mtem-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: 001-32979

 

Molecular Templates, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

94-3409596

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

9301 Amberglen Blvd

Suite 100

Austin, TX 78729

(Address of principal executive offices)

 

 

78729

(Zip Code)

(512) 869-1555

(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, non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No 

On November 6, 2018, there were 36,496,116 shares of common stock, par value $0.001 per share, of Molecular Templates, Inc. outstanding.

 

 


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements, other than statements of historical facts contained herein, regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these identifying words. These forward-looking statements include, but are not limited to, statements about:

 

 

the implementation of our business strategies, including our ability to pursue development pathways and regulatory strategies for MT-3724 and other engineered toxin body, or ETB, product candidates;

 

the timing and our ability to advance the development of our product candidates;

 

our plans to pursue discussions with regulatory authorities, and the anticipated timing, scope and outcome of related regulatory actions or guidance;

 

our ability to establish and maintain potential new partnering or collaboration arrangements for the development and commercialization of ETB product candidates;

 

our financial condition, including our ability to obtain the funding necessary to advance the development of our product candidates;

 

the anticipated progress of our product candidate development programs, including whether our ongoing and potential future clinical trials will achieve clinically relevant results;

 

our ability to generate data and conduct analyses to support the regulatory approval of our product candidates;

 

our ability to establish and maintain intellectual property rights for our product candidates;

 

whether any product candidates that we are able to commercialize are safer or more effective than other marketed products, treatments or therapies;

 

our ability to discover and develop additional product candidates suitable for clinical testing;

 

our ability to identify, in-license or otherwise acquire additional product candidates and development programs;

 

our anticipated research and development activities and projected expenditures;

 

our ability to complete preclinical and clinical testing successfully for new product candidates that we may develop or license;

 

our ability to have manufactured active pharmaceutical ingredient, or API, and drug product that meet required release and stability specifications;

 

our ability to have manufactured sufficient supplies of drug product for clinical testing and commercialization;

 

our ability to obtain licenses to any necessary third-party intellectual property;

 

our ability to retain and hire necessary employees and appropriately staff our development programs; and

 

the sufficiency of our cash resources; and other risks and uncertainties, including those listed under Part II, Item 1A. “Risk Factors”.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources

 


 

Molecular Templates, Inc.

TABLE OF CONTENTS

 

 

  

 

Page

PART I.

  

FINANCIAL INFORMATION

 

 4

Item 1.

  

Condensed Consolidated Financial Statements

 

4

 

  

Condensed Consolidated Balance Sheets (Unaudited)

 

4

 

  

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

 

5

 

  

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

6

 

  

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

7

Item 2.

  

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

 

26

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

 

37

Item 4.

  

Controls and Procedures

 

38

PART II.

  

OTHER INFORMATION

 

39

Item 1

  

Legal Proceedings

 

39

Item 1A.

  

Risk Factors

 

39

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

 

70

Item 3.

  

Defaults Upon Senior Securities

 

70

Item 4.

  

Mine Safety Disclosures

 

70

Item 5.

  

Other Information

 

70

Item 6.

  

Exhibits

 

71

SIGNATURES

 

72

 

 

 

3


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

Molecular Templates, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

September 30,

2018 (unaudited)

 

 

December 31,

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

78,744

 

 

$

58,910

 

Prepaid expenses

 

2,535

 

 

 

1,485

 

Accounts receivable from related party

 

31,163

 

 

 

 

Other current assets

 

4,385

 

 

 

19

 

Total current assets

 

116,827

 

 

 

60,414

 

Property and equipment, net

 

7,165

 

 

 

1,952

 

In-process research and development

 

26,623

 

 

 

26,623

 

Other assets

 

1,345

 

 

 

1,402

 

Total assets

$

151,960

 

 

$

90,391

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,630

 

 

$

2,517

 

Accrued liabilities

 

6,595

 

 

 

2,690

 

Current portion of long-term debt

 

 

 

 

2,400

 

Deferred revenue

 

33,400

 

 

 

2,765

 

Other current liabilities

 

106

 

 

 

70

 

Total current liabilities

 

41,731

 

 

 

10,442

 

Warrant liabilities

 

38

 

 

 

954

 

Long-term debt, net

 

3,155

 

 

 

1,078

 

Other liabilities

 

844

 

 

 

628

 

Total liabilities

 

45,768

 

 

 

13,102

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, $0.001 par value, shares authorized: 150,000,000 shares; issued and outstanding:

    36,496,116 shares at September 30, 2018 and 26,898,330 shares at December 31, 2017

 

36

 

 

 

27

 

Additional paid-in capital

 

194,226

 

 

 

141,733

 

Accumulated other comprehensive loss

 

 

 

 

 

Accumulated deficit

 

(88,070

)

 

 

(64,471

)

Total stockholders’ equity

 

106,192

 

 

 

77,289

 

Total liabilities and stockholders’ equity

$

151,960

 

 

$

90,391

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

4


 

Molecular Templates, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share data)

(unaudited)

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development revenue

$

2,031

 

 

$

648

 

 

$

3,206

 

 

$

2,408

 

Grant revenue

 

4,721

 

 

 

 

 

 

5,395

 

 

 

167

 

Total revenue

 

6,752

 

 

 

648

 

 

 

8,601

 

 

 

2,575

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

8,290

 

 

 

2,522

 

 

 

22,640

 

 

 

4,829

 

General and administrative

 

3,538

 

 

 

3,996

 

 

 

10,165

 

 

 

8,233

 

Total operating expenses

 

11,828

 

 

 

6,518

 

 

 

32,805

 

 

 

13,062

 

Loss from operations

 

5,076

 

 

 

5,870

 

 

 

24,204

 

 

 

10,487

 

Interest and other income, net

 

107

 

 

 

1

 

 

 

307

 

 

 

2

 

Interest expense

 

(279

)

 

 

(107

)

 

 

(672

)

 

 

(752

)

Change in fair value of warrant liabilities

 

4

 

 

 

(272

)

 

 

916

 

 

 

(269

)

Loss on conversion of notes

 

 

 

 

(4,719

)

 

 

 

 

 

(4,719

)

Net loss

 

5,244

 

 

 

10,967

 

 

 

23,653

 

 

 

16,225

 

Deemed dividends on preferred stock

 

 

 

 

(138

)

 

