phat-10q_20200930.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, 2020

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.)

 

 

 

100 Campus Drive, Suite 102

Florham Park, New Jersey

 

07932

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (877) 742-8466

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 6, 2020, the registrant had 28,964,506 shares of common stock ($0.0001 par value) outstanding.

 

 

 


TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Item 1

 

Financial Statements (unaudited)

F-1

 

 

Balance Sheets

F-1

 

 

Statements of Operations and Comprehensive Loss

F-2

 

 

Statements of Stockholders’ Equity (Deficit)  

F-3

 

 

Statements of Cash Flows

F-5

 

 

Notes to Unaudited Financial Statements

F-6

Item 2

 

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

19

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4

 

Controls and Procedures

29

 

PART II. OTHER INFORMATION

 

Item 1

 

Legal Proceedings

30

Item 1A

 

Risk Factors

30

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3

 

Defaults Upon Senior Securities

30

Item 4

 

Mine Safety Disclosures

30

Item 5

 

Other Information

30

Item 6

 

Exhibits

32

 

 

Signatures

33

 

 

2


PART I. FINANCIAL INFORMATION

Item 1.Financial Statements (unaudited)

PHATHOM PHARMACEUTICALS, INC.

Balance Sheets

(Unaudited)

(in thousands, except share and par value amounts)

 

 

 

September 30,

2020

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

226,361

 

 

$

243,765

 

Prepaid expenses and other current assets

 

 

800

 

 

 

11,836

 

Total current assets

 

 

227,161

 

 

 

255,601

 

Property, plant and equipment, net

 

 

862

 

 

 

463

 

Operating lease right-of-use assets

 

 

2,485

 

 

 

933

 

Other long-term assets

 

 

381

 

 

 

181

 

Total assets

 

$

230,889

 

 

$

257,178

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable (including related party amounts of $331 and $200, respectively)

 

$

4,788

 

 

$

699

 

Accrued expenses (including related party amounts of $415 and $308, respectively)

 

 

16,593

 

 

 

2,319

 

Accrued interest

 

 

302

 

 

 

156

 

Current portion of long-term debt

 

 

5,556

 

 

 

 

Operating lease liabilities, current

 

 

431

 

 

 

161

 

Warrant liabilities

 

 

 

 

 

413

 

Total current liabilities

 

 

27,670

 

 

 

3,748

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of discount

 

 

41,062

 

 

 

22,777

 

Operating lease liabilities

 

 

1,644

 

 

 

635

 

Other long-term liabilities

 

 

4,125

 

 

 

2,063

 

Total liabilities

 

 

74,501

 

 

 

29,223

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value; authorized shares  — 400,000,000; issued shares  — 28,964,506; outstanding shares — 25,916,093 at September 30, 2020 and 24,728,258 at December 31, 2019, respectively

 

 

3

 

 

 

2

 

Additional paid-in capital

 

 

488,151

 

 

 

484,372

 

Accumulated deficit

 

 

(331,766

)

 

 

(256,419

)

Total stockholders’ equity

 

 

156,388

 

 

 

227,955

 

Total liabilities and stockholders’ equity

 

$

230,889

 

 

$

257,178

 

 

See accompanying notes.

 

F-1


 

PHATHOM PHARMACEUTICALS, INC.

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,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development (includes related party amounts of $1,023, $207, $1,676, and $207 respectively)

 

$

25,770

 

 

$

4,469

 

 

$

56,494

 

 

$

7,670

 

In-process research and development

 

 

 

 

 

 

 

 

 

 

 

78,897

 

General and administrative (includes related party amounts of $62, $156, $139, and $174, respectively)

 

 

7,060

 

 

 

1,813

 

 

 

16,732

 

 

 

3,955

 

Total operating expenses

 

 

32,830

 

 

 

6,282

 

 

 

73,226

 

 

 

90,522

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(32,830

)

 

 

(6,282

)

 

 

(73,226

)

 

 

(90,522

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

15

 

 

 

429

 

 

 

1,075

 

 

 

530

 

Interest expense (includes related party amounts of $0, $(302), $0 and

   $(498), respectively)

 

 

(1,286

)

 

 

(1,990

)

 

 

(3,286

)

 

 

(3,138

)

Change in fair value of warrant liabilities (includes related party amounts of $0, $(57,754), $0 and $(59,031), respectively)

