Debt

9 Months Ended

Sep. 30, 2021

Debt Disclosure [Abstract]

Debt

6. Debt

Total debt consists of the following (in thousands):

	September 30, 2021
Long-term debt, current portion	$	—
Long-term debt, non-current portion		100,130
Unamortized debt discount		(11,825	)
Long-term debt, net of debt discount	$	88,305

On September 17, 2021, (the “Closing Date”), the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Hercules Capital, Inc., in its capacity as administrative agent and collateral agent and as a lender (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 (collectively, the “Lenders”).

The Loan Agreement provides for term loans in an aggregate principal amount of up to $200.0 million (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 (the “First Advance”), (ii) a second tranche consisting of up to an additional $50.0 million, which will become 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 (“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) 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 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 (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 (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% (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) (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 (each a “Term Loan Advance” and together, the “Term Loan Advances”). As of September 30, 2021, 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 1.25% of the then outstanding principal balance of the Term Loan Advances being prepaid. After repayment, no Term Loan amounts may be borrowed again.

As collateral for the obligations, the Company has granted to Hercules a senior security interest in all of Company’s right, title, and interest in, to and under substantially all of Company’s property, inclusive of intellectual property.

The Loan Agreement contains customary closing fees, prepayment fees and provisions, events of default, and representations, warranties and covenants, including a financial covenant requiring Phathom to maintain certain levels of cash subject to a control agreement in favor of the Agent (minus accounts payable not paid within 120 days of invoice) (“Qualified Cash”), and commencing on May 15, 2023, trailing three-month net product revenue from the sale of vonoprazan and products containing vonoprazan. The revenue covenant will be waived at any time in which the Company maintains Qualified Cash equal to at least 60.0% (prior to the Third Performance Milestone), and 35% (following the Third Performance Milestone) of the total outstanding Term Loan principal amount, or the Company’s market capitalization is at least $900.0 million. Upon the occurrence of an event of default, subject to any specified cure periods, all amounts owed by the Company may be declared immediately due and payable by Hercules, as collateral agent. As of September 30, 2021, the Company was in compliance with all applicable covenants under the Loan Agreement.

In connection with the entry into the Loan Agreement, the Company issued to Hercules a warrant (the “Warrant”) to purchase a number of shares of the Company’s common stock equal to 2.5% of the aggregate amount of the Term Loan advances funded, and will issue to Hercules additional warrants when future Term Loan advances are funded. On the Closing Date, the Company issued a Warrant for 74,782 shares of common stock. The Warrant will be exercisable for a period of seven years from the date of issuance at a per-share exercise price equal to $33.43, which was the closing price of the Company’s common stock on September 16, 2021. The Warrant is exercisable any time until September 17, 2028 and had an initial fair value of approximately $1.3 million.

The initial $1.3 million fair value of the Warrant, the $7.5 million final interest payment fee and $3.1 million of debt issuance costs have been recorded as debt discount and are being amortized to interest expense using the effective interest method over the term of the Term Loan.

Future minimum principal and interest payments under the Term Loan, including the final payment fee, as of September 30, 2021 are as follows (in thousands):

Year ending December 31:
2021		1,625
2022		5,720
2023		5,918
2024		21,040
2025		50,912
2026		62,705
Total principal and interest payments		147,920
Less interest, PIK interest and final payment fee		(47,920	)
Total term loan aggregate principal amount	$	100,000

Prior to the Loan Agreement with Hercules, the Company had a loan with SVB and approximately $54.3 million of the proceeds from the First Advance was used to satisfy in full and retire the Company’s indebtedness under the SVB Term Loan with SVB.

The SVB Term Loan originated on May 14, 2019, when the Company entered into a loan and security agreement with SVB, as administrative and collateral agent, and lenders including SVB and WestRiver Innovation Lending Fund VIII, L.P. The Company borrowed $25.0 million (“Term Loan A”) at the inception of the Loan Agreement and an additional $25.0 million (“Term Loan B”) on March 16, 2020.

The SVB Term Loan bore interest at a floating rate of the higher of the Wall Street Journal Prime rate plus 1.75% or 7.25%. Under the original SVB Term Loan, the monthly payments consisted of interest-only through May 31, 2021. On March 11, 2020, the Company entered into the first amendment and on March 11, 2021, the Company entered into the second amendment (together the “Amendments”) to the SVB Term Loan. Pursuant to the Amendments, the interest-only payment period was initially extended through July 31, 2021, and was further extended until December 31, 2021, after the Company received positive data from its Phase 3 clinical trial in H. pylori infection sufficient to file an NDA with the FDA. The interest-only payment period could have been further extended until November 30, 2022, if the Company would receive positive data from its Phase 3 clinical trial in erosive esophagitis for vonoprazan sufficient to file an NDA with the FDA. Subsequent to the interest-only period, the SVB Term Loan would have been payable in equal monthly installments of principal, plus accrued and unpaid interest through the maturity date of May 1, 2024.

In addition, the Company was obligated to pay a final payment fee of 8.25% of the original principal amount of the SVB Term Loan. The aggregate final payment fee for the Term Loan of $4.1 million was recorded as an other long-term liability.

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

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

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

The initial $0.4 million fair value of the Lender Warrants, the $4.1 million final payment fee and $0.2 million of debt issuance costs were recorded as debt discount and amortized to interest expense using the effective interest method over the term of the Term Loans prior to the retirement of the debt. Upon retirement of the debt any remaining unamortized amounts were recorded as an expense to Other income (expense).

During the three and nine months ended September 30, 2021, the Company recognized $1.5 million and $4.0 million, respectively of interest expense, including amortization of the debt discount in connection with the Hercules Loan Agreement and SVB Term Loan, compared to $1.3 million and $3.3 million, respectively, for the same periods in 2020. As of September 30, 2021, the Company had an outstanding loan balance of $100.1 million and accrued interest of $0.2 million.