PhaseBio Pharmaceuticals Inc - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2019

OR

For the transition period from                      to                     

Commission File Number 001-38697

PhaseBio Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

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)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

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:

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  ☒

Table of Contents

1

PART 1. FINANCIAL INFORMATION

PHASEBIO PHARMACEUTICALS, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

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)

See accompanying notes to unaudited condensed financial statements.

3

PHASEBIO PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except share amounts)

(unaudited)

See accompanying notes to unaudited condensed financial statements.

4

PHASEBIO PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

See accompanying notes to unaudited condensed financial statements.

5

PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

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 novel 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’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 technology, which also serves as an engine for the Company’s preclinical pipeline.

Reverse Stock Split

In October 2018, in connection with its initial public offering (“IPO”), 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 June 30, 2019, had an accumulated deficit of $139.4 million. The Company expects to continue to incur net losses for at least the next several years. As of June 30, 2019, the Company had cash and cash equivalents of $90.3 million and working capital of $89.2 million. Management believes that its cash and cash equivalents as of June 30, 2019 are sufficient to fund the Company’s operating expenses and capital requirements into the second half 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 have been made. Although these interim condensed 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 six months ended June 30, 2019 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 for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 26, 2019, wherein a more complete discussion of significant accounting policies and certain other information can be found.

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”). Certain non-significant reclassifications have been made to conform the prior period presentation. 

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

6

PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

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 prior to the IPO, the conversion option on the convertible notes prior to conversion 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 deposit accounts and money market funds 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 December 31, 2018, which was held in a certificate of deposit at the Company’s bank to secure the Company’s corporate credit card. The restriction was removed in June 2019.

Fair Value of Financial Instruments

The carrying amounts of other receivable, prepaid expenses and other assets, accounts payable and accrued expenses and other current liabilities are reasonable estimates of their fair value because of the short maturity of these items. Based on the borrowing rates currently available to the Company for loans with similar terms, the Company believes the fair values of the term loan and operating lease liabilities and corresponding right-of-use assets approximate their respective carrying values.

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.

Leases

At lease commencement, the Company records a lease liability based on the present value of lease payments over the expected lease term including any options to extend the lease that the Company is reasonably certain to exercise. The Company calculates the present value of lease payments using an incremental borrowing rate as the Company’s leases do not provide an implicit interest rate. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. At the lease commencement date, the Company records a corresponding right-of-use lease asset based on the lease liability, adjusted for any lease incentives received and any initial direct costs paid to the lessor prior to the lease commencement date. The Company may enter into leases with an initial term of 12 months or less (“Short-Term Leases”). For Short-Term Leases, the Company records the rent expense on a straight-line basis and does not record the leases on the condensed balance sheet. The Company had no Short-Term Leases as of June 30, 2019 or December 31, 2018.

7

PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

After lease commencement, the Company measures its leases as follows: (i) the lease liability based on the present value of the remaining lease payments using the discount rate determined at lease commencement and (ii) the right-of-use lease asset based on the remeasured lease liability, adjusted for any unamortized lease incentives received, any unamortized initial direct costs and the cumulative difference between rent expense and amounts paid under the lease agreement. Any lease incentives received and any initial direct costs are amortized on a straight-line basis over the expected lease term. Rent expense is recorded on a straight-line basis over the expected lease term.

Long-Lived Assets

The Company regularly reviews the carrying value and estimated lives of all of its long-lived assets, including property and equipment and right-of-use assets 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 did not recognize any impairment losses in either the six months ended June 30, 2019 or the year ended December 31, 2018.

Preferred Stock Warrant Liability

The Company previously issued freestanding warrants to purchase shares of its redeemable convertible preferred stock. Since the underlying redeemable convertible preferred stock was classified outside of permanent equity, those warrants were classified as liabilities in the accompanying condensed balance sheet. Warrants classified as liabilities were recorded at their estimated fair value on the date of issuance and were 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 estimated the fair value of these warrants using the Black-Scholes option-pricing model.

In connection with the Company’s IPO in October 2018, all warrants were either exercised or converted into warrants to purchase common stock, at which time the liability was reclassified to stockholders’ equity.

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, contract manufacturing 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 Expense

Research and development costs are expensed as incurred.

Stock-Based Compensation

The Company measures and recognizes compensation expense for all stock-based compensation based on the estimated fair value at the date of grant. 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 also maintains an employee stock purchase program under which it

8

PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

may issue shares. 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 ratably vesting stock options on a straight-line basis over the requisite service period of the award and records forfeitures in the period in which they occur.

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 (for option grants prior to the IPO), 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% 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 revenue is 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.

Revenue Under Collaborative Agreement

The Company generates revenues from payments received under a collaborative agreement. Under such collaboration agreements, the Company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identifies the promised goods or services in the contract; (ii) identifies the performance obligations in the contract, including whether they are distinct in the context of the contract; (iii) determines the transaction price, including the constraint on variable consideration; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when (or as) the Company satisfies the performance obligations.