 

 

 

 

 

(57,776

)

 

 

95

 

 

 

(59,060

)

Change in fair value of convertible promissory notes (includes related party amounts of $0, $(732), $0, and $(1,053), respectively)

 

 

 

 

 

(2,486

)

 

 

 

 

 

(4,928

)

Other income (expense)

 

 

(4

)

 

 

(7

)

 

 

(5

)

 

 

(7

)

Total other income (expense)

 

 

(1,275

)

 

 

(61,830

)

 

 

(2,121

)

 

 

(66,603

)

Net loss

 

$

(34,105

)

 

$

(68,112

)

 

$

(75,347

)

 

$

(157,125

)

Net loss per share, basic and diluted

 

$

(1.02

)

 

$

(9.30

)

 

$

(2.29

)

 

$

(22.87

)

Weighted-average shares of common stock outstanding, basic

   and diluted

 

 

33,366,237

 

 

 

7,326,090

 

 

 

32,946,128

 

 

 

6,871,471

 

 

See accompanying notes

 

 

F-2


 

PHATHOM PHARMACEUTICALS, INC.

Statements of Stockholders’ Equity (Deficit)

(Unaudited)

(in thousands, except share amounts)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2019

 

 

24,728,258

 

 

$

2

 

 

$

484,372

 

 

$

(256,419

)

 

$

227,955

 

Conversion of Lender Warrants into equity

 

 

 

 

 

 

 

 

318

 

 

 

 

 

 

318

 

Vesting of restricted shares

 

 

425,295

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

563

 

 

 

 

 

 

563

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(20,141

)

 

 

(20,141

)

Balance at March 31, 2020

 

 

25,153,553

 

 

$

2

 

 

$

485,253

 

 

$

(276,560

)

 

$

208,695

 

Vesting of restricted shares

 

 

460,859

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Stock-based compensation

 

 

 

 

 

 

 

 

828

 

 

 

 

 

 

828

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(21,101

)

 

 

(21,101

)

Balance at June 30, 2020

 

 

25,614,412

 

 

$

3

 

 

$

486,081

 

 

$

(297,661

)

 

$

188,423

 

Vesting of restricted shares

 

 

301,681

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,070

 

 

 

 

 

 

2,070

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(34,105

)

 

 

(34,105

)

Balance at September 30, 2020

 

 

25,916,093

 

 

$

3

 

 

$

488,151

 

 

$

(331,766

)

 

$

156,388

 

 

F-3


 

PHATHOM PHARMACEUTICALS, INC.

Statements 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 December 31, 2018

 

 

 

 

 

 

 

$

2

 

 

$

(1,288

)

 

$

(1,286

)

Merger of entities under common control into the Company

 

 

6,760,334

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting restrictions placed on previously issued and outstanding common stock

 

 

(3,373,408

)

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

1,491,072

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of restricted shares

 

 

1,054,192

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(1,251

)

 

 

(1,251

)

Balance at March 31, 2019

 

 

5,932,190

 

 

$

 

 

$

2

 

 

$

(2,539

)

 

$

(2,537

)

Issuance of common stock in connection with license agreement

 

 

1,084,000

 

 

 

 

 

 

5,885

 

 

 

 

 

 

5,885

 

Vesting of restricted shares

 

 

203,078

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

29

 

 

 

 

 

 

29

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(87,762

)

 

 

(87,762

)

Balance at June 30, 2019

 

 

7,219,268

 

 

$

 

 

$

5,916

 

 

$

(90,301

)

 

$

(84,385

)

Vesting of restricted shares

 

 

201,721

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

36

 

 

 

 

 

 

36

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(68,112

)

 

 

(68,112

)

Balance at September 30, 2019

 

 

7,420,989

 

 

$

 

 

$

5,952

 

 

$

(158,413

)

 

$

(152,461

)

 

See accompanying notes.

 

F-4


 

PHATHOM PHARMACEUTICALS, INC.

Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(75,347

)

 

$

(157,125

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

217

 

 

 

2

 

Stock-based compensation

 

 

3,461

 

 

 

66

 

Amortization of debt discount

 

 

904

 

 

 

243

 

Acquired in-process research and development

 

 

 

 

 

78,897

 

Change in fair value of warrant liabilities (includes related party

   amounts of $0 and $59,031, respectively)

 

 

(95

)

 

 

59,060

 

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

   amounts of $0 and $1,053, respectively)

 

 

 

 

 

4,928

 

Other

 

 

158

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets (includes the change in related party

   amounts of $0, and $17, respectively)

 

 

11,034

 

 

 

(3,147

)

Accounts payable and accrued expenses (includes the change in related party

   amounts of $238, and $186, respectively)

 

 

18,506

 

 

 

1,603

 

Accrued interest (includes the change in related party amounts of $0 and $483,

   respectively)

 

 

146

 

 

 

2,347

 

Operating right-of-use asset and lease liabilities

 

 

(272

)

 

 

 

Other long-term assets

 

 

(200

)

 

 

 

Net cash used in operating activities

 

 

(41,488

)

 

 

(13,126

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Cash paid for purchased in-process research and development

 

 

 

 

 

(25,118

)

Cash paid for property, plant and equipment

 

 

(916

)

 

 

(26

)

Net cash used in investing activities

 

 

(916

)

 

 

(25,144

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from initial public offering, net of issuance costs

 

 

 

 

 

(1,299

)

Proceeds from issuance of convertible promissory notes

 

 

 

 

 

88,324

 

Net proceeds from issuance of long-term debt

 

 

25,000

 

 

 

24,850

 

Net cash provided by financing activities

 

 

25,000

 

 

 

111,875

 

Net (decrease) increase in cash and cash equivalents

 

 

(17,404

)

 

 

73,605

 

Cash and cash equivalents – beginning of period

 

 

243,765

 

 

 

879

 

Cash and cash equivalents – end of period

 

$

226,361

 

 

$

74,484

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

2,235

 

 

$

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

 

Property and equipment purchases included in accounts payable and accrued liabilities

 

$

39

 

 

$

 

Final interest payment fee

 

$

2,063

 

 

$

2,063

 

Operating lease liabilities arising from obtaining right-of-use assets

 

$

1,396

 

 

$

 

Conversion of Lender Warrants into equity

 

$

318

 

 

$

 

Unpaid initial public offering costs

 

$

 

 

$

714

 

 

See accompanying notes.

 

F-5


 

PHATHOM PHARMACEUTICALS, INC.

Notes to Unaudited 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 $191.5 million.

Stock Split

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. In conjunction with the Company’s IPO, the authorized shares of common stock were increased to 400,000,000. The accompanying financial statements and notes to the financial statements give retroactive effect to the Forward Stock Split for all periods presented, unless otherwise indicated.

Basis of Presentation

The Company’s financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The accompanying 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 other things, Frazier’s; (i) ownership of a majority of the outstanding capital stock of both companies, (ii) financing of both companies, (iii) control of the 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 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.

Interim results may not be indicative of the results that may be expected for the full year. In the opinion of management, these unaudited financial statements include all normal and recurring adjustments considered necessary for a fair presentation of these interim unaudited financial statements.

Liquidity and Capital Resources

From inception to September 30, 2020, 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, preparing for and managing the Phase 3 clinical trials of vonoprazan, and providing other general and administrative support for these operations. 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 preparation for commercialization of vonoprazan. From inception to September 30, 2020, the Company has funded its operations through the issuance of convertible promissory notes, commercial bank debt and the sale of 10,997,630 shares of common stock for net proceeds of approximately $191.5 million in its 2019 IPO.

 

The accompanying 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).

F-6


PHATHOM PHARMACEUTICALS, INC.

Notes to Unaudited Financial Statements − (Continued)

 

Management believes that it has sufficient working capital on hand to fund operations through at least the next twelve months from the date these financial statements were available to be issued. There can be no assurance that the Company will be successful in acquiring additional funding (if needed), 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 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 financial statements and accompanying notes. The most significant estimates in the Company’s 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.

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 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.

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, are classified within the Level 1 designation discussed above, while 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, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liabilities

 

$

413

 

 

 

 

 

 

 

 

 

413

 

Total

 

$

413

 

 

$

 

 

$

 

 

$

413

 

 

F-7


PHATHOM PHARMACEUTICALS, INC.

