10-Q 1 phas-10q_20180930.htm 10-Q phas-10q_20180930.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, 2018

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 001-38697

 

PhaseBio Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Delaware

 

03-0375697

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1 Great Valley Parkway, Suite 30

Malvern, Pennsylvania 19355

(Address including zip code of principal executive offices)

(610) 981-6500

(Registrant’s telephone number, including area code)

 

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, 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  

 

Class of Common Stock

 

Outstanding Shares as of November 26, 2018

Common Stock, $0.001 par value

 

24,498,275

 

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

2

Item 1.

Financial Statements (Unaudited)

2

 

Condensed Balance Sheets

2

 

Condensed Statements of Operations

3

 

Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit

4

 

Condensed Statements of Cash Flows

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

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

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

32

Item 4.

Controls and Procedures

32

 

 

 

PART II.

OTHER INFORMATION

33

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Recent Sales of Unregistered Securities and Use of Proceeds

67

Item 3.

Defaults Upon Senior Securities

68

Item 4.

Mine Safety Disclosures

68

Item 5.

Other Information

68

Item 6.

Exhibits

68

 

Signatures

70

1


PART 1. FINANCIAL INFORMATION

Item 1.

Financial Statements

PHASEBIO PHARMACEUTICALS, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,341

 

 

$

13,406

 

Other receivable

 

 

411

 

 

 

 

Prepaid expenses and other assets

 

 

216

 

 

 

340

 

Total current assets

 

 

24,968

 

 

 

13,746

 

Property and equipment, net

 

 

251

 

 

 

302

 

Deferred offering costs

 

 

2,218

 

 

 

 

Other assets

 

 

51

 

 

 

51

 

Total assets

 

$

27,488

 

 

$

14,099

 

Liabilities, redeemable convertible preferred stock and stockholders' deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Convertible promissory notes, net of discount

 

$

 

 

$

12,095

 

Derivative liability

 

 

 

 

 

3,028

 

Current portion of long-term debt

 

 

3,125

 

 

 

761

 

Accounts payable

 

 

1,576

 

 

 

430

 

Accrued expenses

 

 

2,987

 

 

 

1,281

 

Total current liabilities

 

 

7,688

 

 

 

17,595

 

Preferred stock warrant liability

 

 

5,990

 

 

 

1,656

 

Deferred rent

 

 

 

 

 

5

 

Long-term debt

 

 

4,375

 

 

 

2,625

 

Total liabilities

 

 

18,053

 

 

 

21,881

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Redeemable convertible preferred stock, $0.001 par value; 18,292,696 and 13,321,350 shares

   authorized at September 30, 2018 and December 31, 2017, respectively; 13,200,115 and

   9,131,999 shares issued and outstanding at September 30, 2018 and December 31, 2017,

   respectively; liquidation preference of $129,071,361 and $89,776,055 at

   September 30, 2018 and December 31, 2017, respectively

 

 

125,609

 

 

 

89,634

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 20,789,273 shares authorized; 795,640 shares issued

   and 765,673 shares outstanding at September 30, 2018; 775,755 shares issued

   and 745,788 shares outstanding at December 31, 2017

 

 

1

 

 

 

1

 

Treasury stock, at cost, 29,967 shares as of September 30, 2018 and December 31, 2017

 

 

(24

)

 

 

(24

)

Additional paid-in capital

 

 

1,892

 

 

 

1,672

 

Accumulated deficit

 

 

(118,043

)

 

 

(99,065

)

Total stockholders’ deficit

 

 

(116,174

)

 

 

(97,416

)

Total liabilities, redeemable convertible preferred stock, and stockholders' deficit

 

$

27,488

 

 

$

14,099

 

 

See accompanying notes to unaudited condensed financial statements.

2


PHASEBIO PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Grant revenues

 

$

411

 

 

$

 

 

$

411

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,354

 

 

 

1,330

 

 

 

9,779

 

 

 

4,387

 

General and administrative

 

 

1,056

 

 

 

565

 

 

 

2,616

 

 

 

1,700

 

Total operating expenses

 

 

5,410

 

 

 

1,895

 

 

 

12,395

 

 

 

6,087

 

Loss from operations

 

 

(4,999

)

 

 

(1,895

)

 

 

(11,984

)

 

 

(6,087

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

60

 

 

 

14

 

 

 

132

 

 

 

29

 

Interest expense

 

 

(890

)

 

 

(618

)

 

 

(3,741

)

 

 

(1,605

)

Change in fair value of warrant liability

 

 

(1,713

)