For revenue from such collaborative agreements, the Company generally collects an upfront license payment from the collaboration partner and is also entitled to receive event-based payments subject to the collaboration partner's achievement of specified development, regulatory and sales-based milestones. In addition, the Company is generally entitled to royalties if products under the collaboration are commercialized. Although such agreements are in form structured as collaborative agreements, for accounting purposes they represent contracts with customers that are not subject to accounting literature on collaborative arrangements. If the Company grants to collaboration partners a license to the Company’s intellectual property, the Company does not develop assets jointly with the collaboration partner and does not share in significant risks of their development or commercialization activities.

9

PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

Transaction price for a contract represents the amount to which the Company is entitled in exchange for providing goods and services to the customer. Transaction price does not include amounts subject to uncertainties unless it is probable that there will be no significant reversal of revenue when the uncertainty is resolved. Apart from the upfront license payment, all other fees the Company may earn under such collaborative agreements are subject to significant uncertainties of product development. Achievement of many of the event-based development and regulatory milestones may not be probable until such milestones are actually achieved. This generally relates to milestones such as obtaining marketing authorization approvals and successful completion of clinical trials. With respect to other development milestones, e.g. dosing of a first patient in a clinical trial, achievement could be considered probable prior to its actual occurrence, based on the progress towards commencement of the trial. The Company does not include any amounts subject to uncertainties into the transaction price until it is probable that the amount will not result in a significant reversal of revenue in the future. At the end of each reporting period, the Company re-evaluates the probability of achievement of such milestones and any related constraint, and if necessary, adjusts the estimate of the overall transaction price.

Because such agreements generally only have one type of performance obligation, a license, which is generally all transferred at the same time as agreement inception, allocation of the transaction price among multiple performance obligations is not required.

Upfront amounts allocated to licenses are recognized as revenue when the licenses are transferred to the collaboration partners. Development milestones and other fees are recognized in revenue when their occurrence becomes probable.

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.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases. This update amended the current accounting guidance for lease transactions. Under the new guidance, a lessee is required to recognize both assets and liabilities for any leases in excess of twelve months. Additionally, certain qualitative and quantitative disclosures are required in the condensed financial statements. The Company adopted ASU 2016-02 in the first quarter of 2019 using a modified retrospective transition method as of the effective date as permitted by the amendments in ASU 2018-11. As a result, the Company was not required to adjust comparative prior period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption. The Company has elected to adopt the package of transition practical expedients and, therefore, has not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized. The Company did not elect the practical expedient to use hindsight for leases existing at the adoption date. Further, the Company does not expect the amendments in ASU 2018-01: Land Easement Practical Expedient to have an effect on its condensed financial statements because the Company does not enter into land easement arrangements. There was no effect of the adoption of the new leasing standards on retained earnings and other components of equity as of December 31, 2018. Upon adoption in the first quarter of 2019, the Company recorded right-of-use assets and corresponding lease liabilities of $2.0 million.

10

PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

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 is 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.

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:

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 estimated 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 rate; the expected dividend rate; 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 were based, in part, on subjective assumptions.

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):

11

PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

The following table presents the composition of property and equipment, net as of June 30, 2019 and December 31, 2018 (in thousands):

The following table presents the composition of accrued expenses as of June 30, 2019 and December 31, 2018 (in thousands):

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.

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 would 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.

12

PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

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 zero and $1.3 million for the three months ended June 30, 2019 and 2018, respectively, and zero and $2.6 million for the six months ended June 30, 2019 and 2018, respectively.

Term Loans

October 2017 Loan Agreement with Silicon Valley Bank

In October 2017, the Company entered into a Loan and Security Agreement (“SVB Loan”) with Silicon Valley Bank (“SVB”), pursuant to which the Company could 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, which is now exercisable for common stock following the IPO. The warrant is immediately exercisable and expires on October 18, 2027. The Company was 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 had the option to prepay all, but not less than all, of the borrowed amounts, provided that the Company would have been obligated to pay a prepayment fee equal to (a) 3.0% of the outstanding principal balance of the applicable Growth Capital Advances if prepayment was 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 was 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 was 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.

March 2019 Loan Agreement with Silicon Valley Bank and WestRiver Innovation Lending Fund VIII, L.P.

In March 2019, the Company entered into a new term loan agreement (the “2019 Loan”) with SVB and WestRiver Innovation Lending Fund VIII, L.P. (“WestRiver”), pursuant to which the Company may borrow up to $15.0 million, issuable in three separate tranches (“Advances”), of $7.5 million (“Tranche 1”), which was issued upon execution of the 2019 Loan, $2.5 million, which was issued in May 2019 (“Tranche 2”) and $5.0 million (“Tranche 3”), which the Company will draw upon the achievement of certain regulatory milestones (the “Tranche 3 Milestones”).