Notes to Unaudited Financial Statements − (Continued)

 

The warrant liabilities consist of warrants (the “Lender Warrants”) issued in connection with the loan and security agreement (the “Loan Agreement”) for commercial bank debt (see Note 7). The Lender Warrants were accounted for as liabilities as they contained a holder put right under which the lenders could have required the Company to pay cash in exchange for the Lender Warrants. The fair value of the Lender Warrants was estimated on the date of grant using the Black-Scholes option-pricing model with an expected term equal to the remaining contractual term of the warrants. The Company estimates its expected stock volatility based on the historical volatility of a set of peer companies, which are publicly traded, and expects to continue to do so until it has adequate historical data regarding the volatility of its own publicly-traded stock price. 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. The Company uses an expected dividend yield of zero based on the fact that the Company has never paid cash dividends and does not expect to pay cash dividends in the foreseeable future. When the Company drew down the Term Loan B under the Loan Agreement in March 2020 (see Note 7), the Lenders’ put right expired, and the Company recorded a final fair value adjustment and reclassified the Lender Warrants balance of $0.3 million to additional paid-in-capital.

 

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

 

 

 

Warrant

Liabilities

 

 

Balance at December 31, 2019

 

 

413

 

 

Change in fair value

 

 

(95

)

 

Reclassification of Lender Warrants into equity (Note 7)

 

 

(318

)

 

Balance at September 30, 2020

 

$

 

 

 

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.

Property, Plant, and Equipment, Net

Property, plant and equipment are recorded at cost, less accumulated depreciation. Depreciation expense is recognized using the straight-line method over the useful life of the asset. Computer equipment and related software are depreciated over two to three years. Furniture and fixtures are depreciated over three years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the related assets. Expenditures for repairs and maintenance of assets are charged to expense as incurred. Upon retirement or sale, the cost and related accumulated depreciation of assets disposed of are removed from the accounts and any resulting gain or loss is included in loss from operations.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property, plant and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount. The impairment loss, if recognized, would be based on the excess of the carrying value of the impaired asset over its respective fair value. No impairment losses have been recorded through September 30, 2020.

Leases

At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, the Company records the associated lease liability and corresponding right-of-use asset upon commencement of the lease using the implicit rate or a discount rate based on a credit-adjusted secured borrowing rate commensurate with the term of the lease. The Company additionally evaluates leases at their inception to determine if they are to be accounted for as an operating lease or a finance lease.  A lease is accounted for as a finance lease if it meets one of the following five criteria: the lease has a purchase option that is reasonably certain of being exercised, the present value of the future cash

F-8


PHATHOM PHARMACEUTICALS, INC.

Notes to Unaudited Financial Statements − (Continued)

 

flows is substantially all of the fair market value of the underlying asset, the lease term is for a significant portion of the remaining economic life of the underlying asset, the title to the underlying asset transfers at the end of the lease term, or if the underlying asset is of such a specialized nature that it is expected to have no alternative uses to the lessor at the end of the term.  Leases that do not meet the finance lease criteria are accounted for as an operating lease. Operating lease assets represent a right to use an underlying asset for the lease term and operating lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease liabilities with a term greater than one year and their corresponding right-of-use assets are recognized on the balance sheet at the commencement date of the lease based on the present value of lease payments over the expected lease term. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. As the Company’s leases do not typically provide an implicit rate, the Company utilizes the appropriate incremental borrowing rate, determined as the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and in a similar economic environment. Lease cost is recognized on a straight-line basis over the lease term and variable lease payments are recognized as operating expenses in the period in which the obligation for those payments is incurred. Variable lease payments primarily include common area maintenance, utilities, real estate taxes, insurance, and other operating costs that are passed on from the lessor in proportion to the space leased by the Company. The Company has elected the practical expedient to not separate between lease and non-lease components.

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 ongoing clinical trials of vonoprazan, and costs related to manufacturing vonoprazan for clinical trials.

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 or after performance are reflected in the accompanying balance sheets as prepaid expenses or accrued liabilities, respectively. 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.

General and Administrative Expenses

General and administrative expenses consist of salaries, stock-based compensation, facilities and third-party expenses. General and administrative expenses are associated with the activities of the executive, finance, accounting, information technology, legal, medical affairs and human resource functions.

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. The Company also maintains an employee stock purchase program ("ESPP") under which it may issue shares. The Company estimates the fair value of stock options and shares that will be issued under the ESPP using the Black-Scholes option-pricing model, which requires the use of estimates. The Company recognizes stock-based compensation cost for shares that it will issue under the ESPP on a straight-line basis over the requisite service period of the award.