 

 

5

 

 

 

(2,709

)

 

 

130

 

Change in fair value of derivative liability

 

 

(359

)

 

 

(66

)

 

 

(676

)

 

 

(179

)

Total other income (expense)

 

 

(2,902

)

 

 

(665

)

 

 

(6,994

)

 

 

(1,625

)

Net loss

 

$

(7,901

)

 

$

(2,560

)

 

$

(18,978

)

 

$

(7,712

)

Net loss per common share, basic and diluted

 

$

(10.45

)

 

$

(3.44

)

 

$

(25.33

)

 

$

(10.38

)

Weighted average common shares outstanding, basic and diluted

 

 

755,908

 

 

 

743,241

 

 

 

749,198

 

 

 

743,241

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

 

3


 

PHASEBIO PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

(in thousands, except share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Deficit

 

 

 

Redeemable Convertible

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Preferred Stock

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Paid-in

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Deficit

 

Balance at December 31, 2017

 

 

9,131,999

 

 

$

89,634

 

 

 

 

775,755

 

 

$

1

 

 

 

(29,967

)

 

$

(24

)

 

$

1,672

 

 

$

(99,065

)

 

$

(97,416

)

Issuance of redeemable preferred stock

 

 

1,842,959

 

 

 

14,890

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of redeemable preferred stock

   upon conversion of promissory notes

 

 

2,080,209

 

 

 

19,778

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercises of warrants

 

 

144,948

 

 

 

1,212

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercises of stock options

 

 

 

 

 

 

 

 

 

19,885

 

 

 

 

 

 

 

 

 

 

 

 

53

 

 

 

 

 

 

53

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

262

 

 

 

 

 

 

262

 

Accretion of redeemable preferred stock

   to redemption value

 

 

 

 

 

95

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(95

)

 

 

 

 

 

(95

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,978

)

 

 

(18,978

)

Balance at September 30, 2018

 

 

13,200,115

 

 

$

125,609

 

 

 

 

795,640

 

 

$

1

 

 

 

(29,967

)

 

$

(24

)

 

$

1,892

 

 

$

(118,043

)

 

$

(116,174

)

 

See accompanying notes to unaudited condensed financial statements.

 

 

4


 

PHASEBIO PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(18,978

)

 

$

(7,712

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

82

 

 

 

68

 

Stock-based compensation

 

 

262

 

 

 

58

 

Non-cash interest expense

 

 

3,580

 

 

 

1,605

 

Change in fair value warrant liability

 

 

2,709

 

 

 

(130

)

Change in fair value derivative liability

 

 

676

 

 

 

179

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Other receivable

 

 

(411

)

 

 

 

Prepaid expenses and other assets

 

 

130

 

 

 

(67

)

Accounts payable

 

 

558

 

 

 

(39

)

Accrued expenses

 

 

1,182

 

 

 

204

 

Deferred rent

 

 

(5

)

 

 

(1

)

Net cash used in operating activities

 

 

(10,215

)

 

 

(5,835

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(31

)

 

 

(204

)

Net cash used in investing activities

 

 

(31

)

 

 

(204

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of redeemable convertible preferred stock, net

 

 

17,712

 

 

 

 

Proceeds from term loan, net

 

 

3,995

 

 

 

 

Payments of offering costs

 

 

(595

)

 

 

 

 

Proceeds from exercise of stock options

 

 

53

 

 

 

 

Proceeds from exercise of warrants

 

 

16

 

 

 

 

Proceeds from convertible promissory notes, net

 

 

 

 

 

6,601

 

Net cash provided by financing activities

 

 

21,181

 

 

 

6,601

 

Net increase in cash and cash equivalents

 

 

10,935

 

 

 

562

 

Cash and cash equivalents at the beginning of the period

 

 

13,406

 

 

 

3,715

 

Cash and cash equivalents at the end of the period

 

$

24,341

 

 

$

4,277

 

Supplemental disclosure for cash flow

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

161

 

 

$

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Conversion of convertible promissory notes into redeemable convertible

   preferred stock

 

$

19,778

 

 

$

 

Issuance of warrants in conjunction with debt

 

$

2,822

 

 

$

1,046

 

Deferred offering costs included in accounts payable and accrued expenses

 

$

1,623

 

 

$

 

Warrant liability converted to redeemable convertible preferred stock upon

   the exercise of warrants

 

$

1,196

 

 

$

 

Accretion of redeemable convertible preferred stock

 

$

95

 

 

$

50

 

Issuance of derivative in conjunction with debt

 

$

 

 

$

1,309

 

 

See accompanying notes to unaudited condensed financial statements.

