10-Q
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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 March 31, 2023

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 May 8, 2023, the registrant had 43,614,075 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-4

 

 

Notes to Unaudited Financial Statements

F-5

Item 2

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

22

Item 3

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4

Controls and Procedures

32

 

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

33

Item 3

Defaults Upon Senior Securities

33

Item 4

Mine Safety Disclosures

33

Item 5

Other Information

33

Item 6

Exhibits

35

 

 

Signatures

37

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

PHATHOM PHARMACEUTICALS, INC.

Balance Sheets

(Unaudited)

(in thousands, except share and par value amounts)

 

 

 

March 31,
2023

 

 

December 31,
2022

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

129,574

 

 

$

155,385

 

Prepaid expenses and other current assets

 

 

10,269

 

 

 

5,127

 

Total current assets

 

 

139,843

 

 

 

160,512

 

Property, plant and equipment, net

 

 

1,275

 

 

 

1,207

 

Operating lease right-of-use assets

 

 

2,088

 

 

 

2,287

 

Restricted cash

 

 

505

 

 

 

505

 

Other long-term assets

 

 

299

 

 

 

299

 

Total assets

 

$

144,010

 

 

$

164,810

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable (including related party amounts of $78 and $35, respectively)

 

$

4,805

 

 

$

9,997

 

Accrued expenses (including related party amounts of $2,608 and $2,499, respectively)

 

 

8,015

 

 

 

14,678

 

Accrued interest

 

 

911

 

 

 

854

 

Operating lease liabilities, current

 

 

712

 

 

 

708

 

Total current liabilities

 

 

14,443

 

 

 

26,237

 

 

 

 

 

 

 

Long-term debt, net of discount

 

 

96,638

 

 

 

95,264

 

Revenue interest financing liability

 

 

114,679

 

 

 

109,525

 

Operating lease liabilities

 

 

945

 

 

 

1,098

 

Other long-term liabilities

 

 

7,500

 

 

 

7,500

 

Total liabilities

 

 

234,205

 

 

 

239,624

 

 

 

 

 

 

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.0001 par value; authorized shares — 40,000,000 at March 31, 2023 and December 31, 2022; no shares issued and outstanding at March 31, 2023 and December 31, 2022

 

 

 

 

 

 

Common stock, $0.0001 par value; authorized shares — 400,000,000 at March 31, 2023 and December 31, 2022; issued shares — 43,602,984 and 41,723,308 at March 31, 2023 and December 31, 2022, respectively; outstanding shares — 43,571,140 and 41,468,871 at March 31, 2023 and December 31, 2022, respectively

 

 

4

 

 

 

3

 

Treasury stock — 19 shares at March 31, 2023 and December 31, 2022, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

674,708

 

 

 

652,276

 

Accumulated deficit

 

 

(764,907

)

 

 

(727,093

)

Total stockholders’ (deficit) equity

 

 

(90,195

)

 

 

(74,814

)

Total liabilities and stockholders’ equity

 

$

144,010

 

 

$

164,810

 

 

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
March 31,

 

 

2023

 

 

2022

 

Operating expenses:

 

 

 

 

 

Research and development (includes related party amounts of $175 and $1,430, respectively)

$

11,479

 

 

$

17,660

 

General and administrative (includes related party amounts of $3 and $0, respectively)

 

18,598

 

 

 

20,246

 

Total operating expenses

 

30,077

 

 

 

37,906

 

 

 

 

 

 

 

Loss from operations

 

(30,077

)

 

 

(37,906

)

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

1,460

 

 

 

7

 

Interest expense

 

(9,217

)

 

 

(2,759

)

Other income (expense)

 

20

 

 

 

(7

)

Total other expense

 

(7,737

)

 

 

(2,759

)

Net loss and comprehensive loss

$

(37,814

)

 

$

(40,665

)

Net loss per share, basic and diluted

$

(0.89

)

 

$

(1.07

)

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

 

42,354,520

 

 

 

38,036,960

 

 

See accompanying notes.

F-2


 

PHATHOM PHARMACEUTICALS, INC.