The maturity date of the 2019 Loan is March 1, 2023. Under the terms of the 2019 Loan, the Company is to make interest-only payments through December 31, 2019 on Tranche 1 and Tranche 2 at a rate equal to the greater of the Prime Rate plus 1.00%, as defined in the 2019 Loan, or 6.5%, followed by an amortization period of 39 months of equal monthly payments of principal plus interest until paid in full. The interest-only period will automatically be extended to June 30, 2020 if the Company achieves the Tranche 3 Milestones, followed by an amortization period of 33 months of equal monthly payments of principal plus interest until paid in full. In addition to and not in substitution for the Company’s regular monthly payments of principal plus accrued interest, the Company is required to make a final payment equal to 6% of the aggregate principal amount of the advances (“Final Payment”) on the maturity date.

13

PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

Upon execution of the 2019 Loan and the draw of Tranche 1, the Company issued to SVB and WestRiver warrants to purchase an aggregate of 37,606 shares of common stock with an exercise price of $4.73 per share. In May 2019, upon the draw of Tranche 2, the Company issued to SVB and WestRiver warrants to purchase an aggregate of 12,130 shares of common stock with an exercise price of $10.86 per share. The Company has agreed to issue additional warrants to SVB and WestRiver to purchase an aggregate of 24,262 shares of common stock upon the draw of Tranche 3 with an exercise price of the lower of the average closing price of the Company’s common stock for the previous ten days of trading or the closing price on the day prior to funding.

Upon execution of the 2019 Loan, the Company drew $7.5 million from Tranche 1 and repaid the outstanding principal balance and the accrued portion of the Final Payment of the SVB Loan. In May 2019, the Company drew $2.5 million from Tranche 2.    

The Company’s obligations under the 2019 Loan are secured by a first priority security interest in substantially all of the Company’s current and future assets, excluding intellectual property. The Company is also obligated to comply with various other customary covenants, including restrictions on the Company’s ability to encumber its intellectual property assets.

The Company recorded a debt discount of $0.3 million for the estimated fair value of warrants and debt issuance costs upon the borrowings of Tranche 1 and Tranche 2, which is being amortized to interest expense over the term of the 2019 Loan using the effective-interest method. Interest expense under the SVB Loan and the 2019 Loan, including amortization of the debt discount related to the term debt, totaled $0.2 million and $0.1 million for the three months ended June 30, 2019 and 2018, respectively, and $0.4 million and $0.2 million for the six months ended June 30, 2019 and 2018, respectively. The balance of the Final Payment liability was $0.1 million as of June 30, 2019 and is included in long-term debt on the condensed balance sheet. The Company is in compliance with all covenants under the 2019 Loan as of June 30, 2019.

Based on a 39-month amortization of the outstanding principal amounts for the 2019 Loan as discussed above, the following table sets forth by year the Company’s required future principal payments as of June 30, 2019 (in thousands):

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.

Supply Agreement

The Company entered into a master services agreement (“Supply Agreement”) with BioVectra Inc., (“BioVectra”). BioVectra will manufacture and supply cGMP-grade quantities of PB2452 for the Company’s potential Phase 3 clinical trial as well as any work required to support the marketing authorization filing of PB2452. The Company plans to put a commercial supply agreement in place for PB2452 if it is approved by the FDA.

BioVectra is responsible for the facility, including performing all work related to the procurement, design, project management, installation, assembly, commissioning and validation of the facility and all equipment, and for financing a majority of the costs associated with building out the facility. The Company will be responsible for the purchase of certain equipment and raw materials for the production process.

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PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

Operating Leases

The Company leases office and research and development facilities and equipment under various non-cancellable operating lease agreements.

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 amended to extend its term to July 31, 2018 and again to September 30, 2023, with an option to extend the lease for an additional three years. This lease contains escalating rent payments. In December 2018, the Company entered into a lease for office space in San Diego, California, which expires in October 2022. As of June 30, 2019, the weighted average remaining lease term for the Company’s leases was 6.5 years, and the weighted average discount rate used to determine the right-of-use assets and corresponding operating lease liabilities was 6.4%.

Maturities of operating lease liabilities as of June 30, 2019 are as follows (in thousands):

The Company recognizes rent expense for the operating leases on a straight-line basis. The Company accounts for the cumulative difference between the minimum lease payments and the straight-line amount as deferred rent and records it as an offset to operating lease right-of-use assets. Rent expense was $0.1 million for each of the three months ended June 30, 2019 and 2018 and $0.2 million for each of the six months ended June 30, 2019 and 2018, respectively.

Preferred Stock

The Company issued Series 1 redeemable convertible preferred stock, Series 2 redeemable preferred  stock,  Series  AA  redeemable  convertible  preferred  stock, Series B redeemable convertible preferred stock, Series C-1 redeemable convertible preferred stock, Series C-2 redeemable convertible preferred stock, Series C-3 redeemable convertible preferred stock, and Series D convertible preferred stock (collectively, “Preferred Stock”). Upon the closing of the IPO on October 22, 2018, all shares of Preferred Stock were automatically converted into an aggregate of 13,200,115 shares of common stock.