 

5


PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

 

1.

Organization and Description of Business

Description of Business

PhaseBio Pharmaceuticals, Inc. (the “Company”) was incorporated as a Delaware corporation on January 10, 2002. The Company is a clinical-stage biopharmaceutical company focused on the development and commercialization of novel therapies to treat orphan diseases, with an initial focus on cardiopulmonary indications. The Company’s lead product candidate, PB2452, is a first-in-class reversal agent for the antiplatelet drug ticagrelor, which the company is developing for the treatment of patients on ticagrelor who are experiencing a major bleeding event or those who require urgent surgery. The Company recently completed a Phase 1 clinical trial of PB2452 in healthy subjects. The Company’s second product candidate, PB1046, is a once-weekly fusion protein currently in a Phase 2b clinical trial for the treatment of pulmonary arterial hypertension. PB1046 utilizes the Company’s proprietary half-life extending elastin-like polypeptide (“ELP”), technology, which also serves as the engine for future product pipeline candidates.

Reverse Stock Split

In October 2018, the Company effected a 11.0634-for-1 reverse split of its outstanding common stock and redeemable convertible preferred stock. No fractional shares were issued in connection with the stock split, and the par value and other terms of the common stock were not affected by the stock split. All share and per share amounts, including stock options, have been retroactively adjusted in these condensed financial statements for all periods presented to reflect the reverse stock split. Further, exercise prices of stock options have been retroactively adjusted in these condensed financial statements for all periods presented to reflect the reverse stock split.

Liquidity

The Company has experienced net losses and negative cash flows from operations since its inception and, as of September 30, 2018, had an accumulated deficit of $118.0 million. The Company expects to continue to incur net losses for at least the next several years. In August 2018, the Company received $17.7 million in net proceeds from the sale of Series D redeemable convertible preferred stock (“Series D”). Additionally, in August 2018, the Company borrowed $2.0 million under its term loan with Silicon Valley Bank. As of September 30, 2018, the Company had cash and cash equivalents of $24.3 million and working capital of $17.3 million.

On October 22, 2018, the Company completed an initial public offering (“IPO”) of its common stock, which resulted in the issuance and sale of 9,864,666 shares of common stock at a public offering price of $5.00 per share, generating net proceeds of approximately $43.0 million after deducting underwriting discounts and commissions and other offering costs. Upon closing of the IPO, all outstanding shares of the Company’s redeemable convertible preferred stock were converted into an aggregate of 13,225,114 shares of common stock. The Company expects to use the net proceeds from the IPO, together with its existing cash, to advance PB2452 and PB1046, to fund development of its ELP technology and preclinical programs and for working capital and general corporate purposes.

Management believes that its cash and cash equivalents, including the net proceeds from the IPO, are sufficient to fund the Company’s operating expenses and capital requirements into the second quarter of 2020.

Basis of Presentation

The accompanying condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. All adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the accompanying condensed financial statements. Although these interim financial statements do not include all of the information and footnotes required for complete annual financial statements, management believes the disclosures are adequate to make the information presented not misleading. The unaudited interim results of operations and cash flows for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the full year. The unaudited interim condensed financial statements and footnotes should be read in conjunction with the audited financial statements and footnotes included in the Company’s IPO prospectus filed with the SEC on October 17, 2018, wherein a more complete discussion of significant accounting policies and certain other information can be found.

6


PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

 

Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) promulgated by the Financial Accounting Standards Board (“FASB”).

The Company manages its operations as a single reportable segment for the purposes of assessing performance and making operating decisions.

2.

Significant Accounting Policies

Use of Estimates

The preparation of the Company’s condensed financial statements requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s condensed financial statements and accompanying notes. The most significant estimates in the Company’s condensed financial statements relate to the valuation of redeemable convertible preferred stock warrants, equity awards and clinical trial accruals. 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.

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 certain deposits in federally insured financial institutions in excess of federally insured limits. The Company could experience losses on the money market funds in the future.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include cash in readily available checking and money market accounts.

Restricted Cash

The Company had restricted cash of $20,000 as of September 30, 2018 and December 31, 2017, which was held in a certificate of deposit at the Company’s bank to secure the Company’s corporate credit card. Restricted cash is included in the other assets account on the accompanying condensed balance sheets.

