10-Q 1 phat-20220331.htm 10-Q 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, 2022

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 4 2022, the registrant had 39,072,027 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

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

20

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

28

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

31

 

 

Signatures

32

 

 

 


 

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,
2022

 

 

December 31,
2021

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

138,090

 

 

$

183,259

 

Prepaid expenses and other current assets

 

 

7,651

 

 

 

3,267

 

Total current assets

 

 

145,741

 

 

 

186,526

 

Property, plant and equipment, net

 

 

708

 

 

 

650

 

Operating lease right-of-use assets

 

 

1,795

 

 

 

1,914

 

Other long-term assets

 

 

805

 

 

 

341

 

Total assets

 

$

149,049

 

 

$

189,431

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable (including related party amounts of $82 and $1,343, respectively)

 

 

2,858

 

 

 

5,150

 

Accrued clinical trial expenses

 

 

 

 

 

1,402

 

Accrued expenses (including related party amounts of $872 and $2,330, respectively)

 

 

7,565

 

 

 

11,405

 

Accrued interest

 

 

481

 

 

 

477

 

Operating lease liabilities, current

 

 

490

 

 

 

487

 

Total current liabilities

 

 

11,394

 

 

 

18,921

 

 

 

 

 

 

 

 

Long-term debt, net of discount

 

 

91,037

 

 

 

89,671

 

Operating lease liabilities

 

 

1,083

 

 

 

1,183

 

Other long-term liabilities

 

 

7,500

 

 

 

7,500

 

Total liabilities

 

 

111,014

 

 

 

117,275

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.0001 par value; authorized shares — 40,000,000; no shares issued and outstanding at March 31, 2022 and December 31, 2021

 

 

 

 

 

 

Common stock, $0.0001 par value; authorized shares — 400,000,000; issued shares — 39,072,046 and 31,656,035 at March 31, 2022 and December 31, 2021, respectively; outstanding shares — 38,149,813 and 30,511,226 at March 31, 2022 and December 31, 2021, respectively

 

 

3

 

 

 

3

 

Treasury stock — 19 and 1 at March 31, 2022 and December 31, 2021, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

608,067

 

 

 

601,523

 

Accumulated deficit

 

 

(570,035

)

 

 

(529,370

)

Total stockholders’ equity

 

 

38,035

 

 

 

72,156

 

Total liabilities and stockholders’ equity

 

$

149,049

 

 

$

189,431

 

 

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,

 

 

 

2022

 

 

2021

 

Operating expenses:

 

 

 

 

 

 

Research and development (includes related party amounts of $1,430 and $939 respectively)

 

$

17,660

 

 

$

20,580

 

General and administrative (includes related party amounts of $0 and $16, respectively)

 

 

20,246

 

 

 

13,004

 

Total operating expenses

 

 

37,906

 

 

 

33,584

 

 

 

 

 

 

 

 

Loss from operations

 

 

(37,906

)

 

 

(33,584

)

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

Interest income

 

 

7

 

 

 

14

 

Interest expense

 

 

(2,759

)

 

 

(1,272

)

Other (expense)

 

 

(7

)

 

 

(1

)

Total other (expense)

 

 

(2,759

)

 

 

(1,259

)

Net loss and comprehensive loss

 

$

(40,665

)

 

$

(34,843

)

Net loss per share, basic and diluted

 

$

(1.07

)

 

$

(0.96

)

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

 

 

38,036,960

 

 

 

36,298,968

 

 

See accompanying notes.

F-2


 

PHATHOM PHARMACEUTICALS, INC.

