mtem-10q_20190930.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, 2019

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.001 Par Value Per Share

 

MTEM

 

The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

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

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

On November 4, 2019, there were 36,968,510 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.

  

Financial Statements

 

4

 

  

Condensed Consolidated Balance Sheets (Unaudited)

 

4

 

  

Condensed Consolidated Statements of Operations (Unaudited)

 

5

 

 

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

 

6

 

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)

 

7

 

  

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

8

 

  

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

9

Item 2.

  

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

 

24

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

 

73

Item 3.

  

Defaults Upon Senior Securities

 

73

Item 4.

  

Mine Safety Disclosures

 

73

Item 5.

  

Other Information

 

74

Item 6.

  

Exhibits

 

75

SIGNATURES

 

76

 

 

 

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,

2019 (unaudited)

 

 

December 31,

2018

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

15,268

 

 

$

87,721

 

Marketable securities, current

 

36,147

 

 

 

10,234

 

Prepaid expenses

 

2,340

 

 

 

2,244

 

Grants revenue receivable

 

5,591

 

 

 

4,329

 

Accounts receivable from related party

 

 

 

 

240

 

In-process research and development - held for sale

 

4,500

 

 

 

26,623

 

Other current assets

 

300

 

 

 

95

 

Total current assets

 

64,146

 

 

 

131,486

 

Operating lease right-of-use assets, non-current

 

10,397

 

 

 

 

Property and equipment, net

 

13,884

 

 

 

6,851

 

Other assets

 

4,735

 

 

 

1,821

 

Total assets

$

93,162

 

 

$

140,158

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,414

 

 

$

780

 

Accrued liabilities

 

9,105

 

 

 

5,357

 

Deferred revenue, current

 

11,956

 

 

 

26,231

 

Other current liabilities

 

1,623

 

 

 

141

 

Total current liabilities

 

24,098

 

 

 

32,509

 

Deferred revenue, non-current

 

1,236

 

 

 

2,670

 

Long-term debt, non-current, net

 

3,001

 

 

 

3,254

 

Operating lease liabilities, non-current

 

10,573

 

 

 

 

Other liabilities

 

1,238

 

 

 

819

 

Total liabilities

 

40,146

 

 

 

39,252

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, $0.001 par value:

 

 

 

 

 

 

 

Authorized: 150,000,000 shares; issued and outstanding: 36,954,510 shares at September 30, 2019 and 36,736,012 shares at December 31, 2018

 

37

 

 

 

37

 

Additional paid-in capital

 

201,203

 

 

 

195,573

 

Accumulated other comprehensive income

 

20

 

 

 

 

Accumulated deficit

 

(148,244

)

 

 

(94,704

)

Total stockholders’ equity

 

53,016

 

 

 

100,906

 

Total liabilities and stockholders’ equity

$

93,162

 

 

$

140,158

 

 

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

4


 

Molecular Templates, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Research and development revenue - from related party

$

2,903

 

 

$

1,914

 

 

$

14,527

 

 

$

3,009

 

Research and development revenue - other

 

284

 

 

 

117

 

 

 

284

 

 

 

197

 

Grant revenue

 

431

 

 

 

4,721

 

 

 

1,262

 

 

 

5,395

 

Total revenue

 

3,618

 

 

 

6,752

 

 

 

16,073

 

 

 

8,601

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

15,249

 

 

 

8,290

 

 

 

33,946

 

 

 

22,640

 

General and administrative

 

4,509

 

 

 

3,538

 

 

 

14,049

 

 

 

10,165

 

Loss on impairment of in-process research and development

 

22,123

 

 

 

 

 

 

22,123

 

 

 

 

Total operating expenses

 

41,881

 

 

 

11,828

 

 

 

70,118

 

 

 

32,805

 

Loss from operations

 

38,263

 

 

 

5,076

 

 

 

54,045

 

 

 

24,204

 

Interest and other income, net

 

396

 

 

 

107

 

 

 

1,449

 

 

 

307

 

Interest and other expense, net

 

(353

)

 

 

(279

)

 

 

(947

)

 

 

(672

)

Change in fair value of warrant liabilities

 

1

 

 

 