Fair Value of Financial Instruments

The carrying amounts of accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items. The carrying amount of the convertible promissory notes approximates fair value because the interest rates on these instruments are reflective of rates that the Company could obtain on unaffiliated third party debt with similar terms and conditions. Based on the borrowing rates currently available to the Company for loans with similar terms, the Company believes the fair value of the term loan approximates its carrying value (see Note 6).

Property and Equipment

Property and equipment are recorded at cost and depreciated over the estimated useful lives of the assets (three to five years) using the straight-line method. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term.

7


PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

 

Long-Lived Assets

The Company regularly reviews the carrying value and estimated lives of all of its long-lived assets, including property and equipment to determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives. The determinants used for this evaluation include management’s estimate of the asset’s ability to generate net positive cash flow in future periods as well as the strategic significance of the assets to the Company’s business objective. Should an impairment exist, the impairment loss would be measured based on the extent that the estimated fair value is less than its carrying value. The Company has not recognized any impairment losses in either the nine months ended September 30, 2018 or the year ended December 31, 2017.

Preferred Stock Warrant Liability

The Company has issued freestanding warrants to purchase shares of its redeemable convertible preferred stock. Since the underlying redeemable convertible preferred stock is classified outside of permanent equity, these warrants are classified as liabilities in the accompanying condensed balance sheet. Warrants classified as liabilities are recorded at their estimated fair value on the date of issuance and are revalued at each subsequent balance sheet date, with fair value changes recognized as increases or reductions to other income (expense) in the accompanying condensed statements of operations. The Company estimates the fair value of these warrants using the Black-Scholes option pricing model.

Preclinical and Clinical Trial Accruals

The Company accrues and expenses preclinical studies and clinical trial activities performed by third parties based upon estimates of the proportion of work completed over the life of the individual trial and subject enrollment rates in accordance with agreements with clinical research organizations and clinical trial sites. The Company determines the estimates by reviewing contracts, vendor agreements and purchase orders, and through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services. However, actual costs and timing of clinical trials are highly uncertain, subject to risks and may change depending upon a number of factors, including the Company’s clinical development plan.

Management makes estimates of the Company’s accrued expenses as of each balance sheet date in the Company’s condensed financial statements based on facts and circumstances known to the Company at that time. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Nonrefundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed or services are performed.

Research and Development Expenses

Research and development costs are expensed as incurred.

Stock-Based Compensation

The Company measures and recognizes compensation expense for all stock-based compensation for employees and directors based on the estimated fair value at the date of grant, and to consultants based on the ongoing estimated fair value. Currently, the Company’s stock-based awards consist only of stock options; however, future grants under the Company’s equity compensation plan may also consist of shares of restricted stock, restricted stock units, stock appreciation rights, performance awards and performance units. The Company estimates the fair value of stock options using the Black-Scholes option-pricing model, which requires the use of estimates.

The Company recognizes stock-based compensation cost for employees and directors for ratably vesting stock options on a straight-line basis over the requisite service period of the award. The fair value of options granted to consultants is estimated using the Black-Scholes option-pricing model and is re-measured at each reporting date with changes in fair value prior to vesting recognized as expense in the condensed consolidated statements of operations across the applicable vesting period.

8


PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

 

The Black-Scholes option-pricing model requires the input of subjective assumptions, including the risk-free interest rate, the fair value of the underlying common stock, the expected dividend yield of the Company’s common stock, the expected volatility of the price of the Company’s common stock, and the expected term of the option. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, the Company’s stock-based compensation expense could be materially different in the future. 

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 condensed financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the condensed 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 income 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 (1) 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 (2) 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, if any, within income tax expense, and any accrued interest and penalties are included within the related tax liability line.

Grant Revenue

Grant revenues are derived from government grants that support the Company’s efforts on specific research projects. The Company has determined that the government agencies providing grants to the Company are not customers. The Company recognizes grant revenue when there is reasonable assurance of compliance with the conditions of the grant and reasonable assurance that the grant revenue will be received.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included when their effect is dilutive. The Company’s potentially dilutive securities which include redeemable convertible preferred stock, warrants and outstanding stock options under the Company’s stock option plan have been excluded from the computation of diluted net loss per share as they would be anti-dilutive. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position.

The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because their inclusion would be anti-dilutive.