 

 

 

 

(958

)

Net loss attributable to common shareholders

$

5,244

 

 

$

11,105

 

 

$

23,653

 

 

$

17,183

 

Net loss per share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

$

0.19

 

 

$

0.62

 

 

$

0.87

 

 

$

2.75

 

Weighted average number of shares used in net loss per share calculations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

27,680,307

 

 

 

17,925,585

 

 

 

27,246,667

 

 

 

6,241,947

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

`

 

Unrealized gain (loss) on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

$

5,244

 

 

$

11,105

 

 

$

23,653

 

 

$

17,183

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

5


 

Molecular Templates, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Nine Months Ended

September 30,

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

23,653

 

 

$

16,225

 

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

 

 

 

 

 

 

 

Depreciation

 

569

 

 

 

71

 

Stock-based compensation expense

 

2,762

 

 

 

1,430

 

Amortization of debt discount and accretion related to debt

 

219

 

 

 

282

 

Change in common stock warrant fair value

 

(916

)

 

 

269

 

Accretion of asset retirement obligations

 

28

 

 

 

 

Capitalized interest

 

(125

)

 

 

 

Loss on extinguishment of debt

 

115

 

 

 

4,719

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses

 

(1,116

)

 

 

(280

)

Accounts receivable from related party

 

(31,163

)

 

 

(38

)

Other current assets

 

(4,313

)

 

 

(57

)

Other assets

 

57

 

 

 

 

Accounts payable

 

(906

)

 

 

2,618

 

Accrued liabilities

 

3,733

 

 

 

(1,003

)

Other current liabilities

 

49

 

 

 

145

 

Other liabilities

 

166

 

 

 

 

Deferred revenue

 

30,635

 

 

 

1,715

 

Net cash used in operating activities

 

(23,859

)

 

 

(6,354

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Cash received from merger transaction

 

 

 

 

11,216

 

Purchases of property and equipment

 

(5,421

)

 

 

(369

)

Increase in other assets

 

 

 

 

(400

)

Net cash used in investing activities

 

(5,421

)

 

 

10,447

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments of capital lease obligations

 

(36

)

 

 

(35

)

Proceeds from issuance of long-term debt and warrants, net

 

4,537

 

 

 

 

Repayment of long-term debt

 

(3,605

)

 

 

(1,800

)

Retirement of stock warrants

 

 

 

 

(208

)

Proceeds from issuance of related party debt

 

 

 

 

2,685

 

Proceeds from stock option exercises

 

157

 

 

 

14

 

Proceeds from promissory note

 

 

 

 

4,000

 

Proceeds from issuance of common stock and warrants, net of offering expenses

 

48,061

 

 

 

57,716

 

Net cash provided by financing activities

 

49,114

 

 

 

62,372

 

Net increase (decrease) in cash and cash equivalents

 

19,834

 

 

 

66,465

 

Cash and cash equivalents, beginning of period

 

58,910

 

 

 

1,716

 

Cash and cash equivalents, end of period

$

78,744

 

 

$

68,181

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

Cash paid for interest

$

286

 

 

$

194

 

Non-Cash Investing and Financing Activities

 

 

 

 

 

 

 

Fixed asset additions in accounts payable

$

19

 

 

$

274

 

Fixed asset additions in accrued expenses

$

173

 

 

$

 

Deemed dividends on preferred stock

$

 

 

$

958

 

Conversion of preferred stock

$

 

 

$

26,830

 

Conversion of related party debt

$

 

 

$

10,486

 

Capital lease additions to fixed assets

$

 

 

$

57

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

6


 

Molecular Templates, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of the Business

Molecular Templates, Inc. (the “Company” or “Molecular”) is a clinical stage biopharmaceutical company formed in 2001, with a biologic therapeutic platform for the development of novel targeted therapeutics for cancer and other diseases, headquartered in Austin, Texas. The Company’s focus is on the research and development of therapeutic compounds for a variety of cancers. Molecular operates its business as a single segment, as defined by U.S. generally accepted accounting principles (“U.S. GAAP”).

On August 1, 2017, the Company, formerly known as Threshold Pharmaceuticals, Inc. (Nasdaq: THLD) (“Threshold”), completed its business combination with the entity then known as Molecular Templates, Inc., a private Delaware Corporation (“Private Molecular”), in accordance with the terms of an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), dated as of March 16, 2017, by and among Threshold, Trojan Merger Sub, Inc., a wholly owned subsidiary of Threshold (“Merger Sub”), and Private Molecular.  Pursuant to the Merger Agreement, Merger Sub merged with and into Private Molecular, with Private Molecular surviving as a wholly-owned subsidiary of Threshold (the “Merger”) and Private Molecular changed its name to “Molecular Templates OpCo, Inc.” Also on August 1, 2017, in connection with, and prior to the completion of the Merger, Threshold effected an 11-for-1 reverse stock split of its common stock (the “Reverse Stock Split”) and changed its name to “Molecular Templates, Inc.” Following the completion of the Merger, the business conducted by Private Molecular became primarily the business conducted by the Company as described in the paragraph above.

Basis of Presentation

These unaudited interim condensed consolidated financial statements reflect the historical results of Private Molecular prior to the completion of the Merger, and do not include the historical results of the Company prior to the completion of the Merger. All share and per share disclosures have been adjusted to reflect the exchange of shares in the Merger, and the 11-for-1 reverse stock split of the common stock effected on August 1, 2017. Under U.S. GAAP, the Merger is treated as a “reverse merger” under the purchase method of accounting. For accounting purposes, Private Molecular is considered to have acquired Threshold. See Note 3, “Merger with Private Molecular”, for further details on the Merger and the U.S. GAAP accounting treatment.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP pursuant to the requirements of the Securities and Exchange Commission (“SEC”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for the fair presentation of results for the periods presented, have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any other interim period.

The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the recorded amounts reported therein. A change in facts or circumstances surrounding the estimates could result in a change to estimates and impact future operating results.

The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim unaudited condensed consolidated financial statements have read or have access to the audited consolidated financial statements for the preceding fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2018.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, and reflect the elimination of intercompany accounts and transactions.