4

 

 

 

3

 

 

 

916

 

Net loss attributable to common shareholders

$

38,219

 

 

$

5,244

 

 

$

53,540

 

 

$

23,653

 

Net loss per share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

$

1.03

 

 

$

0.19

 

 

$

1.45

 

 

$

0.87

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

36,937,912

 

 

 

27,680,307

 

 

 

36,832,966

 

 

 

27,246,667

 

 

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

5


 

Molecular Templates, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, except share and per share data)

(unaudited)

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss

$

38,219

 

 

$

5,244

 

 

$

53,540

 

 

$

23,653

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(5

)

 

 

 

 

 

20

 

 

 

 

Comprehensive loss

$

38,224

 

 

$

5,244

 

 

$

53,520

 

 

$

23,653

 

 

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

6


 

MOLECULAR TEMPLATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except share data)

(unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

Total Stockholders' Equity (Deficit), beginning balances

$

89,260

 

 

$

62,177

 

 

$

100,906

 

 

$

77,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

37

 

 

 

28

 

 

 

37

 

 

 

27

 

 

Issuance of common stock pursuant to stock plans

 

 

 

 

 

 

 

 

 

 

1

 

 

Issuance of common stock pursuant to Public offering

 

 

 

 

8

 

 

 

 

 

 

8

 

 

Ending balance

 

37

 

 

 

36

 

 

 

37

 

 

 

36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional Paid-In Capital

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

199,223

 

 

 

144,975

 

 

 

195,573

 

 

 

141,733

 

 

Issuance of common stock pursuant to stock plans

 

453

 

 

 

2

 

 

 

1,300

 

 

 

157

 

 

Issuance of warrant to purchase common stock in relation to term loan facility

 

 

 

 

 

 

 

 

 

 

1,522

 

 

Stock-based compensation

 

1,527

 

 

 

1,197

 

 

 

4,330

 

 

 

2,762

 

 

Issuance of common stock pursuant to Public offering

 

 

 

 

48,052

 

 

 

 

 

 

48,052

 

 

Ending balance

 

201,203

 

 

 

194,226

 

 

 

201,203

 

 

 

194,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

25

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income

 

(5

)

 

 

 

 

 

20

 

 

 

 

 

Ending balance

 

20

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

(110,025

)

 

 

(82,826

)

 

 

(94,704

)

 

 

(64,471

)

 

Net loss

 

(38,219

)

 

 

(5,244

)

 

 

(53,540

)

 

 

(23,653

)

 

Cumulative-effect adjustment upon adoption of new accounting standards

 

 

 

 

 

 

 

 

 

 

54

 

 

Ending balance

 

(148,244

)

 

 

(88,070

)

 

 

(148,244

)

 

 

(88,070

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Stockholders' Equity

$

53,016

 

 

$

106,192

 

 

$

53,016

 

 

$

106,192

 

 

 

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

7


 

Molecular Templates, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Nine Months Ended

September 30,

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

53,540

 

 

$

23,653

 

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

 

 

 

 

 

 

 

Depreciation, amortization and other

 

628

 

 

 

569

 

Stock-based compensation expense

 

4,330

 

 

 

2,762

 

Amortization of debt discount and accretion related to debt

 

347

 

 

 

219

 

Change in common stock warrant fair value

 

(3

)

 

 

(916

)

Accretion of asset retirement obligations

 

48

 

 

 

28

 

Capitalized interest

 

 

 

 

(125

)

Loss on extinguishment of debt

 

 

 

 

115

 

Loss on impairment of long-lived assets

 

22,139

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses

 

(96

)

 

 

(1,116

)

Accounts receivable from related party

 

240

 

 

 

(31,163

)

Grants revenue receivable

 

(1,262

)

 

 

(4,100

)

Other assets

 

(145

)

 

 

(156

)

Operating lease right-of-use assets, non-current

 

1,077

 

 

 

 

Accounts payable

 

524

 

 

 

(906

)

Accrued liabilities

 

2,661

 

 

 

3,733

 

Operating lease liabilities

 

(511

)

 

 

 

Other liabilities

 

 

 

 

215

 

Deferred revenue

 