Initial Public Offering

In October 2018, the Company completed an IPO of its common stock, which resulted in the issuance and sale of an aggregate of 9,864,666 shares of common stock at a public offering price of $5.00 per share, generating net proceeds of $43.0 million after deducting underwriting discounts and commissions and other offering costs. In connection with the completion of the IPO, all then-outstanding shares of the Company’s redeemable convertible preferred stock were converted into an aggregate of 13,200,115 shares of common stock.

Upon completion of the IPO, the Company’s certificate of incorporation was amended and restated. Under the amended and restated certificate of incorporation, the Company’s authorized capital stock consists of 200,000,000 shares of common stock with a par value of $0.001 per share and 10,000,000 shares of preferred stock with a par value of $0.001 per share.

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PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

April 2019 Offering

In April 2019, the Company completed an underwritten public offering of its common stock, which resulted in the issuance and sale of an aggregate of 4,124,475 shares of common stock at a public offering price of $12.00 per share, generating net proceeds of $46.3 million after deducting underwriting discounts and commissions and other offering costs.

Stock-based compensation expense has been reported in the Company’s condensed statements of operations for the three and six months ended June 30, 2019 and 2018 as follows (in thousands):

As of June 30, 2019, the total unrecognized compensation expense related to unvested employee and non-employee stock option awards was $3.1 million, which was expected to be recognized in expense over a weighted-average period of approximately 3.0 years.

MedImmune Limited

In November 2017, the Company entered into a license agreement (“MedImmune License”) with MedImmune Limited (“MedImmune”). MedImmune is a wholly owned subsidiary of AstraZeneca plc. Pursuant to the terms of the MedImmune License, MedImmune granted the Company exclusive global rights for the purpose of developing and commercializing products under the MedImmune License (“MedImmune licensed product”). In consideration of the license and other rights granted by MedImmune, the Company made an upfront payment of $0.1 million, which was included as research and development expense for the year ended December 31, 2017. The Company is also obligated to make a series of contingent milestone payments totaling up to an aggregate of $18.0 million upon the achievement of clinical development and regulatory milestones. As of June 30, 2019, the Company incurred a $1.0 million milestone payment payable to MedImmune, which was recorded as a research and development expense. In addition, the Company will pay MedImmune tiered royalties ranging from mid-single-digit to low-teen percentages of net sales of any MedImmune licensed products and additional payments of up to $50.0 million in aggregate commercial milestones. The Company also must pay quarterly fees relating to technical services provided by MedImmune. The MedImmune License requires the Company to cooperate with MedImmune on commercial messaging of PB2452 and provides MedImmune with the return of rights to PB2452 if certain commercial diligence requirements are not achieved by the Company. In addition, the MedImmune License offers an option for third party product storage costs. As of December 31, 2018, the Company had incurred and reimbursed MedImmune $0.5 million for such third-party product storage costs. The Company incurred an insignificant amount of third-party product storage costs in the six months ended June 30, 2019 and 2018. AstraZeneca plc (“AstraZeneca”) is a stockholder of the Company.

Duke University

In October 2006, the Company entered into a license agreement with Duke University (“Duke”) (as amended, the “Duke License”). Pursuant to the Duke License, Duke granted to the Company an exclusive, worldwide license under certain patent rights and a non-exclusive license to know-how owned or controlled by Duke to develop and commercialize any products or processes covered under the Duke License (the “Duke licensed products”). The Duke License was amended in February 2016 to allow Duke to use the Company’s technology in the area of small-molecule oncologics. The Duke License is a worldwide, sublicensable agreement and remains in full effect for the life of the last-to-expire patents included in the patent rights, which is estimated to be 2029. The Company is required to apply for, prosecute and maintain all U.S. and foreign patent rights under the Duke License.

The Company is obligated to pay up to $2.2 million upon the achievement of clinical development and regulatory milestones and up to $0.4 million upon the achievement of commercial milestones. The Duke License may be terminated by Duke if the Company fails to meet certain clinical development and regulatory milestones within specified timeframes. As of June 30, 2019, the Company was in compliance with its development obligations.

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PhaseBio Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

The Company is required to use commercially reasonable efforts to develop one or more products or processes and introduce them into commercial markets. Duke will receive low single-digit royalty percentages on net sales by the Company or its sublicensee, with minimum aggregate royalties of $0.2 million payable following the Company’s achievement of certain commercial milestones. No sales of Duke licensed products or services have occurred since the effective date through June 30, 2019.

Certain alliance fee payments up to the greater of $0.3 million or a low double-digit percentage of the fees the Company receives from a third party in consideration of forming a strategic alliance, may be required depending upon how the patent rights are commercialized. The Company must pay Duke the first $1.0 million of non-royalty payments it receives from a sublicensee, and thereafter a specified percentage of any additional nonroyalty payments it receives, subject to certain conditions. If Duke receives revenue as a result of a license or sublicense to a third-party in the field of small-molecule oncologics, it will pay the Company a specified percentage of the amount of such revenue in excess of $0.1 million. Duke is also a stockholder of the Company.