F-9


PHATHOM PHARMACEUTICALS, INC.

Notes to Unaudited Financial Statements − (Continued)

 

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the statement of operations in the period that includes the enactment date.

The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Company records uncertain tax positions on the basis of a two-step process whereby (i) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability.

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, 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 weighted-average outstanding shares of both the Company and YamadaCo. Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. The Company included 7,588,000 shares of common stock under its warrant (the “Takeda Warrant”) issued to Takeda Pharmaceutical Company Limited (“Takeda”) in connection with a May 2019 license agreement (see Note 4) in the calculation of basic weighted-average common shares outstanding from the time it became exercisable at the Company’s IPO because the Takeda Warrant is exercisable for little consideration. For the three and nine months ended September 30, 2020, the Company has excluded weighted-average unvested shares of 3,186,269 and 3,606,378, respectively, from the weighted-average number of common shares outstanding, compared to 4,550,428 and 3,342,544, respectively, for the same periods in 2019. Diluted net loss per share is computed by dividing the 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 (warrants, stock options, and common shares subject to repurchase) would be antidilutive.

 

 

Recently Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 implements an impairment model, known as the current expected credit loss model, based on expected losses rather than incurred losses. Under the new guidance, an entity will recognize, as an allowance, its estimate of expected credit losses. ASU 2016-13 is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance effective January 1, 2020, and the adoption did not have a material impact on the Company's financial statements.

F-10


PHATHOM PHARMACEUTICALS, INC.

Notes to Unaudited Financial Statements − (Continued)

 

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 adopted this guidance effective January 1, 2020, and the adoption did not have a material impact on the Company's financial statements.

 

Recently Issued Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes. ASU 2019-12 is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2020 on a prospective basis, and early adoption is permitted. The Company does not expect the adoption of ASU 2019-12 will have a significant impact on its financial statements.

2. Balance Sheet Details

Property, Plant and Equipment, net

Property, plant and equipment, net, consist of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Computer equipment and software

 

$

304

 

 

$

152

 

Furniture and fixtures

 

 

729

 

 

 

306

 

Leasehold improvements

 

 

54

 

 

 

13

 

 

 

 

1,087

 

 

 

471

 

Less: accumulated depreciation

 

 

(225

)

 

 

(8

)

Total property, plant and equipment, net

 

$

862

 

 

$

463

 

 

Depreciation expense for the three and nine months ended September 30, 2020 was approximately $88,000 and $217,000, respectively. Depreciation expense for the three and nine months ended September 30, 2019 was approximately $2,000. No property, plant or equipment was disposed of during the nine months ended September 30, 2020 or the year ended December 31, 2019.

 

Accrued Expenses

 

Accrued expenses consist of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Accrued R&D expenses

 

$

13,361

 

 

$

384

 

Accrued compensation expenses

 

 

2,468

 

 

 

1,052

 

Accrued professional & consulting expenses

 

 

762

 

 

 

478

 

Accrued other

 

 

2

 

 

 

405

 

Total accrued expenses

 

$

16,593

 

 

$

2,319

 

 

3. Related Party Transactions

Frazier is a principal stockholder of the Company and is represented on the Company’s board of directors. The Company has conducted operations within office space controlled by Frazier and Frazier allocated a portion of the costs associated with this office space 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, 2020 and December 31, 2019, the Company had outstanding accounts payable and accrued expenses due to Frazier in the amount of $35,000 and $0.1 million, respectively, related to these shared operating expenses. For the three months ended September 30, 2020 and 2019, the Company incurred $62,000 and $0.2 million, respectively, of shared operating expenses. For the nine months ended September 30, 2020 and 2019, the Company incurred $0.1 million and $0.3 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 5).

F-11


PHATHOM PHARMACEUTICALS, INC.

Notes to Unaudited Financial Statements − (Continued)

 

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, 2020 and December 31, 2019, the Company had $0.6 million and $0.3 million, respectively, outstanding accounts payable and accrued expenses related to these manufacturing services.  For the three and nine months ended September 30, 2020, the Company incurred $0.9 million and $1.5 million, respectively, of expenses related to services performed by PCI. 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 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. For the nine months ended September 30, 2019, the Company charged Mountain Field  $0.1 million for shared expenses. There were no such expenses for the three month periods ended September 30, 2019 and 2020 or the nine months ended September 30, 2020.