(15,709

)

 

 

30,635

 

Net cash used in operating activities

 

(39,272

)

 

 

(23,859

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(6,329

)

 

 

(5,421

)

Purchase of marketable securities

 

(73,758

)

 

 

 

Sales of marketable securities

 

48,583

 

 

 

 

Net cash used in investing activities

 

(31,504

)

 

 

(5,421

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments of capital and finance lease obligations

 

23

 

 

 

(36

)

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

 

 

 

 

4,537

 

Repayment of long-term debt

 

 

 

 

(3,605

)

Proceeds from stock option exercises

 

1,300

 

 

 

157

 

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

 

 

 

 

48,061

 

Net cash provided by financing activities

 

1,323

 

 

 

49,114

 

Net (decrease) increase in cash, cash equivalents, and restricted cash

 

(69,453

)

 

 

19,834

 

Cash, cash equivalents and restricted cash, beginning of period

 

87,721

 

 

 

58,910

 

Cash, cash equivalents and restricted cash, end of period

$

18,268

 

 

$

78,744

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

Cash paid for interest

$

514

 

 

$

286

 

Non-Cash Investing and Financing Activities

 

 

 

 

 

 

 

Fixed asset additions in accounts payable and accrued expenses

$

1,197

 

 

$

192

 

 

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

 

 

8


 

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”) 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. The Company operates its business as a single segment, as defined by U.S. generally accepted accounting principles (“U.S. GAAP”).

Basis of Presentation

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 condensed consolidated balance sheet at December 31, 2018 included herein was derived from the audited financial statements at that date, but includes a reclassification of $4.3 million from Other current assets to Grants revenue receivable in order to conform to current period presentation. Additionally, the condensed balance sheet also includes a reclassification of $26.6 million from In-process research and development to In-process research and development - held for sale in order to conform to current period presentation.

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, 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2019.

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.

Liquidity

At September 30, 2019, we had cash, cash equivalents, and marketable securities of $51.4 million. We have devoted substantially all of our resources to developing our ETB candidates and platform technology, building our intellectual property portfolio, developing our supply chain, conducting business planning, raising capital and providing for general and administrative support for these operations. Based on our current research and development plans, we expect that our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditure requirements through 2020.

Recently Adopted Accounting Pronouncements 

 

Leases

 

In February 2016, the Financial Accounting Standards Board ("FASB") established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which supersedes ASC 840, Leases, and requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. Topic 842, as amended, (the "new lease standard") establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the consolidated balance sheets for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statements of operation.

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The Company adopted the new lease standard on January 1, 2019 and used the effective date as the date of initial adoption. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for earlier periods.

 

The Company has completed a qualitative and quantitative assessment of its lease portfolio, in which the standard had a material impact on the condensed consolidated balance sheets but did not have an impact on the condensed consolidated statement of operations. Upon adoption, the Company recognized lease liabilities of approximately $4.7 million based on the present value of the remaining minimum rental payments under current leasing standards for our existing operating leases. The corresponding ROU assets of $4.2 million recognized upon adoption are net of deferred rent.

The new standard provides a number of optional practical expedients in transition. The Company elected the practical expedients, which permits lessees not to reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company. The new standard also provides practical expedients for an entity's ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, ROU assets or lease liabilities will not be recognized, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient to not separate lease and non-lease components for office leases.

Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2019, 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, 2018, other than lease accounting as noted below.

 

Lease Accounting

At inception of a contract, the Company determines whether an arrangement is or contains a lease. For all leases, the Company determines the classification as either operating leases or finance leases. Operating leases are included in Operating lease right-of-use assets and Operating lease liabilities in our condensed consolidated balance sheets.

Lease recognition occurs at the commencement date and lease liability amounts are based on the present value of lease payments over the lease term. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. If a lease does not provide information to determine an implicit interest rate, the Company uses our incremental borrowing rate in determining the present value of lease payments. ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments under the lease. ROU assets also include any lease payments made prior to the commencement date and exclude lease incentives received. Operating lease expense is recognized on a straight-line basis over the lease term. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Lease agreements with both lease and non-lease components, are generally accounted for together as a single lease component.

