recorded as debt discount and are being amortized to interest expense using the effective interest method over the term of the Term Loans. For the three and nine months ended September 30, 2019, the Company recognized $0.6 million and $0.9 million of interest expense, including amortization of the debt discount, in connection with the Loan Agreement. As of September 30, 2019, the Company had outstanding Term Loans of $25.0 million and accrued interest of $0.2 million.

Future minimum principal and interest payments under the Term Loans, including the final payment fee, as of September 30, 2019 are as follows (in thousands):

 

Year ending December 31:

 

 

 

 

2019

 

$

458

 

2020

 

 

1,843

 

2021

 

 

6,609

 

2022

 

 

9,533

 

2023

 

 

8,920

 

2024

 

 

5,599

 

Total principal and interest payments

 

 

32,962

 

Less interest and final payment fee

 

 

(7,962

)

Long-term debt

 

$

25,000

 

 

 

US-DOCS\111623708.4

F-14

 

 


Phathom Pharmaceuticals, Inc.

Notes to Combined Financial Statements − (Continued)

(Information as of September 30, 2019 and thereafter and for the nine months ended September 30, 2018 and 2019 is unaudited)

 

6. Stockholders’ Deficit

Common Stock

In March 2019, subsequent to the Merger, the Company sold 1,491,072 shares of the Company’s common stock to Frazier.

In March 2019, the founders granted the Company a repurchase right for the 3,373,408 shares of common stock originally purchased in 2018. The Company has the right, but not the obligation, to repurchase unvested shares in the event the founder’s relationship with the Company is terminated, subject to certain limitations, at the original purchase price of the stock. The repurchase right lapsed for 843,352 shares in March 2019 and the repurchase right for the remaining 2,530,056 shares lapses in equal monthly amounts over the following 48-month period ending in March 2023. The fair value of the founder shares at the date the repurchase right was granted is being recognized as stock-based compensation expense on a straight-line basis over the vesting period. As of September 30, 2019, 2,213,808 shares of common stock were subject to repurchase by the Company and the associated repurchase liability was not significant. The amount of recognized and unrecognized stock-based compensation related to the founder stock was immaterial for all periods presented.

In May 2019, the Company issued Takeda 1,084,000 shares of common stock in connection with the Takeda License.

For the period from January 1, 2019 to May 6, 2019, the Company issued 2,524,852 shares of common stock to various employees and consultants of the Company for aggregate proceeds of approximately $1,000. Upon issuance, these shares were subject to a repurchase option by the Company at the original purchase price of the shares. The repurchase rights generally lapse as to 25% of the shares on the first anniversary of the vesting commencement date, and the repurchase right lapses as to 1/48th of the shares each one-month period thereafter, subject to the purchaser remaining continuously an employee, consultant or director of the Company.

On October 29, 2019, the Company completed its IPO and issued 10,997,630 shares of common stock for net proceeds of approximately $191.4 million.

Equity Incentive Plan

The Company’s 2019 Equity Incentive Plan (the “Existing Incentive Plan”) provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, and other stock awards to eligible recipients, including employees, directors or consultants of the Company. As of September 30, 2019, the Company had 2,231,739 shares of common stock authorized for issuance under the Existing Incentive Plan, of which 814,951 shares remained available for grant. In May 2019, the Company issued 16,260 shares of common stock under a restricted stock award, of which 6,775 were unvested as of September 30, 2019. For the nine months ended September 30, 2019, 1,400,258 stock options and 16,260 restricted stock awards were granted under the Existing Incentive Plan.

A summary of the Company’s unvested shares is as follows:

 

Balance at January 1, 2019

 

 

 

Vesting restrictions placed on previously issued shares

 

 

3,373,408

 

Sale of unvested common stock

 

 

2,524,852

 

Issuance of unvested restricted stock awards

 

 

16,260

 

Share vesting

 

 

(1,458,985

)

Balance at September 30, 2019

 

 

4,455,535

 

 

For accounting purposes, unvested shares of common stock are considered issued, but not outstanding until they vest.

 

US-DOCS\111623708.4

F-15

 

 


Phathom Pharmaceuticals, Inc.

Notes to Combined Financial Statements − (Continued)

(Information as of September 30, 2019 and thereafter and for the nine months ended September 30, 2018 and 2019 is unaudited)

 

Stock Options

The fair value of each employee and non-employee stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company, prior to the IPO on October 29, 2019, is a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected volatility based on the historical volatility of a publicly traded set of peer companies. Due to the lack of historical exercise history, the expected term of the Company’s stock options for employees has been determined utilizing the “simplified” method for awards. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is zero based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

A summary of the Company’s stock option activity and related information is as follows:

 

 

 

Options

Outstanding

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value (in

thousands)

 

Balance at December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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