Significant Accounting Policies

Except as detailed below, there have been no material changes to the Company’s significant accounting policies during the three and nine months ended September 30, 2018, as compared to the significant accounting policies disclosed in Note 1, Summary of significant accounting policies, to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

7


 

Revenue Recognition

Effective January 1, 2018, the Company adopted the Financial Accounting Standards Board’s (“FASB”) provisions of ASC 606, Revenue from Contracts with Customers (ASC 606), using the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with available practical expedients. The reported results for 2018 reflect the application of ASC 606 guidance, while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition, which is also referred to herein as “Previous Guidance.”

 

Under ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of ASC 606, the Company performs the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer.

 

The Company identifies the goods or services promised within each collaboration agreement and assesses whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and (ii) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. In assessing whether a promised good or service is distinct, the Company considers factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. If a promised good or service is not distinct, an entity is required to combine that promised good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct.

 

The allocation of the transaction price to the performance obligations in proportion to their standalone selling prices is determined at contract inception. If the consideration promised in a contract includes a variable amount, the Company estimates the amount of consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer. The Company determines the amount of variable consideration by using the expected value method or the most likely amount method. The Company includes the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, the Company re-evaluates the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment.

 

In determining the transaction price, the Company adjusts consideration for the effects of the time value of money if there is a significant benefit of financing. The Company assessed its collaboration agreements and concluded that no significant financing components were present.

 

If an arrangement contains customer options that allow the customer to acquire additional goods or services, including an exclusive license to the Company’s intellectual property, the goods and services underlying the customer options are evaluated to determine whether they are deemed to represent a material right. In determining whether the customer option has a material right, the Company assesses whether there is an option to acquire additional goods or services at a discount. If the customer option is determined not to represent a material right, the option is not considered to be performance obligations at the outset of the arrangement. If the customer option is determined to represent a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement. The Company allocates the transaction price to material rights based on the relative standalone selling price, which is determined based on the identified discount and the probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until the option is exercised.

 

The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation as each performance obligation is satisfied over time, based on the use of an input method. Performance obligations may include research and development services to be performed by the Company on behalf of the collaboration partner. Revenue is recognized on research and development efforts as the services are performed and presented on a gross basis, since the Company is the principal.

 

8


 

Under collaboration agreements, the timing of revenue recognition and contract billings may differ, and result in contract assets and contract liabilities. Contract assets represent revenues recognized in excess of amounts billed under collaboration agreements and are transferred to accounts receivable when billed or billing rights become unconditional. Contract liabilities represent billings in excess of revenues recognized under collaboration agreements. 

 

Refer to Note 4,” Research and Development Agreements”, for further details about the impact of the adoption of ASC 606.

Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject the Company to concentrations of risk consist principally of cash and cash equivalents, investments, long term debt and accounts receivable.

The Company’s cash and cash equivalents are with two major financial institutions in the United States.

The Company performs an ongoing credit evaluation of its strategic partners’ financial conditions and generally does not require collateral to secure accounts receivable from its strategic partners. The Company’s exposure to credit risk associated with non-payment will be affected principally by conditions or occurrences within Takeda Pharmaceutical Company Ltd. (“Takeda”). Approximately 28% and 35% of total revenues for the three and nine months ended September 30, 2018, respectively, were derived from Takeda. There was $31.2 million in accounts receivable due from Takeda at September 30, 2018, which was received in October 2018. See also Note 4, “Research and Development Agreements”, regarding the collaboration agreements with Takeda.

Drug candidates developed by the Company may require approvals or clearances from the U.S. Food and Drug Administration (“FDA”) or international regulatory agencies prior to commercial sales. There can be no assurance that the Company’s drug candidates will receive any of the required approvals or clearances. If the Company were to be denied approval or clearance or any such approval or clearance were to be delayed, it would have a material adverse impact on the Company.

 

Recently Issued Accounting Pronouncements

Effective January 1, 2018, the Company adopted ASC 606, which provides principles for recognizing revenue to depict the transfer of 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. The Company adopted ASC 606 on a modified retrospective basis through a cumulative adjustment to equity.  The impact of the adoption of the standard to prior period amounts is discussed below in Note 4, “Research and Development Agreements”.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires management to record right-to-use asset and lease liability on the statement of financial position for operating leases. ASU 2016-02 is effective for annual and interim reporting periods beginning on or after December 15, 2018 and the modified retrospective approach is required. The Company is in the process of evaluating the impact the adoption of this standard would have on its consolidated financial statements and disclosures and expects the new standard to significantly increase the reported assets and liabilities on its consolidated balance sheets.

In December 2017, the SEC issued Staff Accounting Bulletin (“SAB”) 118 to address the application of GAAP in situations in which a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law on December 22, 2017. In March 2018, the FASB issued ASU No. 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update)”, which amended ASC 740 to incorporate the requirements of SAB 118. There were no changes in the provisional amounts recorded by the Company at December 31, 2017 related to the Tax Act.  The Company continues to evaluate the impact of the Tax Act.

In June 2018, the FASB issued ASU No. 2018-07, “Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting”, which amends the existing accounting standards for share-based payments to nonemployees. This ASU aligns much of the guidance on measuring and classifying nonemployee awards with that of awards to employees. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date. This ASU becomes effective in the first quarter of fiscal year 2019 and early adoption is permitted. Entities will apply the ASU by recognizing a cumulative-effect adjustment to retained earnings as of the beginning of the annual period of adoption. We are currently evaluating the impact that ASU 2018-07 will have on our condensed consolidated financial statements.

9


 

NOTE 2 — NET LOSS PER COMMON SHARE

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by giving effect to all potential dilutive common shares, including outstanding options and warrants.  The following is the calculation of basic and diluted net loss per share (in thousands, except share and per share data):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common shareholders

$

5,244

 

 

$

11,105

 

 

$

23,653

 

 

$

17,183

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

27,680,307

 

 

 

17,925,585

 

 

 

27,246,667

 

 

 

6,241,947

 

Net loss per share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

$

0.19

 

 

$

0.62

 

 

$

0.87

 

 

$

2.75

 

 

The following outstanding warrants and options were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an antidilutive effect (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Shares issuable upon exercise of warrants

 

3,522

 

 

 

3,274

 

 

 

3,522

 

 

 

3,274

 

Shares issuable upon exercise of stock options

 

4,201

 

 

 

1,870

 

 

 

4,201

 

 

 

1,870

 

 

 

NOTE 3 — MERGER WITH PRIVATE MOLECULAR

On August 1, 2017, the Company, formerly known as Threshold, completed the Merger with Private Molecular, in accordance with the terms of the Merger Agreement. Immediately upon completion of the Merger, the former stockholders of Private Molecular held a majority of the voting interest of the combined company.