 

 

 

As of September 30,

 

 

 

2018

 

 

2017

 

Redeemable convertible preferred stock

 

 

13,200,115

 

 

 

9,131,999

 

Common stock options

 

 

1,315,625

 

 

 

1,084,243

 

Warrants to purchase redeemable convertible preferred stock

 

 

708,484

 

 

 

269,225

 

Total

 

 

15,224,224

 

 

 

10,485,467

 

 

9


PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

 

Recent Accounting Pronouncements

In May 2014, the FASB issued guidance codified in ASC 606, "Revenue Recognition - Revenue from Contracts with Customers," which amended the guidance in former ASC 605, "Revenue Recognition." The core principal of the standard is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration expected to be received for those goods or services. The standard also calls for additional disclosures around the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this standard, and the adoption did not have any impact on the Company’s condensed financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. This update amends the current accounting guidance for lease transactions. Under the new guidance, a lessee will be required to recognize both assets and liabilities for any leases in excess of twelve months. Additionally, certain qualitative and quantitative disclosures will also be required in the financial statements. This guidance will be effective for public companies for annual and interim periods beginning after December 15, 2018. The Company will adopt ASU 2016-02 in 2019. The adoption of this guidance is expected to result in a significant increase in the total assets and liabilities reported on the condensed balance sheets.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for certain cash receipts and cash payments. The Company adopted this standard in the first quarter of 2018, and the adoption did not have any impact on the Company’s condensed financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The new standard was effective on January 1, 2018. The Company adopted this guidance effective January 1, 2018 and it did not have a material impact on the Company’s financial statements and related disclosures.

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which largely aligns the accounting for share-based payment awards issued to nonemployees with the accounting for share-based payment awards issued to employees. Under previous GAAP, the accounting for nonemployee share-based payments differed from that applied to employee awards, particularly with regard to the measurement date and the impact of performance conditions. Under the new guidance, (i) equity-classified share-based payment awards issued to nonemployees will be measured at the grant date, instead of the previous requirement to remeasure the awards through the performance completion date, (ii) for performance conditions, compensation cost associated with the award will be recognized when the achievement of the performance condition is probable, rather than upon achievement of the performance condition, and (iii) the current requirement to reassess the classification (equity or liability) for nonemployee awards upon vesting will be eliminated, except for awards in the form of convertible instruments. This new guidance will be effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company does not believe the adoption of this guidance will have a material impact on its financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement. The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance if effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.

10


PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

 

3.

Fair Value Measurement

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 at the measurement date. 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 a liability.

The Company classifies fair value measurements in one of the following three categories for disclosure purposes:

 

Level 1:

Quoted prices in active markets for identical assets or liabilities.

 

Level 2:

Inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.

 

Level 3:

Unobservable inputs which are supported by little or no market activity and values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

The Company’s cash equivalents are classified using Level 1 inputs within the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. 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.

The Company estimates the fair value of redeemable convertible preferred stock warrants at the time of issuance and subsequent remeasurement using the Black-Scholes option pricing model at each reporting date, based on the following inputs: the risk-free interest rates; the expected dividend rates; the remaining contractual life of the warrants; the fair value of the underlying stock; and the expected volatility of the price of the underlying common stock. The estimates are based, in part, on subjective assumptions and could differ materially in the future. Changes to these assumptions as well as the fair value of the Company’s stock on the reporting date can have a significant impact on the fair value of the redeemable convertible preferred stock warrant liability.

The following table summarizes the Company’s assets and liabilities that require fair value measurements on a recurring basis and their respective input levels based on the fair value hierarchy (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

As of September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

23,103

 

 

$

23,103

 

 

$

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock warrant liability

 

$

5,990

 

 

$

 

 

$

 

 

$

5,990

 

As of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

12,472

 

 

$

12,472

 

 

$

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

3,028

 

 

$

 

 

$

 

 

$

3,028

 

Preferred stock warrant liability

 

 

1,656

 

 

 

 

 

 

 

 

 

1,656

 

Total liabilities

 

$

4,684

 

 

$

 

 

$

 

 

$

4,684

 

 

11


PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

 

The following weighted-average assumptions were used in determining the fair value of the preferred stock warrant liability valued using the Black-Scholes option pricing model as of September 30, 2018 and December 31, 2017:

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Expected volatility

 

 

68.7

%

 

 

68.0

%

Risk-free interest rate

 

 

3.0

%

 

 

2.2

%

Contractual term (in years)

 

 

5.7

 

 

 

5.9

 

Expected dividend yield

 

 

 

 

 

 

 

The following estimated fair values per share of the Company’s underlying redeemable convertible preferred stock were used to determine the estimated fair value of the preferred stock warrant liability:

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Series AA

 

$

 

 

$

5.75

 

Series B

 

$

8.95

 

 

$

3.76

 

Series C-1

 

$

8.95

 

 

$

3.76

 