Statements of Stockholders’ Equity

(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, 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

 

 

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 Stockholders’ Equity

(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, 2020

 

 

28,516,010

 

 

$

3

 

 

 

 

 

$

579,755

 

 

$

(385,487

)

 

$

194,271

 

Issuance of common stock from exercise of stock options

 

 

36,998

 

 

 

 

 

 

 

 

 

412

 

 

 

 

 

 

412

 

401(k) matching contribution

 

 

8,356

 

 

 

 

 

 

 

 

 

323

 

 

 

 

 

 

323

 

Vesting of restricted shares

 

 

301,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

3,818

 

 

 

 

 

 

3,818

 

ESPP shares issued

 

 

13,490

 

 

 

 

 

 

 

 

 

358

 

 

 

 

 

 

358

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(34,843

)

 

 

(34,843

)

Balance at March 31, 2021

 

 

28,876,510

 

 

$

3

 

 

 

 

 

$

584,666

 

 

$

(420,330

)

 

$

164,339

 

 

See accompanying notes.

F-4


 

PHATHOM PHARMACEUTICALS, INC.

Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(40,665

)

 

$

(34,843

)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

128

 

 

 

125

 

Stock-based compensation

 

 

5,775

 

 

 

3,818

 

Issuance of PIK interest debt

 

 

848

 

 

 

 

Amortization of debt discount

 

 

518

 

 

 

364

 

Other

 

 

591

 

 

 

357

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other current assets (includes the change in related party
   amounts of $
0, and $82, respectively)

 

 

(4,384

)

 

 

(965

)

Accounts payable and accrued expenses (includes the change in related party
   amounts of $
2,719, and $428, respectively)

 

 

(6,073

)

 

 

(9,516

)

Accrued clinical trial expenses

 

 

(1,402

)

 

 

(9,129

)

Accrued interest

 

 

4

 

 

 

0

 

Operating right-of-use asset and lease liabilities

 

 

22

 

 

 

25

 

Other long-term assets

 

 

(464

)

 

 

(1

)

Net cash used in operating activities

 

 

(45,102

)

 

 

(49,765

)

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Cash paid for property, plant and equipment

 

 

(67

)

 

 

(169

)

Net cash used in investing activities

 

 

(67

)

 

 

(169

)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from issuance of common stock from exercise of stock options

 

 

 

 

 

412

 

Net cash provided by financing activities

 

 

 

 

 

412

 

Net (decrease) in cash and cash equivalents

 

 

(45,169

)

 

 

(49,522

)

Cash and cash equivalents – beginning of period

 

 

183,259

 

 

 

287,496

 

Cash and cash equivalents – end of period

 

$

138,090

 

 

$

237,974

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Interest paid

 

$

1,388

 

 

$

906

 

Supplemental disclosure of noncash investing and financing activities

 

 

 

 

 

 

Property and equipment purchases included in accounts payable and accrued liabilities

 

$

120

 

 

$

21

 

Settlement of ESPP liability in common stock

 

$

515

 

 

$

358

 

Settlement of 401(k) liability in common stock

 

$

254

 

 

$

323

 

 

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 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, 2022, 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, 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, 2022, the Company has funded its operations through the issuance of convertible promissory notes, commercial bank debt, the sale of 10,997,630 shares of common stock for net proceeds of approximately $191.5 million in its 2019 IPO, and 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 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.

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.

F-6


 

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.

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, 2022.

F-7


 

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. In addition, the Company elected the short-term lease exception for leases with an initial term of one year or less. Consequently, such leases are not recorded on the Company's balance sheets.

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 with forfeitures recognized as they occur.

F-8


 

The Company also maintains an employee stock purchase program, or ESPP, under which it may issue shares. The Company estimates the fair value 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.

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. 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 until its exercise because the Takeda Warrant was exercisable for little consideration. As of March 31, 2022, all Takeda Warrants has been exercised and no Takeda Warrants remain exercisable. For the three months ended March 31, 2022 and 2021, the Company has excluded weighted-average unvested shares of 1,022,885 and 2,582,666, 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.