Also on August 1, 2017, in connection with, and prior to the completion of, the Merger, Threshold effected a Reverse Stock Split and changed its name from “Threshold Pharmaceuticals, Inc.” to “Molecular Templates, Inc.” Under the terms of the Merger, at the effective time of the Merger, the Company issued shares of its common stock to Private Molecular stockholders, at an exchange ratio of 7.7844 shares of common stock (the “Exchange Ratio”), after taking into account the Reverse Stock Split, in exchange for each share of Private Molecular common stock outstanding immediately prior to the Merger.   Immediately following the closing of the Merger on August 1, 2017, the former Threshold stockholders owned approximately 34.4% of the aggregate number of shares of common stock of the Company and the former Private Molecular stockholders owned approximately 65.6% of the shares of common stock of the Company, subject to adjustments in accordance with the Merger Agreement.

All Private Molecular stock options granted under the Private Molecular stock option plan (whether or not then exercisable) outstanding prior to the effective time of the Merger were exchanged for options to purchase the Company’s common stock. All outstanding and unexercised Private Molecular stock options assumed by the Company may be exercised solely for shares of the Company’s common stock. The number of shares of the Company’s common stock subject to each Private Molecular stock option assumed by the Company was determined by multiplying (a) the number of shares of Private Molecular common stock that were subject to such Private Molecular stock option, as in effect immediately prior to the effective time of the merger by (b) the Exchange Ratio and dividing by 11 (to account for the Reverse Stock Split); rounding the resulting number down to the nearest whole number of shares of the Company’s common stock. The per share exercise price for the Company’s common stock issuable upon exercise of each Private Molecular stock option assumed by the Company was determined by dividing (a) the per share exercise price of Private Molecular common stock subject to such Private Molecular stock option, as in effect immediately prior to the effective time of the Merger, by (b) the Exchange Ratio, and multiplying by 11 (to account for the Reverse Stock Split); rounding the resulting exercise price up to the nearest whole cent. The exchange of the Private Molecular stock options for the Company’s stock options was treated as a modification of the awards.

Threshold equity awards issued and outstanding at the time of the Merger remained issued and outstanding. However, for accounting purposes, Threshold equity awards will be assumed to have been exchanged for equity awards of Private Molecular, the accounting acquirer. As of August 1, 2017, Threshold had outstanding stock options to purchase 963,681 shares of common stock, of which stock options to purchase 963,681 shares were vested and exercisable at a weighted average exercise price of $33.62 per share, after giving effect to the Reverse Stock Split.

10


 

Allocation of Purchase Consideration

Pursuant to business combination accounting, the Company applied the acquisition method, which requires the assets acquired and liabilities assumed be recorded at fair value with limited exceptions.

The purchase price for Threshold on August 1, 2017, the closing date of the Merger, was calculated as follows (in thousands, except per share amounts):

 

 

August 1, 2017

 

 

Number of shares of the combined company owned by Threshold stockholders

 

6,508

 

(1)

Multiplied by the price per share of Threshold common stock

$

5.94

 

(2)

Purchase price before options

$

38,658

 

 

Threshold options assumed

 

1,006

 

(3)

Settlement of preexisting bridge note with Threshold

 

(4,010

)

(4)

Total purchase price

$

35,654

 

 

 

(1)

Represents the number of shares of common stock of the combined company that Threshold stockholders owned as of the closing of the Merger pursuant to the Merger Agreement. As of August 1, 2017, there were 6,508,356 shares of Threshold common stock outstanding, adjusted for the 11-for-1 reverse stock split.

(2)

The fair value of Threshold common stock used in determining the purchase price was $5.94, which was derived from the $0.54 per share closing price of Threshold on August 1, 2017, the current price at the time of closing, adjusted for the 11-for-1 reverse stock split.

(3)

Because the Company is considered to be the acquirer for accounting purposes, the pre-Merger vested stock options granted by Threshold under Threshold’s 2014 Equity Incentive Plan are deemed to have been exchanged for equity awards of the Company and as such the portion of the acquisition date fair value of these equity awards attributable to pre-Merger service to Threshold were accounted for as a component of the consideration transferred.

(4)

Represents the bridge loan outstanding as of the closing date of the Merger. As the receivable on Threshold’s balance sheet was settled as part of the Merger, it is deemed to be a reduction in the purchase price.

Under the acquisition method of accounting, the total purchase price was allocated to tangible and identifiable intangible assets acquired and liabilities assumed of Threshold on the basis of their estimated fair values as of the transaction closing date on August 1, 2017.

The following table summarizes the allocation of the purchase consideration to the assets acquired and liabilities assumed based on their fair values as of August 1, 2017 (in thousands):

 

 

August 1, 2017

 

Cash and cash equivalents

$

11,216

 

Prepaid expenses and other current assets

 

945

 

In-process research and development (IPR&D)

 

26,623

 

Accounts payable, accrued expenses

 

(2,009

)

Warrant liability

 

(1,121

)

Net assets acquired

$

35,654

 

 

The Company believes that the historical values of the Company’s current assets and current liabilities approximate fair value based on the short-term nature of such items. The allocation of the purchase price is dependent on the valuation of the fair value of assets acquired and liabilities assumed. The Company does not expect any further revisions to the allocation of the purchase price.

In-Process Research and Development

The Company used the risk adjusted discounted cash flow method to value the in-process research and development intangible asset.  Under the valuation method, the present value of future cash flows expected to be generated from the in-process research and development of the acquired product candidate, evofosfamide, was determined using a discount rate of 12%, and identified projected cash flows from evofosfamide were risk adjusted to take into consideration the probabilities of moving through the various clinical stages.  

Transaction Costs

Transaction costs associated with the Merger of approximately $2.0 million were included in general and administrative expense in 2017.

11


 

Threshold Promissory Note

On March 24, 2017, the Company received $2.0 million from Threshold in the form of a promissory note at an interest rate of 1.0% per annum. The Company received an additional $2.0 million on June 1, 2017. The note was settled as part of the Merger.