 

The following tables present activity for the preferred stock warrant liability and the derivative liability measured at fair value using significant unobservable Level 3 inputs during the nine months ended September 30, 2018 (in thousands):

 

 

 

Preferred Stock

 

  

 

Warrant Liability

 

Balance at December 31, 2017

 

$

1,656

 

Issuance of warrants

 

 

2,822

 

Exercise of warrants

 

 

(1,197

)

Changes in fair value reflected as change in fair

   value of warrant liability

 

 

2,709

 

Balance at September 30, 2018

 

$

5,990

 

 

 

 

Derivative Liability

 

Balance at December 31, 2017

 

$

3,028

 

Changes in fair value reflected as change in fair

   value of derivative liability

 

 

676

 

Extinguishment of derivative upon conversion of

   convertible promissory notes

 

 

(3,704

)

Balance at September 30, 2018

 

$

 

 

12


PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

 

4.

Property and Equipment

The following table presents the composition of property and equipment, net as of September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

As of

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Lab equipment

 

$

1,684

 

 

$

1,681

 

Computer hardware, software and telephone

 

 

200

 

 

 

174

 

Furniture and fixtures

 

 

70

 

 

 

70

 

Leasehold improvements

 

 

24

 

 

 

22

 

 

 

 

1,978

 

 

 

1,947

 

Less accumulated depreciation

 

 

(1,727

)

 

 

(1,645

)

Property and equipment, net

 

$

251

 

 

$

302

 

 

5.

Accrued Expenses

The following table presents the composition of accrued expenses as of September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

As of

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Accrued clinical and related costs

 

$

1,335

 

 

$

197

 

Accrued stock offering costs

 

 

1,041

 

 

 

 

Accrued compensation and related costs

 

 

261

 

 

 

346

 

Accrued interest

 

 

110

 

 

 

628

 

Accrued other

 

 

240

 

 

 

110

 

Accrued expenses

 

$

2,987

 

 

$

1,281

 

 

6.

Debt

Convertible Promissory Notes

In January 2017 and October 2017, the Company issued $14.7 million of convertible promissory notes (the “2017 Notes”) to holders of Series C-1 redeemable convertible preferred stock (“Series C-1”). The 2017 Notes bore interest at the rate of 8% per annum. Upon a subsequent equity financing of at least $10.0 million prior to the stated maturity date, the 2017 Notes plus accrued interest would automatically convert into shares of the stock issued by the Company in such financing at a price equal to 80% of the lowest issue price.

The 2017 Notes could have converted into a variable number of shares of preferred stock, and accordingly, the Company determined the conversion provision to be a redemption feature. The redemption feature was evaluated as an embedded derivative and bifurcated from the convertible promissory notes due to the substantial premium paid upon redemption and accounted for as a derivative instrument. Upon bifurcating the redemption feature, the Company recorded a debt discount of $3.0 million that was recognized in interest expense over the term of the 2017 Notes.

13


PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

 

In connection with the 2017 Notes, the Company issued warrants to the noteholders to purchase 304,397 shares of Series C-1. The warrants were exercisable for $0.12 per share and expire upon the earlier of (1) the date of the initial closing of a liquidation event, as defined, (2) the closing of a firm commitment underwritten initial public offering, or (3) January 2024. All warrants were exercised in connection with the closing of the Company’s IPO. The Company recorded a debt discount of $1.7 million, which represents the estimated fair value of the warrants, upon issuance of the 2017 Notes, which was being amortized to interest expense over the term of the 2017 Notes using the effective-interest method.

In August 2018, the Company sold 1,842,959 shares of Series D redeemable preferred stock (“Series D”) to new and existing investors at a price of $9.659 per share for net proceeds of $17.7 million and issued warrants to purchase 368,582 shares of Series C-1 at an exercise price of $0.12 (the “Series D Financing”). Concurrent with the Series D Financing, all of the Company’s previously outstanding 2017 Notes, including accrued interest thereon, were converted into 2,080,209 shares of Series D. 

Interest expense, including the debt discount related to the 2017 Notes, was $0.7 million and $0.6 million for the three months ended September 30, 2018 and 2017, respectively. Interest expense was $3.4 million and $1.6 million for the nine months ended September 30, 2018 and 2017, respectively.