Wacker

In April 2019, the Company entered into a license agreement (“Wacker License Agreement”), with Wacker Biotech GmbH (“Wacker”), pursuant to which Wacker granted the Company an exclusive license under certain of Wacker’s intellectual property rights to use Wacker’s proprietary E. coli strain for the manufacture of PB2452 worldwide outside of specified Asian countries, and to commercialize PB2452, if approved, manufactured by the Company or on the Company’s behalf using Wacker’s proprietary E. coli strain throughout the world. The Company has the right to grant sublicenses under the license, subject to certain conditions as specified in the Wacker License Agreement. Under the terms of the agreement, the Company is required to pay a fixed nominal per-unit royalty, which is subject to adjustment, and an annual license fee in a fixed Euro amount in the low to mid six digits. The agreement will be in force for an indefinite period of time, and upon the expiration of the Company’s royalty obligations, the license will be considered fully paid and will convert to a non-exclusive license. Either party may terminate the Wacker License Agreement for breach if such breach is not cured within a specified number of days. As of June 30, 2019, the Company has not incurred any costs under the Wacker License Agreement.

Grant revenue

In February 2018, the Company received Small Business Innovation Research (“SBIR”) grants from the National Institutes of Health in an aggregate amount of $2.8 million to support the clinical development of PB1046 for the treatment of pulmonary arterial hypertension for the period from February 17, 2018 to July 31, 2020. In connection with the SBIR grants, the U.S. government will receive a non-exclusive, royalty-free license to use any technology the Company develops under such grants. The Company recognized $0.2 million and $0.9 million of revenue under the SBIR grants in the three and six months ended June 30, 2019, respectively. The Company did not recognize any revenue from the SBIR grant in the three and six months ended June 30, 2018.

Revenue Under Collaborative Agreement

In April 2019, the Company entered into an agreement with ImmunoForge Co., Ltd. (“ImmunoForge”) for the exclusive, worldwide license of PB1023, a long-acting, recombinant glucagon-like peptide-1 analogue, for the treatment of certain diseases, including conditions related to sarcopenia. The Company received an upfront payment of $0.2 million upon execution of the contract and is entitled to receive $0.3 million within one year of the effective date of the agreement. The Company is eligible to receive milestone-based payments and mid-single digit royalty payments on net sales of licensed products, a percentage of which Duke University is entitled to receive pursuant to the Duke License. For the three and six months ended June 30, 2019, the Company recognized $0.5 million in revenue related to the upfront fee received from ImmunoForge upon the execution of the contract.

As described above in Note 11, the Company is party to the MedImmune License. AstraZeneca, the parent company of MedImmune, is a related party of the Company.

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the periods ended December 31, 2018 and 2017 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K filed with the SEC on March 26, 2019. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us,” and “our” refer to PhaseBio Pharmaceuticals, Inc.

Forward-Looking Statements

The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the SEC. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.

Overview

We are 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. Our lead product candidate, PB2452, is a novel reversal agent for the antiplatelet drug ticagrelor, which we are developing for the treatment of patients on ticagrelor who are experiencing a major bleeding event or those who require urgent surgery. Based on feedback from the United States Food and Drug Administration, or FDA, we intend to seek approval of PB2452 in the United States through an accelerated approval process. In our recently completed Phase 1 clinical trial of PB2452, we observed immediate and complete reversal of ticagrelor’s antiplatelet activity within five minutes following initiation of infusion, and sustained reversal for over 20 hours in dosing cohorts in which we administered PB2452 over an extended infusion period. We are currently conducting a Phase 2a clinical trial of PB2452 in healthy older and elderly subjects. In June 2019, we announced the preliminary results from the Phase 2a trial, in which a statistically significant reversal of ticagrelor was achieved within 5 minutes of initiation of PB2452 infusion and sustained for over 20 hours. Platelet function was normalized by 15 minutes following initiation of PB2452 infusion and remained normal for over 20 hours. In these cohorts, PB2452 was generally well tolerated, with only minor adverse events reported. These preliminary data are consistent with results from our previously published Phase 1 trial. The FDA granted Breakthrough Therapy designation for PB2452 in April 2019. We expect to complete our Phase 2a trial, and initiate our Phase 2b trial, in the fourth quarter of 2019. Based on feedback from the FDA, we intend to submit a Biologics License Application, or BLA, based on an interim analysis of the first 100 patients treated in our Phase 3 trial. We expect to initiate our Phase 3 trial in the first quarter of 2020. Based on an 18-month estimated enrollment timeline for the Phase 3 trial, we anticipate that we could submit our BLA for PB2452 in the second half of 2022. Our second product candidate, PB1046, is a once-weekly fusion protein currently in a Phase 2b clinical trial for the treatment of pulmonary arterial hypertension, or PAH. PB1046 utilizes our proprietary half-life extending elastin-like polypeptide, or ELP, technology, which also serves as the engine for our preclinical pipeline. We retain worldwide rights to all of our product candidates.