Share Based Awards

The exchange of Private Molecular stock options for options to purchase Threshold common stock, as renamed Molecular, was accounted for as a modification of the awards because the legal exchange of the awards is considered a modification of Private Molecular stock options.  The modification of the stock options did not result in any incremental compensation expense as the modification did not increase the fair value of the stock options.

Additionally, pursuant to the terms of the Merger Agreement, participants in Threshold’s 2014 Equity Incentive Plan received accelerated vesting for all or a portion of their pre-Merger awards granted under such plan, as well as a modification of the exercise period. The Company recorded $1.2 million in stock-based compensation associated with the transaction.

 

NOTE 4 — RESEARCH AND DEVELOPMENT AGREEMENTS

Disaggregated Research and Development Revenue

Research and Development revenue is attributable to regions based on the location of our collaboration partner's parent company headquarters.  Research and Development revenues disaggregated by location were as follows (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Japan

 

$

1,914

 

 

$

648

 

 

$

3,009

 

 

$

1,908

 

United States

 

 

117

 

 

 

 

 

 

197

 

 

 

500

 

Total Research and Development Revenue

 

$

2,031

 

 

$

648

 

 

$

3,206

 

 

$

2,408

 

 

Impact of Adoption of ASC 606

Effective January 1, 2018, the Company adopted ASC 606, which provides principles for recognizing revenue to depict the transfer of 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. The Company adopted ASC 606 on a modified retrospective basis through a cumulative adjustment to stockholders’ equity.

The cumulative effect of applying the new guidance of ASC 606 to all contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made to accounts on the Condensed Consolidated Balance Sheet as of January 1, 2018 (in thousands):

 

Balance Sheet

 

December 31, 2017

 

 

Effect of adoption of ASC 606 (1)

 

 

January 1, 2018

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

$

19

 

 

$

54

 

 

$

73

 

Total assets

 

 

90,391

 

 

 

54

 

 

 

90,445

 

Stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(64,471

)

 

 

54

 

 

 

(64,417

)

Total liabilities and stockholders' equity

 

$

90,391

 

 

$

54

 

 

$

90,445

 

 

(1)

This impact represents the amount of revenue that would have been recognized and accounted for as unbilled revenue, during the year ended December 31, 2017.

12


 

 

The impact of adoption on the Company’s Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended September 30, 2018 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Balance without

 

 

 

As reported

 

 

Effect of adoption of

 

 

adoption of ASC 606

 

Statement of operations and comprehensive loss

 

September 30, 2018

 

 

ASC 606 (1)

 

 

September 30, 2018

 

Research and development revenue

 

$

2,031

 

 

$

133

 

 

$

2,164

 

Total revenue

 

 

6,752

 

 

 

133

 

 

 

6,885

 

Net loss

 

$

5,244

 

 

$

133

 

 

$

5,111

 

Net loss per share

 

$

0.19

 

 

$

0.00

 

 

$

0.19

 

 

(1)

The adoption of ASC 606 resulted in a reduction in revenues recognized in the three months ended September 30, 2018. This impact represents the amount of aggregate revenue that would have been recognized during the three months ended September 30, 2018 under Previous Guidance.

 

The impact of adoption on the Company’s Condensed Consolidated Statement of Operations and Comprehensive Loss for the nine months ended September 30, 2018 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Balance without

 

 

 

As reported

 

 

Effect of adoption of

 

 

adoption of ASC 606

 

Statement of operations and comprehensive loss

 

September 30, 2018

 

 

ASC 606 (1)

 

 

September 30, 2018

 

Research and development revenue

 

$

3,206

 

 

$

54

 

 

$

3,260

 

Total revenue

 

 

8,601

 

 

 

54

 

 

 

8,655

 

Net loss

 

$

23,653

 

 

$

54

 

 

$

23,599

 

Net loss per share

 

$

0.87

 

 

$

0.00

 

 

$

0.87

 

 

 

(1)

The adoption of ASC 606 resulted in a reduction in revenues recognized in the nine months ended September 30, 2018. This impact represents the amount of aggregate revenue that would have been recognized during the nine months ended September 30, 2018 under Previous Guidance.

The impact of adoption on the Company’s Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2018 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Balance without

 

 

 

As reported

 

 

Effect of adoption of

 

 

adoption of ASC 606

 

Statement of cash flows

 

September 30, 2018

 

 

ASC 606 (1)

 

 

September 30, 2018

 

Net loss

 

$

23,653

 

 

$

54

 

 

$

23,599

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

 

(4,313

)

 

 

(54

)

 

 

(4,367

)

Net cash used in operating activities

 

$

(23,859

)

 

$

 

 

$

(23,859

)

 

(1)

The adoption of ASC 606 resulted in a decrease of net loss and an increase in unbilled revenue that is included in other current assets.

13


 

Contract Assets and Liabilities

Changes in the Company’s contract assets and liabilities under Topic 606 were as follows (in thousands):

 

 

 

September 30, 2018

 

December 31, 2017 (1)

 

Contract Assets

 

 

 

 

 

 

 

Unbilled revenue

 

$

 

$

 

Contract Liabilities

 

 

 

 

 

 

 

Deferred revenue

 

$

33,023

 

$

1,092

 

 

(1)

December 31, 2017 balances prior to the impact related to the modified retrospective adoption of ASC 606. During the nine months ended September 30, 2018, the Company recorded $836,000 in research and development revenue that was previously included in deferred revenue at December 31, 2017. The main reason for the increase in deferred revenue during the nine months ended September 30, 2018, is the Takeda Development and License Agreement entered into during September 2018, and the increased consideration under the Takeda Individual Project Agreement.

The performance obligations are expected to be fulfilled, and revenue fully recognized, as services are rendered.  The aggregate amount of the contract price of the Company’s collaborative agreements allocated to performance obligations not yet satisfied is $33.6 million. During the three and nine months ended September 30, 2018, the Company recorded a cumulative catch-up adjustment to revenue of $180,000, respectively, related to a change in an estimate of the transaction price of the Takeda Individual Project Agreement.

As of September 30, 2018, the Company had receivables from customers of $31.4 million, and as of December 31, 2017, the Company had no receivables from customers.

Related Party Collaboration Agreement - Takeda Pharmaceuticals, Inc.