Term Loan

In October 2017, the Company entered into a Loan and Security Agreement (“SVB Loan”) with Silicon Valley Bank (“SVB”), pursuant to which the Company may borrow up to $7.5 million, issuable in three separate tranches (“Growth Capital Advances”) of $3.5 million (“Tranche A”), $2.0 million (“Tranche B”) and $2.0 million (“Tranche C”). Each of the Growth Capital Advances would become available upon the achievement of certain clinical and regulatory milestones. Under the original terms of the SVB Loan, the Company was to make interest-only payments through June 30, 2018 at a rate equal to the Prime Rate as defined per the SVB Loan. The interest-only period would be extended to December 31, 2018 if the Company borrowed the remaining tranches, followed by an amortization period of 24 months of equal monthly payments of principal plus interest amounts until paid in full. In connection with the SVB Loan, the Company issued to SVB a warrant to purchase 49,713 shares of Series C-1 at an exercise price of $9.659 per share. The warrant is immediately exercisable and expires on October 18, 2027. The Company is required to make a final payment equal to 7% of the original aggregate principal amount of the Growth Capital Advances at maturity. In November 2017, the Company drew $3.5 million from Tranche A.

The Company has the option to prepay all, but not less than all, of the borrowed amounts, provided that the Company will be obligated to pay a prepayment fee equal to (a) 3.0% of the outstanding principal balance of the applicable Growth Capital Advances if prepayment is made prior to the first anniversary of the effective date of the SVB Loan, (b) 2.0% of the outstanding principal balance of the applicable Growth Capital Advances if prepayment is made by the second anniversary of the effective date of the SVB Loan or (c) 1.0% of the outstanding principal balance of the applicable Growth Capital Advances if prepayment is made after the second anniversary of the effective date of the SVB Loan.

In April 2018, the SVB Loan was amended to extend the draw period of Tranche B and Tranche C to April 30, 2018 and July 31, 2018, respectively, as well as to extend the interest-only period through July 31, 2018, which would be extended to December 31, 2018 if the Company borrowed Tranche B and Tranche C. Additionally, all Capital Growth Advances would mature on June 1, 2020; however, if the Company were to draw Tranche B and Tranche C, the maturity date would be December 31, 2020. On April 30, 2018, the Company borrowed $2.0 million under Tranche B.

In July 2018, the SVB Loan was amended to further extend the draw period of Tranche C to August 31, 2018, as well as to extend the interest-only period of the SVB Loan through August 31, 2018, which would be extended to December 31, 2018 if the Company were to draw Tranche C. In August 2018, the Company borrowed $2.0 million under Tranche C.

14


PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

 

The Company’s obligations under the SVB Loan are secured by a first priority security interest in substantially all of its current and future assets, other than its owned intellectual property. The Company is also obligated to comply with various other customary covenants, including restrictions on its ability to encumber intellectual property assets.

The Company recorded a debt discount of $0.4 million for the estimated fair value of warrants and debt issuance costs upon the borrowing of Tranche A and Tranche B, which is being amortized to interest expense over the term of the SVB Loan using the effective-interest method. As of September 30, 2018, and December 31, 2017, the Company had $7.5 million and $3.5 million, respectively, of outstanding principal under the SVB Loan and $7.5 million and $3.4 million, respectively, is reflected on the balance sheet net of debt discounts. Interest expense, including amortization of debt discount related to the term debt, totaled $0.2 million for the three months ended September 30, 2018 and $0.4 million for the nine months ended September 30, 2018. The Company is in compliance with all covenants under the SVB Loan as of September 30, 2018.

Based on a 24-month amortization of the outstanding principal amounts for the Company’s Growth Capital Advances beginning on January 1, 2019 as discussed above, the following table sets forth by year the Company’s required future principal payments (in thousands):

 

Years Ending December 31,

 

 

 

 

2018 (remaining three months)

 

$

 

2019

 

 

3,750

 

2020

 

 

3,750

 

Thereafter

 

 

 

 

 

$

7,500

 

 

7.

Commitments and Contingencies

Operating Leases

The Company leases office and research and development facilities under various non-cancellable operating lease agreements with expiration dates into 2023. The Company’s facility leases generally provide for periodic rent increases.

In January 2010, the Company entered into a lease for office and laboratory space in Malvern, Pennsylvania (the “Malvern Lease”). The Malvern Lease commenced in March 2010 and was originally to expire on July 31, 2015. In December 2014, the Malvern Lease was amended to extend its term to July 31, 2018. In February 2018, the Malvern lease was further amended to extend its term to September 30, 2023.