Statements of Stockholders’ Equity (Deficit)

(Unaudited)

(in thousands, except share amounts)

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional
Paid-in

 

 

Accumulated

 

 

Total
Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2022

 

 

41,468,871

 

 

 

3

 

 

 

19

 

 

 

652,276

 

 

 

(727,093

)

 

 

(74,814

)

401(k) matching contribution

 

 

52,130

 

 

 

 

 

 

 

 

 

456

 

 

 

 

 

 

456

 

Vesting of restricted shares and restricted stock units

 

 

414,119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

7,048

 

 

 

 

 

 

7,048

 

ESPP shares issued

 

 

121,801

 

 

 

 

 

 

 

 

 

856

 

 

 

 

 

 

856

 

Issuance of common stock under ATM facility

 

 

1,514,219

 

 

 

1

 

 

 

 

 

 

14,072

 

 

 

 

 

 

14,073

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37,814

)

 

 

(37,814

)

Balance at March 31, 2023

 

 

43,571,140

 

 

$

4

 

 

 

19

 

 

$

674,708

 

 

$

(764,907

)

 

$

(90,195

)

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional
Paid-in

 

 

Accumulated

 

 

Total
Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2021

 

 

30,511,226

 

 

 

3

 

 

 

1

 

 

 

601,523

 

 

 

(529,370

)

 

 

72,156

 

Cashless exercise of common stock warrants

 

 

7,359,285

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

 

401(k) matching contribution

 

 

16,756

 

 

 

 

 

 

 

 

 

254

 

 

 

 

 

 

254

 

Vesting of restricted shares and restricted stock units

 

 

222,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

5,775

 

 

 

 

 

 

5,775

 

ESPP shares issued

 

 

39,951

 

 

 

 

 

 

 

 

 

515

 

 

 

 

 

 

515

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(40,665

)

 

 

(40,665

)

Balance at March 31, 2022

 

 

38,149,813

 

 

$

3

 

 

 

19

 

 

$

608,067

 

 

$

(570,035

)

 

$

38,035

 

 

See accompanying notes.

 

F-3


 

PHATHOM PHARMACEUTICALS, INC.

Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(37,814

)

 

$

(40,665

)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

146

 

 

 

128

 

Stock-based compensation

 

 

7,048

 

 

 

5,775

 

Issuance of PIK interest debt

 

 

877

 

 

 

848

 

 Accrued interest on revenue interest financing liability

 

 

5,154

 

 

 

 

Amortization of debt discount

 

 

496

 

 

 

518

 

Other

 

 

763

 

 

 

591

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(5,143

)

 

 

(4,384

)

Accounts payable and accrued expenses (includes changes in related party amounts of $137 and $2,719, respectively)

 

 

(11,303

)

 

 

(6,075

)

Accrued clinical trial expenses

 

 

 

 

 

(1,402

)

Accrued interest

 

 

57

 

 

 

4

 

Operating right-of-use assets and lease liabilities

 

 

50

 

 

 

22

 

Other long-term assets

 

 

 

 

 

(117

)

Net cash used in operating activities

 

 

(39,669

)

 

 

(44,757

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Cash paid for property, plant and equipment

 

 

(214

)

 

 

(67

)

Net cash used in investing activities

 

 

(214

)

 

 

(67

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Net proceeds from issuance of common stock under ATM facility

 

 

14,072

 

 

 

 

Net cash provided by financing activities

 

 

14,072

 

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents and restricted cash

 

 

(25,811

)

 

 

(44,824

)

Cash and cash equivalents and restricted cash – beginning of period

 

 

155,890

 

 

 

183,419

 

Cash and cash equivalents and restricted cash – end of period

 

$

130,079

 

 

$

138,595

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Interest paid

 

$

2,546

 

 

$

1,388

 

Supplemental disclosure of noncash investing and financing activities

 

 

 

 

 

 

Property and equipment purchases included in accounts payable and accrued expenses

 

$

 

 

$

120

 

Settlement of ESPP liability in common stock

 

$

856

 

 

$

515

 

Settlement of 401(k) liability in common stock

 

$

456

 

 

$

254

 

 

See accompanying notes.

F-4


 

PHATHOM PHARMACEUTICALS, INC.