Takeda Collaboration Agreement

In October 2016, Private Molecular entered into a collaboration and option agreement (the “Takeda Collaboration Agreement”) with Millennium Pharmaceuticals, Inc., a wholly owned subsidiary of Takeda (“Takeda”), to discover and develop CD38-targeting engineered toxin bodies (“ETBs”), which includes MT-4019 for evaluation by Takeda. Under the terms of the Takeda Collaboration Agreement, Molecular is responsible for providing to Takeda (i) new ETBs generated using Takeda’s proprietary fully human antibodies targeting CD38 and (ii) MT-4019 for in vitro and in vivo pharmacological and anti-tumor efficacy evaluations. Private Molecular granted Takeda (1) a background intellectual property (“IP”) license during the term of the Takeda Collaboration Agreement, and (2) an exclusive option during the term of the Takeda Collaboration Agreement and for a period of thirty days thereafter, to negotiate and obtain an exclusive worldwide license to develop and commercialize any ETB that may result from this collaboration, including MT-4019.

The Company has received payments of $2.0 million in technology access fees and cost reimbursement associated with the Company’s performance obligations under the agreement.

The Company determined that the promised goods and services under the Takeda Collaboration Agreement were the background IP license, as well as the research and development services. The Company determined that there was one performance obligation, since the background IP and manufacturing were not distinct from the research and development services. Revenues are recognized over the period that the research and development services occur. The Company also concluded that, since the option for the exclusive license is deemed to be at fair value that the option does not provide the customer with a material right, and should be accounted for if and when the option is exercised. All research and development services were performed as of September 30, 2018.  

During the three months ended September 30, 2018 and 2017, the Company recorded research and development revenue from Takeda of $0 and $648,000, respectively, under the Takeda Collaboration Agreement. During the nine months ended September 30, 2018 and September 30, 2017, the Company recorded research and development revenue from Takeda of $92,000 and $1.9 million, respectively, under the Takeda Collaboration Agreement. This revenue is deemed to be revenue from a related party (as discussed further in Note 5 “Related Party Transactions”).

14


 

Takeda Individual Project Agreement

In connection with the Takeda Collaboration Agreement, the Company entered into an Individual Project Agreement (the “Takeda Individual Project Agreement”) with Takeda in June 2018, that was subsequently amended in July 2018.  Under the Takeda Individual Project Agreement, the Company is responsible to perform certain research and development services relating to Chemistry, Manufacturing, and Controls (“CMC”) work for three potential lead ETBs targeting CD38.  In consideration of these services, the Company will receive up to $2.2 million in compensation that includes an increase in transaction consideration of $1.1 million as a result of the amendment to the Takeda Individual Project Agreement in July 2018.   

During the three and nine months ended September 30, 2018, the Company recognized research and development revenue from Takeda of $1.2 million and $1.9 million, respectively, under the Takeda Individual Project Agreement. No revenue was recognized during the three and nine months ended September 30, 2017 since the agreement was not in place. As of September 30, 2018, $1.2 million was due from Takeda under the Development and License Agreement.

Takeda Development and License Agreement

On September 18, 2018, the Company entered into a Development and License Agreement with Takeda (“Takeda Development and License Agreement”) for the development and commercialization of products incorporating or comprised of one or more CD38 SLT-A fusion proteins (“Licensed Products”) for the treatment of patients with diseases such as multiple myeloma.

Pursuant the Takeda Development and License Agreement Takeda made an upfront payment of $30.0 million to the Company in October 2018.

The Takeda Development and License Agreement also provides for development costs to be shared equally between the Company and Takeda during the Early Stage Development Period. The Company has an option to opt into co-development after the Early Stage Development, that would make the Company eligible to potentially receive higher milestone payments and a higher royalty percentage.

In addition to the upfront fee, if the Company exercises its co-development option and funds its share of development costs, it is eligible to receive pre-clinical and clinical development milestone payments of up to $307.5 million, upon the achievement of certain development milestones and regulatory approvals; and sales milestone payments of up to $325.0 million, upon the achievement of certain sales milestone events. If the Company does not exercise its co-development option, it is eligible to receive development milestone payments of up to $162.5 million upon the achievement of certain development milestones and regulatory approvals; and sales milestone payments of up to $175.0 million upon the achievement of certain sales milestone events. The Company will also be entitled to receive tiered royalties, subject to certain reductions, as percentages of annual aggregate net sales, if any, of Licensed Products. The royalty percentages would range from low double-digits to low twenties if the Company exercises its option to co-develop, and from high-single digits to low teens if the Company does not exercise its option to co-develop.

The Company identified one performance obligation at the inception of the Takeda Development and License Agreement, the research and development services for the CD38 ETBs, including manufacturing. The Company determined that research, development and commercialization license and the participation in the committee meetings are not distinct from the research and development services and therefore those promised services were combined into one combined performance obligation.

The total transaction price of $29.3 million, consisting of the (1) $30.0 million upfront payment, (2) a $10.0 million development milestone payment that is deemed probable of being achieved, (3) minus $10.7 million in expected co-share payment payable to Takeda during Early Stage Development. The expected co-share payment is considered variable consideration, and the Company applied a constraint using the expected value method. Significant judgement was involved in determining transaction consideration, including the determination of the variable consideration, including the constraint on consideration.  

The Company determined that the initial $10.0 million potential development milestone payment under the Development and License Agreement is probable of being achieved. Therefore, this payment was included in the transaction consideration. As of September 30, 2018, the other potential development milestones and sales milestones are not currently deemed probable of being achieved, as they are dependent on factors outside the Companys control.  Therefore, these future development milestones and sales-based milestone payments have been fully constrained and are not included in the transaction price as of September 30, 2018.

The Company recognizes revenue using a cost-based input measure. In applying the cost-based input method of revenue recognition, the Company used actual costs incurred relative to budgeted costs expected to be incurred for the combined performance obligation. These costs consist primarily of internal employee efforts and third-party contract costs. Revenue is recognized based on actual costs incurred as a percentage of total budgeted costs as the Company completes its performance obligation over the estimated service period.

15


 

The Company recognized revenue of $253,000 during the three and nine months ended September 30, 2018, respectively, related to the Takeda Development and License Agreement. During the three and nine months ended September 30, 2017, the Company recorded no research and development revenue under the Development Agreement, since the agreement was not in place. As of September 30, 2018, deferred revenue related to the performance obligation was $28.8 million. As of September 30, 2018, $30.0 million was due from Takeda under the Development and License Agreement, that the Company received in October 2018.