The Company’s future minimum commitments under its non-cancelable operating leases were as follows (in thousands):

 

Year Ending December 31,

 

 

 

 

2018 (remaining three months)

 

$

63

 

2019

 

 

251

 

2020

 

 

256

 

2021

 

 

262

 

2022

 

 

267

 

Thereafter

 

 

203

 

Total

 

$

1,302

 

 

The Company recognizes rent expense for the facility operating leases on a straight-line basis. The Company accounts for the difference between the minimum lease payments and the straight-line amount as deferred rent. Rent expense was $0.1 million for each of the three months ended September 30, 2018 and 2017, and $0.3 million for each of the nine months ended September 30, 2018 and 2017.

15


PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

 

Legal Proceedings

The Company is not currently a party to any litigation, nor is management aware of any pending or threatened litigation against the Company, that it believes would materially affect the Company’s business, operating results, financial condition or cash flows. However, the Company’s industry is characterized by frequent claims and litigation including securities litigation, claims regarding patent and other intellectual property rights and claims for product liability. As a result, in the future, the Company may be involved in various legal proceedings from time to time.

8.

Preferred Stock Warrants

The Company accounts for its warrants to purchase shares of redeemable convertible preferred stock as liabilities as they are exercisable for a redeemable instrument. The Company will continue to adjust the liability for changes in fair value of these warrants until the exercise of warrants or the consummation of the Company’s IPO, at which time the liability will be reclassified to stockholders’ equity.

The following table summarizes the outstanding redeemable convertible preferred stock warrants and the corresponding exercise price as of September 30, 2018 and December 31, 2017:

 

 

 

Number of Shares Outstanding

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Exercise Price

 

 

Expiration Date

Series AA warrants

 

 

 

 

 

1,506

 

 

$

13.28

 

 

March 7, 2018

2009 Series B warrants

 

 

25,884

 

 

 

25,884

 

 

 

9.659

 

 

December 22, 2019

2014 Series B warrants

 

 

104,856

 

 

 

104,856

 

 

 

0.12

 

 

May 14, 2021

Convertible debt Series C-1 warrants

 

 

304,397

 

 

 

304,397

 

 

 

0.12

 

 

January 17, 2024

Term loan Series C-1 warrants

 

 

49,713

 

 

 

49,713

 

 

 

9.659

 

 

October 18, 2027

2018 Series C-1 warrants

 

 

223,634

 

 

 

 

 

 

0.12

 

 

August 25, 2025

 

 

 

708,484

 

 

 

486,356

 

 

 

 

 

 

 

 

In August 2018, as part of the Series D Financing, the Company issued warrants to purchase 368,582 shares of Series C-1 redeemable convertible preferred stock (the “2018 Series C-1 warrants”) at an exercise price of $0.12. Of those 2018 Series C-1 warrants, 144,948 were exercised in August and September 2018.

In connection with the IPO in October 2018, stockholders exercised the outstanding 2014 Series B warrants, convertible debt Series C-1 warrants, and the 2018 Series C-1 warrants to purchase an aggregate of 632,887 shares of the Company’s redeemable convertible preferred stock, at a weighted-average exercise price of $0.12 per share, and all such shares were automatically converted into an aggregate of 632,888 shares of common stock upon the closing of the IPO on October 22, 2018.

9.

Redeemable Convertible Preferred Stock and Stockholders’ Deficit

Preferred Stock

The Company has issued and outstanding Series 1 redeemable convertible preferred stock (“Series 1”), Series 2 redeemable preferred  stock  (“Series  2”),  Series  AA  redeemable  convertible  preferred  stock  (“Series AA”), Series B redeemable convertible preferred stock (“Series B”), Series C-1, Series C-2 redeemable convertible preferred stock (“Series C-2”), Series C-3 redeemable convertible preferred stock (“Series C-3”), and Series D (collectively, “Preferred Stock”). In August 2018, the Company sold 1,842,959 shares of Series D to new and existing investors at a price of $9.659 per share for net proceeds of $17.7 million. Upon the closing of the IPO on October 22, 2018, all shares of Preferred Stock were automatically converted into an aggregate of 13,225,114 shares of common stock.

16


PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

 

As of September 30, 2018, the authorized, issued, and outstanding shares of Preferred Stock and their carrying amounts and liquidation values were as follows:

 

 

 

 

 

 

 

Shares Issued

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

and

 

 

Carrying

 

 

Liquidation

 

 

 

Authorized

 

 

Outstanding

 

 

Amount

 

 

Value

 

Series 1

 

 

132,255

 

 

 

132,255

 

 

$

523,838

 

 

$

526,778

 

Series 2

 

 

1

 

 

 

1

 

 

 

243,640

 

 

 

250,000