We have a limited operating history. Since our inception in 2002, our operations have focused on developing our clinical and preclinical product candidates and our proprietary ELP technology, organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and conducting clinical trials and preclinical studies. We do not have any product candidates approved for sale and have not generated any revenue from product sales. Since inception, we have financed our operations through the sale of equity and debt securities and our term loans with Silicon Valley Bank, or SVB, and WestRiver Innovation Lending Fund VIII, L.P., or WestRiver.

In 2018, we received $60.7 million in aggregate net proceeds from our initial public offering, or IPO, and the sale of Series D convertible preferred stock and $4.0 million in borrowings under our term loan with SVB. In the second quarter of 2019, we received $46.3 million in net proceeds from an underwritten public offering of our common stock and an additional $2.5 million under our term loan with SVB and WestRiver, or our 2019 Loan.

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Since our inception, we have incurred significant operating losses. Our net loss was $16.5 million for the six months ended June 30, 2019. As of June 30, 2019, we had an accumulated deficit of $139.4 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:

Recent Developments

PB2452 Regulatory Update

We recently provided an update on our clinical development and regulatory plans for PB2452. Based on the written minutes from our End-of-Phase 1 meeting with the FDA held in July 2019, we believe that we have reached general agreement with the FDA on the overall design of our Phase 3 trial in major bleeding and urgent surgical populations to support the submission of a BLA for potential accelerated approval of PB2452. During the meeting, the FDA agreed that Accelerated Approval was the appropriate approval pathway for PB2452.

To further support safety assessments, the FDA recommended that we include 200 active treatment subjects across our Phase 1 and Phase 2 trials, which includes our planned Phase 2b trial that will begin in the fourth quarter of 2019 and run in parallel to our ongoing Phase 2a and planned Phase 3 trial. To date, approximately 50 subjects have received PB2452 in the completed Phase 1 trial and ongoing Phase 2a trial. We expect to enroll a total of 200 subjects in our Phase 2b trial, including 150 subjects who will be randomized to receive PB2452.

The FDA also recommended an assessment of PB2452 reversal in patients who may have supratherapeutic blood levels of ticagrelor as a result of ticagrelor overdosage or drug-drug interactions. Based on the pharmacokinetic and pharmacodynamic modeling conducted in earlier preclinical studies and clinical trials of PB2452, we believe we have a clear understanding of the appropriate dosing regimen to reverse the antiplatelet effects of supratherapeutic blood levels of ticagrelor and plan to address this request in our ongoing Phase 2a trial, with dosing of these subjects to begin in the third quarter of 2019. We expect to complete the Phase 2a trial in the fourth quarter of 2019.

With respect to the pivotal Phase 3 trial design, the FDA agreed with our proposed 200 patient, non-randomized, open-label trial design and the proposed pharmacodynamic, clinical and safety endpoints. The FDA also agreed with the proposed use of the VerifyNow PRUTest^® biomarker as the primary endpoint for the Phase 3 trial. We have used VerifyNow PRUTest in our Phase 1 and Phase 2a clinical trials, where it demonstrated a high degree of correlation to other biomarkers used to measure platelet function. To support the BLA submission for Accelerated Approval, the FDA recommended that an interim analysis of the Phase 3 trial include data from the first 100 subjects treated with PB2452, with approximately 50 subjects from each of the major bleeding and surgical populations. To support full approval for patients with major bleeding or requiring urgent surgery, the FDA recommended enrollment of 200 total patients in the Phase 3 trial. We expect to initiate the Phase 3 trial in the first quarter of 2020; based on an estimated 18-month enrollment timeline, a BLA could potentially be submitted in the second half of 2022. For post-approval commitments, the FDA recommended the completion of the remaining portions of the Phase 3 trial and the establishment of a post-approval registry.

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FINANCIAL OVERVIEW

Components of Operating Results

Revenue

Grant Revenue

Grant revenue is derived from government grants that support our efforts on specific research projects. We recognize 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.

Revenue Under Collaborative Agreement

Revenue under collaborative agreement is derived from an agreement with our collaboration partner, ImmunoForge Co., Ltd., or ImmunoForge. We have granted ImmunoForge a license to develop certain compound indications in exchange for an upfront license payment and event-based payments subject to ImmunoForge’s achievement of specified development, regulatory and sales-based milestones. In addition, we are entitled to royalties if products under the collaboration are commercialized. We recognize revenue for upfront amounts when the license is transferred to the collaboration partner. Development milestones and other fees are recognized in revenue when it is probable that the amount will not result in a significant reversal of revenue in the future. Sales-based milestones and royalties cannot be recognized until the underlying sales occur. 

Research and Development Expense

Research and development expense consists of expenses incurred in connection with the discovery and development of our product candidates. We expense research and development costs as incurred. These expenses include:

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect our research and development expense to increase significantly over the next several years as we increase personnel costs, including stock-based compensation, conduct our later-stage clinical trials for PB2452 and PB1046 and conduct other preclinical studies and clinical trials and potentially prepare regulatory filings and, if approved, commence commercialization efforts for our product candidates.