Takeda Multi-Target Agreement

In June 2017, Private Molecular entered into a Multi-Target Collaboration and License Agreement with Takeda (“Takeda Multi-Target Agreement”) in which Molecular agreed to collaborate with Takeda to identify and generate ETBs, against two targets designated by Takeda. Takeda designated certain targets of interest as the focus of the research. Each party granted to the other nonexclusive rights in its intellectual property for purposes of the conduct of the research, and Private Molecular agreed to work exclusively with Takeda with respect to the designated targets.

Under the Takeda Multi-Target Agreement, Takeda has an option during an option period to obtain an exclusive license under the Company’s intellectual property to develop, manufacture, commercialize and otherwise exploit ETBs against the designated targets. The option period for each target ends three months after the completion of the evaluation of such designated target. Under the Takeda Multi-Target Agreement, both parties have the right to terminate the agreement, with a specified notice period.

The Company received an upfront fee of $1.0 million and an additional $2.0 million following the designation of each of the two targets in December 2017. As of September 30, 2018, the Company has received $5.0 million from Takeda pursuant to the Takeda Multi-Target Agreement.

The Company may also receive an additional $25.0 million in aggregate through the exercise of the option to license ETBs. Additionally, the Company may also be entitled to receive clinical development milestone payments of up to approximately $397.0 million, for achievement of development milestones and regulatory approval of collaboration products under the Takeda Development Agreement. The Company may also be entitled to receive commercial milestone payments of up to $150.0 million, for achievement of pre-specified sales milestones related to net sales of all collaboration products under the Takeda Development Agreement. The Company is also entitled to tiered royalty payments of a mid-single to low-double digit percentage of net sales of any licensed ETBs, subject to certain reductions. Finally, the Company is entitled to receive up to $10.0 million in certain contingency fees.

The Takeda Multi-Target Agreement will expire on the expiration of the option period (within three months after the completion of the evaluation of each designated target) for the designated targets if Takeda does not exercise its options, or, following exercise of the option, on the later of the expiration of patent rights claiming the licensed ETB or ten years from first commercial sale of a licensed ETB. The Takeda Multi-Target Agreement may be sooner terminated by Takeda for convenience or upon a material change of control, or by either party for an uncured material breach of the agreement.

The Company evaluated the contract termination clause and concluded that it was a non-substantive termination provision. As such, an initial contract term was defined as the length of the termination notice period, with a deemed renewal option to continue the research and development services over the remainder of the contract term as a material right.

The Company determined that the promised goods and services under the Takeda Multi-Target Agreement were the background IP license, the research and development services, and manufacturing during the initial contract period; and a renewal option to continue the research and development services. The Company determined that there were two performance obligations; research and development services, and the renewal options. Since the background IP and manufacturing were not distinct from the research and development services, they were deemed to be one performance obligation. Transaction consideration was allocated to each of the performance obligation using an estimate of the standalone selling price, and revenues are recognized over the period that the research and development services occur. The Company also concluded that, since the option for the exclusive license is deemed to be at fair value that the option does not provide the customer with a material right, and should be accounted for if and when the option is exercised.

In connection with the execution of the Takeda Multi-Target Agreement, Takeda also entered into a stock purchase agreement with the Company (“Takeda Stock Purchase Agreement”), pursuant to which Takeda purchased approximately $20.0 million of shares of the Company’s common stock following the Merger. See Note 10, “Stockholders’ Equity” for further details. Since the Takeda Stock Purchase Agreement was dependent on contingent events, the Company determined that the transaction was constrained, and not a performance obligation under the Takeda Multi-Target Agreement. The Company accounted for the stock purchase agreement in August 2017, once the constraints were removed, and recorded the $20.0 million in equity upon the settlement of the stock purchase transaction.

16


 

During the three and nine months ended September 30, 2018, the Company recorded $415,000 and $755,000, respectively, in research and development revenue under the Multi-Target Takeda Agreement. During the three and nine months ended September 30, 2017, the Company recorded no research and development revenue under the Multi-Target Takeda Agreement, since the agreement had not been entered into.

Other Collaboration Agreements

In September 2016, Private Molecular entered into a collaboration agreement with an undisclosed pharmaceutical company (“Other Collaboration Agreement”) to generate ETBs, for evaluation for consideration of $500,000. Under the terms of the Other Collaboration Agreement, Private Molecular was responsible for providing to the customer (i) new ETBs generated using the customer’s materials and (ii) ETB study molecules for testing and evaluation.  

The customer also exercised an option under the Other Collaboration Agreement in November 2017, for the manufacture of additional quantities of ETB molecules, for additional consideration of $250,000, upon delivery and acceptance of the additional materials.

The Company determined that at the inception of the agreement, the promised goods and services under the Other Collaboration Agreement were, the research and development services, and manufacturing. The Company determined that there was one performance obligation, since the manufacturing was not distinct from the research and development services. Revenues are recognized over the period that the research and development services occur using an input method to measure progress towards satisfaction of the performance obligation. The option for additional ETB molecules was determined to be at fair value and was accounted for once the option was exercised. All research and development services were performed as of September 30, 2018.

During the three months ended September 30, 2018 and 2017, the Company recorded $117,000 and zero in research and development revenue under the Other Collaboration Agreement, respectively. During the nine months ended September 30, 2018 and 2017, the Company recorded $196,000 and $500,000 in research and development revenue under the Other Collaboration Agreement, respectively.

 

Grant Agreements

The Company receives funds from a state grant funding program, which is a conditional cost reimbursement grant, and revenue is recognized as allowable costs are paid.

In November 2011, Private Molecular was awarded a $10.6 million product development grant from the Cancer Prevention Research Institute of Texas (“CPRIT”) for its CD20-targeting ETB MT-3724. To date, Private Molecular has received $9.5 million in grant funds.

On September 18, 2018, the Company entered into a Cancer Research Grant Contract (the “CPRIT Agreement”) with CPRIT, in connection with a grant of approximately $15.2 million awarded by CPRIT to the Company to fund research of a cancer therapy involving a CD38 targeting ETB. Pursuant to the CPRIT Agreement, the Company may also use such funds to develop a replacement CD38 targeting ETB, with or without a partner.