F-9


 

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, 2021. There were no new material accounting standards issued in the first quarter of 2022 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,

 

 

 

2022

 

 

2021

 

Computer equipment and software

 

$

703

 

 

$

646

 

Furniture and fixtures

 

 

900

 

 

 

780

 

Leasehold improvements

 

 

85

 

 

 

76

 

 

 

 

1,688

 

 

 

1,502

 

Less: accumulated depreciation and amortization

 

 

(980

)

 

 

(852

)

Total property, plant and equipment, net

 

$

708

 

 

$

650

 

Depreciation expense for the three months ended March 31, 2022 and 2021 was approximately $128,000 and $125,000, respectively. No property, plant or equipment was disposed of during the three months ended March 31, 2022 or the year ended December 31, 2021.

Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Accrued research and development expenses

 

$

2,845

 

 

$

3,165

 

Accrued compensation expenses

 

 

2,594

 

 

 

6,344

 

Accrued professional & consulting expenses

 

 

2,067

 

 

 

1,855

 

Accrued other

 

 

59

 

 

 

41

 

Total accrued expenses

 

$

7,565

 

 

$

11,405

 

 

3. Related Party Transactions

Frazier is a principal stockholder of the Company. 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 March 31, 2022 and December 31, 2021 the Company had outstanding accounts payable and accrued expenses due to Frazier in the amount of $0, related to these shared operating expenses. For the three months ended March 31, 2022 and 2021, the Company incurred $0 and $16,000, respectively, of shared operating expenses.

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 March 31, 2022 and December 31, 2021, the Company had $0.1 million and $1.7 million, respectively, outstanding accounts payable and accrued expenses related to these manufacturing services. For the three months ended March 31, 2022 and 2021, the Company incurred $0.3 million and $0.9 million, respectively, of expenses related to services performed by PCI.

F-10


 

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, 2022 and December 31, 2021, the Company had $0.9 million, in outstanding accounts payable and accrued expenses related to these agreements. For the three months ended March 31, 2022 and 2021, the Company incurred $1.1 million and $0 million, respectively, of expenses related to these agreements. The Company has no remaining minimum purchase obligation related to these agreements.

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 has an exercise price of $0.00004613 per share, expires on May 7, 2029 and became exercisable upon the consummation of the IPO. As of March 31, 2022, 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, 2022 and 2021.

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.

F-11


 

 

5. Lease Commitments

As of March 31, 2022, the Company had operating leases for office space in both Buffalo Grove, Illinois and Florham Park, New Jersey, with remaining lease terms of 3.1 years and 3.4 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 months ended March 31, 2022 and 2021 was approximately $0.2 million.

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Assets:

 

 

 

 

 

 

Operating lease right-of-use assets

 

 

1,795

 

 

 

1,914

 

Total right-of-use assets

 

$

1,795

 

 

$

1,914

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Operating lease liabilities, current

 

 

490

 

 

 

487

 

Operating lease liabilities, non-current

 

 

1,083

 

 

 

1,183

 

Total operating lease liabilities

 

$

1,573

 

 

$

1,670

 

As of March 31, 2022, the future minimum annual lease payments under the operating leases were as follows (in thousands):

 

2022

 

$

378

 

2023

 

 

516

 

2024

 

 

529

 

Thereafter

 

 

342

 

Total minimum lease payments

 

$

1,765

 

 

 

 

 

Less: amount representing interest

 

 

(192

)

Present value of operating lease liabilities

 

 

1,573

 

Less: operating lease liabilities, current

 

 

(490

)

Operating lease liabilities

 

$

1,083

 

 

 

 

 

Weighted-average remaining lease term (in years)

 

 

3.31

 

Weighted-average incremental borrowing rate

 

 

7.25

%

Operating cash flows for the three months ended March 31, 2022 and 2021 included cash payments for operating leases of approximately $0.1 million and $0.2 million, respectively.

In February 2022, the Company entered into an operating lease for 6,250 rentable square feet of additional office space in Florham Park, New Jersey. The lease liability and the corresponding right-of-use asset associated with this lease obligation will be recorded upon the commencement of the lease, or the date in which the underlying asset is made available for use to the Company, which is expected to occur later in 2022.

The Company also entered into one year leases for passenger vehicles during the three months ended March 31, 2022. The Company elected the short-term lease exception for these leases and did not recognize a right-of-use asset and operating lease liability related to these leases.