Takeda became a common stockholder of the Company in connection with the May 2019 license agreement (see Note 4). In conjunction with this license, Takeda provides proprietary supplies for the Company’s ongoing clinical development of vonoprazan in addition to the exclusive license for the commercialization of vonoprazan in the United States, Canada and Europe. As of September 30, 2020 and December 31, 2019, the Company had $22,000 and $0.1 million, respectively, in outstanding accounts payable and accrued expenses related to these supply services. The Company did not have any such expenses incurred for the three and nine months ended September 30, 2020 and 2019 related to services performed by Takeda.

On May 5, 2020, the Company entered into a Commercial Supply Agreement (the “Commercial Supply Agreement”) with Takeda, pursuant to which Takeda will supply commercial quantities of vonoprazan bulk drug product. Pursuant to the Commercial Supply Agreement, Takeda has agreed to supply the Company with and the Company has agreed to purchase from Takeda certain quantities of vonoprazan bulk drug product according to approved specifications at a fixed price per batch of bulk drug product in order to commercialize vonoprazan in accordance with the Takeda License. Unless terminated earlier, the term of the Commercial Supply Agreement extends for a period of two years from the date the Company places an order for bulk drug product for the first commercial launch of vonoprazan in any jurisdiction in the licensed territory, provided that this two-year period will expire no later than December 31, 2023. The Commercial Supply Agreement will terminate immediately upon the termination of the Takeda License in accordance with its terms. As of September 30, 2020, the Company had $0.1 million in outstanding accounts payable and accrued expenses related to these bulk drug product costs. For the three and nine months ended September 30, 2020, the Company incurred $0.1 million of expenses related to the Commercial Supply Agreement. The Company has a remaining minimum purchase obligation of approximately $2.4 million related to this agreement.

 

4. 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 a right to receive an additional common stock warrant (the “Takeda Warrant Right”) 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 then 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 without effect since no fair value had been allocated to it upon completion of the 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 became exercisable upon the consummation of the IPO. Following the October 11, 2019 increase in the Company’s authorized shares of common stock to 50,000,000, the Company recorded a non-cash charge related to the final fair value adjustment of the Takeda Warrants and reclassified the full balance of $144.2 million from warrant liabilities to additional paid-in capital.

F-12


PHATHOM PHARMACEUTICALS, INC.

Notes to Unaudited Financial Statements − (Continued)

 

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.

5. Convertible Promissory Notes

Frazier Convertible Note Financing

From January 2018 to April 2019, the Company issued convertible promissory notes to Frazier (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 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 convertible promissory notes issued by the Company in May 2019 (the “May 2019 Notes”). For the nine months ended September 30, 2019, the Company recognized $50,000  of other income in the statements of operations related to decreases in the fair value of the Frazier Notes. For the nine months ended September 30, 2019, the Company recognized  $15,000 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. The Company did not have any such expenses incurred for the three and nine months ended September 30, 2020 in connection with the Frazier Notes.

May 2019 Convertible Note Financing

In May 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 bore interest at a rate of 6% per annum and were subordinated to borrowings under the Company’s loan and security agreement (see Note 7).

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. The outstanding principal and accrued interest of the May 2019 Notes automatically converted into 6,107,918 shares of common stock immediately prior to the completion of the IPO on October 29, 2019.

6. Lease Commitments

As of September 30, 2020, the Company had operating leases for office space in both Buffalo Grove, Illinois and Florham Park, New Jersey, with remaining lease terms of 4.6 years and 4.9 years, respectively. Both operating leases contain an option to extend the term for one additional five year period, which was not considered in the determination of the right-of-use asset or lease liability as the Company did not consider it reasonably certain that it would exercise such options.

The total rent expense for the three and nine months ended September 30, 2020 was approximately $0.2 million and $0.4 million, respectively. There was no rent expense for the three and nine months ended September 30, 2019.

The following table summarizes supplemental balance sheet information related to the operating leases as of September 30, 2020 and December 31, 2019.