 

Cash and Cash Equivalents

The Company considers temporary investments with original maturities of three months or less from date of purchase to be cash equivalents. Restricted cash is recorded in other assets, based on when the restrictions expire. Other assets include $3.0 million of restricted cash at September 30, 2019.

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”). Takeda accounted for approximately 80% and 28% of total revenues for the three months ended September 30, 2019 and 2018, respectively. Takeda accounted for approximately 90% and 35% of total revenues for the nine months ended September 30, 2019 and 2018,

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respectively. There were no accounts receivable due from Takeda at September 30, 2019. There were $0.2 million in accounts receivable due from Takeda at December 31, 2018.

The Cancer Prevention Research Institute of Texas (“CPRIT”) accounted for approximately 12% and 70% of total revenues for the three months ended September 30, 2019 and 2018, respectively. CPRIT accounted for approximately 8% and 63% of total revenues for the nine months ended September 30, 2019 and 2018, respectively. There were $5.6 million in accounts receivable due from CPRIT at September 30, 2019. There were $4.3 million in accounts receivable due from CPRIT at December 31, 2018. See also Note 3, Research and Development Agreements, regarding the collaboration and grant agreements.

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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which amends the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the incurred-loss model with an expected-loss model. Accordingly, these financial assets will be presented at the net amount expected to be collected. This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than by reducing the carrying amount under the current, other-than-temporary-impairment model. The new standard is effective for interim and annual periods beginning on January 1, 2020, but may be adopted earlier. With certain exceptions, adjustments are to be applied using a modified-retrospective approach by reflecting adjustments through a cumulative-effect impact on retained earnings at the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC Topic 606 when the counterparty is a customer. In addition, Topic 808 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. This guidance will be effective for the Company beginning January 1, 2020. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

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. More specifically, at September 30, 2019 and September 30, 2018, stock options, and warrants totaling approximately 8,121,000 and 7,723,000 shares, respectively, were excluded from the computation of diluted net loss per share as their effect would have been anti-dilutive.

NOTE 3 — 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,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Japan

 

$

2,903

 

 

$

1,914

 

 

$

14,527

 

 

$

3,009

 

United States

 

 

284

 

 

 

117

 

 

 

284

 

 

 

197

 

Total research and development revenue

 

$

3,187

 

 

$

2,031

 

 

$

14,811

 

 

$

3,206

 

 

 

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Related Party Collaboration Agreement - Takeda Pharmaceuticals, Inc.

Research and development revenue from related party relates to revenue from research and development agreements with Takeda Pharmaceuticals, Inc (“Takeda”) and were as follows (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Takeda Collaboration Agreement

$

 

 

$

 

 

$

 

 

$

92

 

Takeda Individual Project Agreement

 

 

 

 

1,246

 

 

 

54

 

 

 

1,909

 

Takeda Development and License Agreement

 

2,581

 

 

 

253

 

 

 

13,707

 

 

 

253

 

Takeda Multi-Target Agreement

 

322

 

 

 

415

 

 

 

766

 

 

 

755

 

Total research and development revenue

$

2,903

 

 

$

1,914

 

 

$

14,527

 

 

$

3,009

 

 

Deferred revenue and accounts receivable balances from the research and development agreements with Takeda were as follows (in thousands):

 

 

 

September 30, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Unbilled revenue

 

$

 

 

$

240

 

Liabilities

 

 

 

 

 

 

 

 

Deferred revenue, current

 

$

11,735

 

 

$

26,231

 

Deferred revenue, non-current

 

 

1,236

 

 

 

2,670

 

Total deferred revenue

 

$

12,971

 

 

$

28,901

 

 

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.

The Company, at its discretion, may choose to exercise its co-development option, which requires the Company to fund its share of development costs. If exercised, the Company 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 exercised the co-development option in July 2019 and may elect to end its co-development by providing Takeda with written notice of termination of the co-development. In the event the Company elects to end the co-development, the Company will be subject to reduced payments and royalty rates as set forth more specifically in the Takeda Development and License Agreement.