F-12


 

6. Debt

Total debt consists of the following (in thousands):

 

 

 

March 31,
2022

 

Long-term debt, current portion

 

$

 

Long-term debt, non-current portion

 

 

101,838

 

Unamortized debt discount

 

 

(10,801

)

Total debt, net of debt discount

 

$

91,037

 

 

On September 17, 2021, or the Closing Date, the Company entered into a Loan and Security Agreement, or, the Loan Agreement, with Hercules Capital, Inc., in its capacity as administrative agent and collateral agent and as a lender, or, in such capacity, the Agent or Hercules, and the other financial institutions that from time to time become parties to the Loan Agreement as lenders, or, collectively, the Lenders.

The Loan Agreement provides for term loans in an aggregate principal amount of up to $200.0 million, or the Term Loan, under multiple tranches. The tranches consist of (i) a first tranche consisting of term loans in an aggregate principal amount of $100.0 million, all of which was funded to the Company on the Closing Date, or First Advance, (ii) a second tranche consisting of up to an additional $50.0 million, which became available to the Company upon achievement of the protocol-specified primary efficacy endpoints in the Company’s Phase 3 trial studying vonoprazan for the healing and maintenance of healing of erosive esophagitis with acceptable safety data, such that the results support the submission of a New Drug Application, or NDA, or supplemental NDA without the need to conduct another Phase 3 study and will be available, if specified conditions are met, through December 15, 2022, (iii) a third tranche consisting of an additional $25.0 million, which will become available to the Company upon the achievement of (a) Food and Drug Administration, or FDA, approval of the Company’s NDA for vonoprazan and amoxicillin, or its New Drug Application for vonoprazan, amoxicillin and clarithromycin, in each case for an indication relating to the treatment of Helicobacter pylori, or H. pylori, with an approved indication on the claim that is generally consistent with that sought in the Company’s NDA submission; and (b) filing of the Company’s NDA or supplemental NDA for vonoprazan for indications relating to the healing and maintenance of healing of erosive esophagitis, or, milestones (a) and (b), together, the Second Performance Milestone, and will be available, if specified conditions are met, through September 30, 2023, and (iv) a fourth tranche consisting of up to an additional $25.0 million, which will be available, if specified conditions are met, through March 31, 2024, upon achievement of the Second Performance Milestone.

The Company paid a $1.25 million facility charge in connection with closing of the Loan Agreement and would need to pay 0.5% of any advances made under the third and fourth tranches.

The Term Loan will mature on October 1, 2026, or the Maturity Date. The Term Loan bears (i) cash interest at a variable annual rate equal to the greater of (a) 5.50% and (b) the Prime Rate (as reported in the Wall Street Journal) plus 2.25%, or the “Interest Rate”, and (ii) payment-in-kind interest at a per annum rate of interest equal to 3.35%. Phathom may make payments of interest only through October 1, 2024, which may be extended to October 1, 2025, upon the achievement of the Second Performance Milestone on or prior to September 30, 2024 and the condition that no default or event of default exists, and which is further extendable to October 1, 2026, subject to FDA approval of the Company’s NDA (or supplemental NDA) for vonoprazan for an indication relating to the healing and maintenance of healing of erosive esophagitis with an approved indication on the label that is generally consistent with that sought in the Company’s NDA submission (or supplemental NDA submission), or the Third Performance Milestone, on or prior to September 30, 2025 and no default or event of default exists (the “interest only period”). After the interest-only period, the principal balance and related interest will be required to be repaid in equal monthly installments and continuing until the Maturity Date.

In addition, the Company is obligated to pay a final payment fee of 7.50% of the original principal amount of amounts actually advanced under the Term Loan, or, each a Term Loan Advance and together, the Term Loan Advances. As of March 31, 2022, the aggregate final payment fee for the first Term Loan Advance of $7.5 million has been recorded as an other long-term liability.

The Company may elect to prepay all or a portion of the Term Loan Advances prior to maturity, subject to a prepayment fee of up to