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets:

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

 

2,485

 

 

 

933

 

Total right-of-use assets

 

$

2,485

 

 

$

933

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Operating lease liabilities, current

 

 

431

 

 

 

161

 

Operating lease liabilities, non-current

 

 

1,644

 

 

 

635

 

Total operating lease liabilities

 

$

2,075

 

 

$

796

 

 

F-13


PHATHOM PHARMACEUTICALS, INC.

Notes to Unaudited Financial Statements − (Continued)

 

As of September 30, 2020, the future minimum annual lease payments under the operating leases were as follows (in thousands):

 

2020

 

$

120

 

2021

 

 

490

 

2022

 

 

503

 

2023

 

 

516

 

2024

 

 

529

 

Thereafter

 

 

342

 

Total minimum lease payments

 

$

2,500

 

 

 

 

 

 

Less: amount representing interest

 

 

(425

)

Present value of operating lease liabilities

 

 

2,075

 

Less: operating lease liabilities, current

 

 

(431

)

Operating lease liabilities

 

$

1,644

 

 

 

 

 

 

Weighted-average remaining lease term (in years)

 

 

4.81

 

Weighted-average incremental borrowing rate

 

 

7.25

%

 

Operating cash flows for the nine months ended September 30, 2020 included $0.8 million in cash payments for operating leases, $0.6 million of which were prepaid lease payments. There were no lease costs for the nine months ended September 30, 2019.

 

 

7. Debt

Total debt consists of the following (in thousands):

 

 

 

September 30,

2020

 

Long-term debt, current portion

 

$

5,556

 

Long-term debt, non-current portion

 

 

44,444

 

Unamortized debt discount

 

 

(3,382

)

Total debt, net of debt discount

 

$

46,618

 

 

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 an additional $25.0 million (“Term Loan B”) on March 16, 2020.

The Term Loans bear interest at a floating rate of the higher of the Wall Street Journal Prime rate plus 1.75% (5% at September 30, 2020) or 7.25%. Under the original Loan Agreement, the monthly payments consisted of interest-only through May 31, 2021. On March 11, 2020, the Company entered into the first amendment (the “Amendment”) to the Loan Agreement. Pursuant to the Amendment, the interest-only payment period was extended either (i) until December 31, 2021, if the Company receives positive data from its Phase 3 clinical trial in H. pylori infection sufficient to file a New Drug Application (“NDA”) with the U.S. Food and Drug Administration (“FDA”); or (ii) until November 30, 2022, if the Company receives positive data from its Phase 3 clinical trials in both indications for vonoprazan sufficient to file an NDA with the FDA; provided, in each case, that the Company had drawn down an additional $25.0 million, Term Loan B, pursuant to the Loan Agreement. 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, 2020, the aggregate final payment fee for the Term Loans of $4.1 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.

F-14


PHATHOM PHARMACEUTICALS, INC.

Notes to Unaudited Financial Statements − (Continued)

 

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, 2020, 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, which expire ten years from the date of issuance. Upon completion of the IPO in 2019, the Lender Warrants became exercisable for 16,446 shares of common stock. The Lender Warrants included a put option pursuant to which, in the event that the Company did not draw down Term Loan B on or before March 31, 2020, the warrant holders could have required that the Company repurchase the warrants for a total aggregate repurchase price of $0.5 million. Upon the Term Loan B draw in March 2020, the Lender Warrants became exercisable and the put option related to the Lender Warrants expired.  Accordingly, the Company recorded a final fair value adjustment and reclassified the Lender Warrants balance of $0.3 million to additional paid-in-capital.

The initial $0.4 million fair value of the Lender Warrants, the $4.1 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. During the three and nine months ended September 30, 2020, the Company recognized $1.3 million and $3.3 million, respectively, of interest expense, including amortization of the debt discount, in connection with the Loan Agreement, compared to $0.6 million and $0.9 million for the three and nine months ended September 30, 2019, respectively. As of September 30, 2020, the Company had outstanding Term Loans of $50.0 million and accrued interest of $0.3 million.

Future minimum principal and interest payments under the Term Loans, including the final payment fee, as of September 30, 2020 are as follows (in thousands):

 

Year ending December 31:

 

 

 

 

2020

 

$

916

 

2021

 

 

13,219

 

2022

 

 

19,065

 

2023

 

 

17,840

 

2024

 

 

11,198

 

Total principal and interest payments

 

 

62,238

 

Less interest and final payment fee