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 consists of (1) the $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, as defined in the Takeda Development and License Agreement. The expected co-share payment is considered variable consideration, and the Company applied a constraint using the expected value method. Significant

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judgement was involved in determining transaction consideration, including the determination of the variable consideration, including the constraint on consideration.  

At September 30, 2019, 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 at September 30, 2019.

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.

Concurrent with the exercise of the Company’s co-development option in July 2019, the agreed upon collaboration budget was increased to cover additional research and development activities whereby both parties will continue to cost share.   The Company evaluated the additional research and development services and concluded these services were distinct from services currently being provided and represented a cost sharing arrangement between the Company and Takeda.  As such, research and development expenses for this performance obligation will be expensed as incurred.  Any cost sharing reimbursements received from Takeda will be recorded as collaboration revenue, consistent with the Company’s accounting policy for collaboration agreements.

For the three months ended September 30, 2019 and 2018, the Company recognized research and development revenue under the Takeda Development and License Agreement of $2.6 million and $0.3 million, respectively. For the nine months ended September 30, 2019 and 2018, the Company recognized research and development revenue under the Takeda Development and License Agreement of $13.7 million and $0.3 million, respectively. This revenue is deemed to be revenue from a related party (as discussed further in Note 4, Related Party Transactions). At September 30, 2019 and December 31, 2018, total deferred revenue related to the performance obligation was $9.7 million and $24.8 million, respectively.

Takeda Multi-Target Agreement

In June 2017, The Company entered into a Multi-Target Collaboration and License Agreement with Takeda (the “Takeda Multi-Target Agreement”) in which the Company 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 the Company 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.

At April 2018, the Company received cumulative payments of $5.0 million from Takeda pursuant to the Takeda Multi-Target Agreement. The Company may receive additional payments from the following:

 

 

$25.0 million in aggregate through the exercise of the option to license ETBs.

 

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 Multi-Target Agreement.

 

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 Multi-Target Agreement.

 

Tiered royalty payments of a mid-single to low-double digit percentage of net sales of any licensed ETBs, subject to certain reductions.

 

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 terminated sooner by Takeda for convenience or upon a material change of control, or by either party for an uncured material breach of the agreement. Under the Takeda Multi-Target Agreement, both parties have the right to terminate the agreement, with a specified notice period.

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.

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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, 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 obligations 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, the option does not provide the customer with a material right and should be accounted for if and when the option is exercised.

During the three months ended September 30, 2019 and 2018, the Company recognized $0.3 million and $0.4 million, respectively, in research and development revenue under the Takeda Multi-Target Agreement. During the nine months ended September 30, 2019 and 2018, the Company recognized $0.8 million, for both periods, in research and development revenue under the Takeda Multi-Target Agreement. This revenue is deemed to be revenue from a related party (as discussed further in Note 4, Related Party Transactions). At September 30, 2019 and December 31, 2018, deferred revenue related to the performance obligation was $3.3 million and $4.1 million, respectively.

Takeda Collaboration Agreement

In October 2016, the Company entered into a collaboration and option agreement (the “Takeda Collaboration Agreement”) with Millennium Pharmaceuticals, Inc., a wholly owned subsidiary of Takeda, to discover and develop CD38-targeting engineered toxin bodies (“ETBs”), which includes TAK-169 for evaluation by Takeda. All research and development services under the Takeda Collaboration Agreement were performed at December 31, 2018.  

The Company recognized no research and development revenue under the Takeda Collaboration Agreement for the three and nine months ended September 30, 2019. The Company recognized no revenue for the three months ended September 30, 2018. The Company recognized revenue of $0.1 million for the nine months ended September 30, 2018. This revenue is deemed to be revenue from a related party (as discussed further in Note 4, Related Party Transactions).

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.  

All research and development services under the Takeda Collaboration Agreement were performed at March 31, 2019, as such, no associated research and development revenue was recognized for the three months ended September 30, 2019. The Company recognized $1.2 million of research and development revenue for the three months ended September 30, 2018. The Company recognized $0.1 million and $1.9 million of research and development revenue for the nine months ended September 30, 2019 and 2018, respectively.  