Notes to Unaudited Financial Statements

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

Organization and Basis of Presentation

Phathom Pharmaceuticals, Inc., or the Company or Phathom, was incorporated in the state of Delaware in January 2018. The Company is a biopharmaceutical company focused on developing and commercializing novel treatments for gastrointestinal diseases. The Company’s financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP.

Liquidity and Capital Resources

From inception to March 31, 2023, 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, managing the clinical trials of vonoprazan, preparing for commercialization of its initial products containing 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 additional net losses in the future as it continues to develop and prepares for commercialization of vonoprazan. From inception to March 31, 2023, the Company has funded its operations through the issuance of convertible promissory notes, commercial bank debt, revenue interest financing debt, the sale of 10,997,630 shares of common stock for net proceeds of approximately $191.5 million in its 2019 IPO, the sale of 2,250,000 shares of common stock for net proceeds of approximately $88.6 million in its December 2020 follow-on public offering, the sale of 3,929,116 shares of common stock for net proceeds of approximately $38.7 million in its issuances of common stock pursuant to the Open Market Sale AgreementSM, or the Sales Agreement, with Jefferies LLC, or the Sales Agent, under which the Company may, from time to time, sell shares of its common stock having an aggregate offering price of up to $125.0 million, or the ATM Offering, through March 31, 2023.

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 in accordance with GAAP. 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).

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 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 various 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.

F-5


 

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.

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.

As of March 31, 2023, the estimated fair value of the Company’s long-term debt approximated the carrying amount given its floating interest rate basis. The fair value of the Company’s long-term debt was estimated for disclosure purposes only and was determined based on quoted market data for valuation, and thus categorized as Level 2 in the fair value hierarchy.

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 March 31, 2023.

F-6


 

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 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.

Revenue Interest Financing Liability

The Company entered into a revenue interest financing agreement, or the Revenue Interest Financing Agreement, with entities managed or advised by NovaQuest Capital Management, or NQ, Sagard Holdings Manager LP, or Sagard, and Hercules Capital, Inc., or Hercules, together with NQ and Sagard, the Initial Investors, in which the Company received funds in return for royalties on net sales of products containing vonoprazan. The net proceeds received under the transaction were recognized as short-term and long-term liabilities with interest expense based on an imputed effective rate derived from the expected future payments. The Company recalculates the effective interest rate each period based on the current carrying value and the revised estimated future payments. Changes in future payments from previous estimates are included in current and future financing expense.

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, or CROs, 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.

F-7


 

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 commercial, 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 with forfeitures recognized as they occur.

The Company also maintains an employee stock purchase program, or ESPP, under which it may issue shares. The Company estimates the fair value of shares that will be issued under the ESPP, and of stock options using the Black-Scholes valuation 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.

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.

Beginning in 2022, the Tax Cuts and Jobs Act, or TCJA, eliminates the option to deduct research and development expenditures currently and requires taxpayers to amortize domestic and foreign research and development expenditures over 5 years and 15 years, respectively. The requirement did not impact cash from operations in the current period.

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.

F-8


 

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

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. For the three months ended March 31, 2023 and 2022, the Company has excluded weighted-average unvested shares of 132,514 and 1,022,885, respectively, from the weighted-average number of common shares outstanding. 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 and warrants. For the 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

There were no recently adopted accounting standards which would have a material impact on the Company's financial statements.

Recently Issued Accounting Pronouncements

The Company assesses the adoption impacts of recently issued accounting standards by the Financial Accounting Standards Board or other standard setting bodies on the Company's financial statements as well as material updates to previous assessments, if any, from the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. There were no new material accounting standards issued in the first quarter of 2023 that impacted the Company.

2. Balance Sheet Details

Property, Plant and Equipment, net

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Computer equipment and software

 

$

1,087

 

 

$

1,078

 

Furniture and fixtures

 

 

1,086

 

 

 

1,086

 

Leasehold improvements

 

 

115

 

 

 

115

 

Construction in process

 

 

604

 

 

 

399

 

Total property, plant and equipment, gross

 

 

2,892

 

 

 

2,678

 

Less: accumulated depreciation

 

 

(1,617

)

 

 

(1,471

)

Total property, plant and equipment, net

 

$

1,275

 

 

$

1,207

 

 

F-9


 

Depreciation expense for each of the three months ended March 31, 2023 and 2022 was approximately $0.1 million. No property, plant or equipment was disposed of during the three months ended March 31, 2023 or the year ended December 31, 2022.

Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Accrued research and development expenses

 

$

2,497

 

 

$

3,080

 

Accrued compensation expenses

 

 

3,490

 

 

 

8,447

 

Accrued professional & consulting expenses

 

 

1,972

 

 

 

3,000

 

Accrued other

 

 

56

 

 

 

151

 

Total accrued expenses

 

$

8,015

 

 

$

14,678

 

 

3. Related Party Transactions

Frazier is a principal stockholder of the Company with representation on the Board of Directors. Frazier is compensated for their participation on the Board of Directors and as of March 31, 2023 and December 31, 2022, the Company had $17,000 and $15,000, respectively, outstanding accounts payable and accrued expenses related to these services. For the three months ended March 31, 2023 and 2022, the Company incurred $3,000 and no expense, respectively, of expenses related to participation on the Board of Directors. Frazier is also a principal stockholder in PCI Pharma Services, or PCI. In the third quarter of 2019, the Company engaged PCI for clinical manufacturing services. As of March 31, 2023 and December 31, 2022, the Company had $1.2 million and $1.1 million, respectively, outstanding accounts payable and accrued expenses related to these manufacturing services. For the three months ended March 31, 2023 and 2022, the Company incurred $0.1 million and $0.3 million, respectively, of expenses related to services performed by PCI.

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. On May 5, 2020, the Company entered into a Commercial Supply Agreement, or the Commercial Supply Agreement, with Takeda, pursuant to which Takeda will supply commercial quantities of vonoprazan bulk drug product or drug substance. 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 or drug substance 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. In connection with the Takeda License, the Company entered into a temporary services agreement, or the Temporary Services Agreement, with Takeda on November 24, 2020. Pursuant to the Temporary Services Agreement, Takeda agreed to provide or procure the provision of services related to the ongoing clinical development of vonoprazan. The Temporary Services Agreement will terminate immediately upon termination of the Takeda License in accordance with its terms. As of March 31, 2023 and December 31, 2022, the Company had $1.5 million and $1.4 million, respectively, in outstanding accounts payable and accrued expenses related to these agreements. For the three months ended March 31, 2023 and 2022, the Company incurred $0.1 million and $1.1 million, respectively, of expenses related to these agreements. The Company has no remaining minimum purchase obligation related to these agreements.

F-10


 

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, or, 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, or, 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 Takeda Warrant had an exercise price of $0.00004613 per share, and was to expire on May 7, 2029 and became exercisable upon the consummation of the IPO. As of March 31, 2023, all Takeda Warrants have been exercised.

Purchase Commitments

In December 2020, the Company entered into a supply agreement with Sandoz pursuant to which Sandoz will supply commercial quantities of amoxicillin capsules and clarithromycin tablets, package these antibiotics with vonoprazan, and provide in finished convenience packs. The supply agreement commits the Company to a minimum purchase obligation of approximately $3.8 million in the first 24-month period following the launch of the final product. The Company has not incurred any expenses under the agreement during the three months ended March 31, 2023 and 2022.

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. Lease Commitments

As of March 31, 2023, the Company had operating leases for office space in both Buffalo Grove, Illinois and Florham Park, New Jersey, with remaining lease terms of 2.1 years and 2.4 years, respectively. All 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 months ended March 31, 2023 and 2022 was $0.3 million and $0.2 million, respectively.

The following table summarizes supplemental balance sheet information related to the operating leases (in thousands):

 

F-11


 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Assets:

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

2,088

 

 

$

2,287

 

Total right-of-use assets

 

 

2,088

 

 

 

2,287

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Operating lease liabilities, current

 

 

712

 

 

 

708

 

Operating lease liabilities, non-current

 

 

945

 

 

 

1,098

 

Total operating lease liabilities

 

$

1,657

 

 

$