During the three months ended September 30, 2018 and 2017, the Company recorded $4.7 million and zero in grant revenue under these awards, respectively. During the nine months ended September 30, 2018 and 2017, the Company recorded $5.4 million and $167,000 in grant revenue under these awards, respectively. Amounts collected in excess of revenue recognized are recorded as deferred revenue.

NOTE 5 — RELATED PARTY TRANSACTIONS

Takeda Collaboration and Stock Purchase

In connection with and immediately following the transactions consummated pursuant to the Takeda Stock Purchase Agreement described in Note 4, “Research and Development Agreements”, Takeda became a related party. Refer to Note 4, “Research and Development Agreements” for more details about the Takeda Development and License Agreement, Takeda Collaboration Agreement, Takeda Individual Project Agreement, and the Takeda Multi-Target Agreement. Refer to Note 10, “Stockholders’ Equity”, for more detail about the Takeda Stock Purchase Agreement.

17


 

Private Placement

Following the Private Placement described in Note 10, “Stockholders’ Equity” below, Longitude Venture Partner III, L.P. (“Longitude”) and CDK Associates, L.L.C. (“CDK”) became related parties, with Longitude and CDK beneficially owning 15.3% and 4.99% of the Company, respectively, following investments of $20.0 million and $7.0 million, respectively. The ownership of CDK is subject to a 4.99% ownership blocker, pursuant to which shares of the Company’s common stock may not be issued pursuant to the warrant held by CDK to the extent that the issuance of the common stock subject to such issuance would cause CDK to beneficially own more than 4.99% of the Company’s outstanding common stock. Scott Morenstein, a director of the Company is a Managing Director of Caxton Alternative Management LP, the investment manager of CDK. David Hirsch, a director of the Company, is a member of Longitude Capital Partners III, LLC, the general partner of Longitude. Furthermore, Kevin Lalande, a director of the Company is affiliated with Sante Health Ventures I, L.P. and Sante Heath Ventures Annex Fund, L.P., which are both stockholders of the Company and were investors in the Private Placement. Finally, Excel Venture Fund II, L.P., a stockholder of the Company beneficially owning greater than 5% of the Company, invested approximately $333,000 in the Private Placement.

Public Offering

Following the Public Offering described in Note 10, “Stockholders’ Equity” below, BVF Partners L.P. (“BVF”) became a related party, owning 7.6% of the Company, following investments of $15.3 million.

BVF is not affiliated with any director or executive officer of the Company. Longitude Venture Partners III, L.P. and CDK, current stockholders of the Company, purchased 365,000 and 545,454 shares of common stock, respectively, in the Public Offering at the public offering price.  Scott Morenstein, a director of the Company is a Managing Director of Caxton Alternative Management LP, the investment manager of CDK. David Hirsch, a director of the Company, is a member of Longitude Capital Partners III, LLC, the general partner of Longitude.

 

 

NOTE 6 —MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS

The Company accounts for its marketable securities in accordance with ASC 820 “Fair Value Measurements and Disclosures.” ASC 820 defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. For Level 2 securities that have market prices from multiples sources, a “consensus price” or a weighted average price for each of these securities can be derived from a distribution-curve-based algorithm which includes market prices obtained from a variety of industrial standard data providers (e.g. Bloomberg), security master files from large financial institutions, and other third-party sources. Level 2 securities with short maturities and infrequent secondary market trades are typically priced using mathematical calculations adjusted for observable inputs when available.

The following table sets forth the Company’s financial assets (cash equivalents and marketable securities) at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

Fair Value as of September 30, 2018

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

$

76,373

 

 

$

76,373

 

 

$

 

 

$

 

18


 

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

Fair Value as of December 31, 2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

$

51,751

 

 

$

51,751

 

 

$

 

 

$

 

 

The Company invests in highly-liquid, investment-grade securities. The following is a summary of the Company’s available-for-sale securities at September 30, 2018 and December 31, 2017 (in thousands):

 

As of September 30, 2018

Cost Basis

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

Money market funds

$

76,373

 

 

$

 

 

$

 

 

$

76,373

 

Less cash equivalents

 

(76,373

)

 

 

 

 

 

 

 

 

(76,373

)

Total marketable securities

$

 

 

$

 

 

$

 

 

$

 

 

As of December 31, 2017

Cost Basis

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

Money market funds

$

51,751

 

 

$

 

 

$

 

 

$

51,751

 

Less cash equivalents

 

(51,751

)

 

 

 

 

 

 

 

 

(51,751

)

Total marketable securities

$

 

 

$

 

 

$

 

 

$

 

 

There were no realized gains or losses in the three and nine months ended September 30, 2018 and 2017, respectively.  

 

The following table sets forth the Company’s financial liabilities measured at fair value on a recurring basis as of the date indicated below:

 

 

 

 

 

Basis of Fair Value Measurements

 

 

Fair Value as of September 30, 2018

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

2017 Warrants

 

38

 

 

 

 

 

 

 

 

 

38

 

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

Fair Value as of December 31, 2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

2017 Warrants

 

954

 

 

 

 

 

 

 

 

 

954

 

The Company determined the fair value of the liability associated with its 2017 Warrants to purchase in aggregate 377,273 shares of outstanding common stock using a Black-Scholes Model. See detailed discussion in Note 10, “Stockholders’ Equity”.

As of September 30, 2018 and December 31, 2017 the fair value of the long-term debt, payable in installments through years ended 2022 and 2019, respectively, approximated its carrying value of $3.2 million and $3.5 million, respectively, because it is carried at a market observable interest rate, which are considered Level 2.

 

NOTE 7 — BALANCE SHEET COMPONENTS

Accrued liabilities were comprised of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Accrued liabilities:

 

 

 

 

 

 

 

 

General and administrative

 

$

848

 

 

$

374

 

Clinical trial related costs

 

 

1,441

 

 

 

702

 

Non-clinical research and manufacturing operations

 

 

3,078

 

 

 

435

 

Payroll related

 

 

1,204

 

 

 

1,149

 

Other accrued expenses

 

 

24

 

 

 

30

 

Total accrued liabilities

 

$

6,595

 

 

$

2,690

 

19


 

Deferred revenue was comprised of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Deferred revenue:

 

 

 

 

 

 

 

 

Grant agreements

 

$

377

 

 

$

1,673

 

Research and development agreements

 

 

33,023