The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when, if ever, material net cash inflows may commence from our product candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:

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Our expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals, and the expense of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. We may never succeed in achieving regulatory approval for our product candidates. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of our product candidates. A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. Product commercialization will take several years and millions of dollars in development costs.

General and Administrative Expense

General and administrative expense consists principally of salaries and related costs for personnel in executive and administrative functions, including stock-based compensation, travel expenses and recruiting expenses. Other general and administrative expense includes professional fees for legal, accounting and tax-related services and insurance costs.

We anticipate that our general and administrative expense will increase as a result of increased payroll, expanded infrastructure and higher consulting, legal and tax-related services associated with maintaining compliance with stock exchange listing and SEC requirements, accounting and investor relations costs, and director and officer insurance premiums associated with being a public company. We anticipate the additional costs for these services will increase our general and administrative expense by between $1.0 million and $2.0 million on an annual basis.

Interest Expense

Interest expense consists of interest expense on our convertible promissory notes and term loan. Following the conversion of the convertible promissory notes into shares of redeemable convertible Series D preferred stock in August 2018, we no longer recognize interest on the convertible promissory notes. We recognize interest on our term loan with SVB and WestRiver.

Change in Fair Value of Warrant and Derivative Liabilities

Change in fair value of warrant and derivative liabilities reflects the revaluation at each reporting date of our redeemable convertible preferred stock warrants and the conversion option on our convertible promissory notes, respectively. Following the conversion of our convertible promissory notes to preferred stock in August 2018, the conversion of all outstanding shares of our preferred stock into common stock, and the corresponding conversion of all outstanding preferred stock warrants into common stock warrants, in connection with the closing of our IPO in October 2018, we no longer remeasure the warrant liability or derivative liability for periods following the closing of the IPO.

License Agreements

MedImmune Limited

In November 2017, we entered into an exclusive license agreement, or the MedImmune License, with MedImmune Limited, or Medimmune, a wholly owned subsidiary of AstraZeneca plc. Pursuant to the MedImmune License, MedImmune granted us an exclusive, worldwide license under certain patent rights owned or controlled by MedImmune to develop and commercialize any products covered by the MedImmune License, or the MedImmune Licensed Products, for the treatment, palliation, diagnosis or prevention of any human disorder or condition. Under the MedImmune License, we paid MedImmune an upfront fee of $0.1 million. We are also required to pay MedImmune: quarterly fees relating to technical services provided by MedImmune; up to $18.0 million in clinical and regulatory milestone fees, $1.0 million of which was incurred in the second quarter of 2019; up to $50.0 million in commercial milestone fees; and mid-single digit to low-teen royalty percentages on net sales of MedImmune Licensed Products, subject to reduction in specified circumstances. In addition, the MedImmune License offers an option for third-party product storage costs. As of June 30, 2019, we have incurred costs of $1.6 million under the MedImmune License.

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Duke University

In October 2006, we entered into an exclusive license agreement, or the Duke License, with Duke University, or Duke, which we most recently amended in April 2019. Pursuant to the Duke License, Duke granted us an exclusive, worldwide license under certain patent rights owned or controlled by Duke, and a non-exclusive, worldwide license under certain know-how of Duke, to develop and commercialize any products covered by the Duke License, or Duke licensed products, relating to ELPs. Under the Duke License, we paid Duke an upfront fee of $37,000, additional fees in connection with amendments to the Duke License of $0.2 million and other additional licensing fees of $0.2 million. In consideration for license rights granted to us, we initially issued Duke 24,493 shares of our common stock. Until we reached a certain stipulated equity milestone, which we reached in October 2007, we were obligated to issue additional shares of common stock to Duke from time to time so that its aggregate ownership represented 7.5% of our issued and outstanding capital stock. We are also required to pay Duke: up to $2.2 million in regulatory and clinical milestone fees; up to $0.4 million in commercial milestone fees; low single-digit royalty percentages on net sales of Duke licensed products, with minimum aggregate royalty payments of $0.2 million payable following our achievement of certain commercial milestones; and up to the greater of $0.3 million or a low double-digit percentage of the fees we receive from a third party in consideration of forming a strategic alliance with respect to certain patent rights covered under the Duke License. We also must pay Duke the first $1.0 million of non-royalty payments we receive from a sublicensee, and thereafter a low double-digit percentage of any additional nonroyalty payments we receive, subject to certain conditions. As of June 30, 2019, we have incurred $0.3 million payable to Duke under the Duke License. We are also required to apply for, prosecute and maintain all U.S. and foreign patent rights under the Duke License.