Other Collaboration Agreements

In September 2016, the Company entered into a collaboration agreement with an undisclosed pharmaceutical company (“Other Collaboration Agreement”) to generate ETBs and provide the customer (i) new ETBs generated using the customer’s materials and (ii) ETB study molecules for testing and evaluation. The customer exercised an option under the Other Collaboration Agreement for the manufacture of additional quantities of ETB molecules in November 2017.

Under the Other Collaboration Agreement, the Company recognized $0.3 million and $0.1 million of research and development revenue for the three months ended September 30, 2019 and 2018, respectively. Under the Other Collaboration Agreement, the Company recognized $0.3 million and $0.2 million of research and development revenue for the nine months ended September 30, 2019 and 2018, respectively. All research and development services under the Other Collaboration Agreement were performed at December 31, 2018.

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Grant Agreements

In September 2018, the Company entered into a cancer research agreement (“CD38 CPRIT Agreement”) with CPRIT, under which CPRIT awarded a $15.2 million product development grant to fund research of a cancer therapy involving a CD38 targeting ETB. Pursuant to the CD38 CPRIT Agreement, the Company may also use such funds to develop a replacement CD38 targeting ETB, with or without a partner.

In November 2011, the Company entered into a cancer research agreement (“CPRIT Agreement”) with CPRIT under which CPRIT awarded a $10.6 million product development grant for the CD20-targeting ETB MT-3724.

During the three months ended September 30, 2019 and 2018, the Company recognized $0.4 million and $4.7 million, respectively, in grant revenue under these awards. During the nine months ended September 30, 2019 and 2018, the Company recognized $1.3 million and $5.4 million, respectively, in grant revenue under these awards. Qualified expenditures submitted for reimbursement in excess of amounts received are recorded as receivables in Grant revenue receivable. At September 30, 2019 and December 31, 2018, the Company had $5.6 million and $4.3 million, respectively, recorded in Grants revenue receivable.

NOTE 4 — RELATED PARTY TRANSACTIONS

Takeda Collaboration and Stock Purchase

The Company has multiple agreements with Takeda. Takeda’s Vice President and Global Head of Oncology and Neuroscience Business Development, Jonathan Lanfear, is a member of the Company’s Board of Directors. Refer to Note 3, Research and Development Collaboration Agreements, for more details about the agreements between the Company and Takeda.

 

NOTE 5 —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.

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The following table sets forth the Company’s financial assets (cash equivalents and marketable securities) at fair value on a recurring basis (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

September 30, 2019

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

$

14,261

 

 

$

14,261

 

 

$

 

 

$

 

Commercial paper

 

19,841

 

 

 

 

 

 

19,841

 

 

 

 

United States Treasury Bills

 

7,246

 

 

 

 

 

 

7,246

 

 

 

 

United States government-related debt securities

 

7,006

 

 

 

 

 

 

 

7,006

 

 

 

 

 

Corporate bonds

 

2,951

 

 

 

 

 

 

2,951

 

 

 

 

 

Total

$

51,305

 

 

$

14,261

 

 

$

37,044

 

 

$

 

Amounts included in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

15,158

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities, current

 

36,147

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents and marketable securities

$

51,305

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

December 31, 2018

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

$

82,843

 

 

$

82,843

 

 

$

 

 

$

 

Commercial paper

 

12,825

 

 

 

 

 

 

12,825

 

 

 

 

Total

$

95,668

 

 

$

82,843

 

 

$

12,825

 

 

$

 

Amounts included in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

85,434

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities, current

 

10,234

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents and marketable securities

$

95,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company invests in highly-liquid, investment-grade securities. The following is a summary of the Company’s available-for-sale securities (in thousands):

 

 

September 30, 2019

 

Cost Basis

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Maturity

Dates

Cash equivalents - money market funds, commercial paper and corporate bonds

$

15,158

 

 

$

 

 

$

 

 

$

15,158

 

 

9/2019 - 11/2019

Marketable securities, current - commercial paper, Treasury bills and corporate bonds

$

36,127

 

 

$

20

 

 

$

 

 

$

36,147

 

 

10/2019 - 7/2020

 

 

December 31, 2018

 

Cost Basis

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Maturity

Dates

Cash equivalents - money market funds and commercial paper

$

85,434

 

 

$