Wacker

In April 2019, we entered into a license agreement, or the Wacker License Agreement, with Wacker Biotech GmbH, or Wacker, pursuant to which Wacker granted us an exclusive license under certain of Wacker’s intellectual property rights to use Wacker’s proprietary E. coli strain for the manufacture of PB2452 worldwide outside of specified Asian countries, and to commercialize PB2452, if approved, manufactured by us or on our behalf using Wacker’s proprietary E. coli strain throughout the world. We have the right to grant sublicenses under the license, subject to certain conditions as specified in the Wacker License Agreement. Under the terms of the agreement, we are required to pay a fixed nominal per-unit royalty, which is subject to adjustment, and an annual license fee in a fixed Euro amount in the low to mid six digits. The agreement will be in force for an indefinite period of time, and upon the expiration of our royalty obligations, the license will be considered fully paid and will convert to a non-exclusive license. Either party may terminate the Wacker License Agreement for breach if such breach is not cured within a specified number of days. As of June 30, 2019, we have not incurred any costs under the Wacker License Agreement.

Results of Operations

Comparison of the Three Months Ended June 30, 2019 and 2018

The following table summarizes our results of operations for the three months ended June 30, 2019 and 2018 (in thousands):

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Revenue

Grant revenue was $0.2 million for the three months ended June 30, 2019 as we incurred allowable costs qualifying for reimbursement under our government grants. We did not receive any grant revenue for the three months ended June 30, 2018. Revenue under collaborative agreement was $0.5 million for the three months ended June 30, 2019 related to the receipt of an upfront payment in April 2019 under our agreement with ImmunoForge.

Research and Development Expense

Research and development expense was $7.8 million for the three months ended June 30, 2019, compared to $3.2 million for the three months ended June 30, 2018. The increase of $4.6 million was primarily attributable to increased costs associated with preclinical and clinical development activities largely related to PB2452 and increased personnel costs.

The following table summarizes our research and development expenses by functional area for the three months ended June 30, 2019 and 2018 (in thousands):

We track our external research and development expenses on a program-by-program basis. However, we do not track our internal research and development expenses on a program-by-program basis as they primarily relate to compensation, early research and consumable costs, which are deployed across multiple projects under development. The following table summarizes our research and development expenses by product candidate for the three months ended June 30, 2019 and 2018 (in thousands):

General and Administrative Expense

General and administrative expense was $2.4 million for the three months ended June 30, 2019, compared to $0.9 million for the three months ended June 30, 2018. The increase of $1.5 million was primarily attributable to increases in professional services including legal, marketing and other consulting services, personnel expense due to additional headcount and expenses associated with being a public company.

Interest Income

Interest income was $0.5 million for the three months ended June 30, 2019, compared to $36,000 for the three months ended June 30, 2018. The increase of $0.5 million was attributable to higher balances of cash and cash equivalents.

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Interest Expense

Interest expense was $0.2 million for the three months ended June 30, 2019, compared to $1.4 million for the three months ended June 30, 2018. The decrease of $1.2 million was attributable to interest from $14.1 million in borrowings pursuant to our convertible promissory notes, which were outstanding as of June 30, 2018. These notes were converted into shares of redeemable convertible Series D stock in August 2018 and therefore were not outstanding during the three months ended June 30, 2019. Interest for the three months ended June 30, 2019 was attributable to interest on the 2019 Loan.

Change in Fair Value of Warrant Liability

Change in fair value of warrant liability resulted in no expense for the three months ended June 30, 2019, compared to other expense of $1.0 million for the three months ended June 30, 2018. The preferred stock warrants were subject to remeasurement at each reporting period, with changes in fair value recorded in the condensed statement of operations. The outstanding preferred stock warrants converted into common stock warrants upon the completion of our IPO in October 2018 and, accordingly, we no longer remeasure the fair value of the warrant liability.

Change in Fair Value of Derivative Liability

Change in fair value of derivative liability resulted in no expense for the three months ended June 30, 2019, compared to $0.2 million of expense for the three months ended June 30, 2018. The conversion option related to our convertible promissory notes was subject to remeasurement at each reporting period, with changes in fair value recorded in the condensed statement of operations. The convertible promissory notes converted into redeemable convertible preferred stock in August 2018 upon the sale of the Series D redeemable convertible preferred stock and, accordingly, we no longer remeasure the fair value of the derivative liability.

Comparison of the Six Months Ended June 30, 2019 and 2018

The following table summarizes our results of operations for the six months ended June 30, 2019 and 2018 (in thousands):

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Revenue

Grant revenue was $0.9 million for the six months ended June 30, 2019 as we incurred allowable costs qualifying for reimbursement under our government grants. We did not receive any grant revenue for the six months ended June 30, 2018. Revenue under collaborative agreement was $0.5 million for the six months ended June 30, 2019 related to the receipt of an upfront payment in April 2019 under our agreement with ImmunoForge.

Research and Development Expense

Research and development expense was $13.5 million for the six months ended June 30, 2019, compared to $5.4 million for the six months ended June 30, 2018. The increase of $8.1 million was primarily attributable to increased costs associated with preclinical and clinical development activities largely related to PB2452 and increased personnel costs.

The following table summarizes our research and development expenses by functional area for the six months ended June 30, 2019 and 2018 (in thousands):