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 June 30, 2023

☐	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 (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 August 7, 2023, there were 80,612,816 shares of common stock, par value $0.001 per share, of Molecular Templates, Inc. outstanding.

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, 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-6402, MT-8421, MT-0169 and other engineered toxin body (“ETB”) biologic candidates;

●

our utilization of a de-immunized ETB scaffold that has been designed to reduce or eliminate the propensity for innate immunity, including capillary leak syndrome (“CLS”), via de-immunization of the Shiga-like Toxin A subunit (“SLTA”) as well as chemistry, manufacturing, and controls (“CMC”) improvements;

●

the timing and our ability to advance the development of our drug or biologic 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 biologic candidates;

●

our ability to obtain the benefits we anticipate from partnering, collaboration, or supply agreements that we may enter into;

●

our financial condition, including our ability to obtain the funding necessary to advance the development of our drug or biologic candidates, any statements indicating whether or not the closing of the second tranche of our July 2023 private placement will occur, and our ability to continue as a going concern;

●

our ability to comply with the terms of our Contingent Value Rights Agreement pursuant to which our obligations are secured, subject certain limited exceptions, by substantially all of our assets;

●

our ability to maintain the listing of shares of our common stock on the Nasdaq Capital Market;

●

the results of our special meeting at which our stockholders are being asked to approve a reverse stock split of our common stock and any statements about the effect, or potential effect, of this reverse split on the price or trading of our common stock or our ability to maintain the listing of our common stock on the Nasdaq Capital Market;

●

the anticipated progress of our drug or biologic 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 drug or biologic candidates;

●

our ability to establish and maintain intellectual property rights for our drug or biologic candidates;

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Molecular Templates, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)


	June 30, 2023(unaudited)		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	4,952	$	32,190
Marketable securities, current		—		28,859
Prepaid expenses		3,887		3,459
Grants revenue receivable		274		—
Other current assets		2,710		3,790
Total current assets		11,823		68,298
Operating lease right-of-use assets		10,163		11,132
Property and equipment, net		10,158		14,632
Other assets		3,368		3,486
Total assets	$	35,512	$	97,548
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	4,669	$	504
Accrued liabilities		3,510		8,823
Deferred revenue, current		16,409		45,573
Other current liabilities		2,349		2,182
Total current liabilities		26,937		57,082
Deferred revenue, long-term		19		5,904
Long-term debt, net of current portion		—		36,168
Operating lease liabilities, long term portion		11,029		12,231
Contingent value right liability		4,856		—
Other liabilities		1,349		1,295
Total liabilities		44,190		112,680
Commitments and contingencies (Note 10)
Stockholders’ deficit
Preferred stock, $0.001 par value:
Authorized: 2,000,000 shares as of June 30, 2023 and December 31, 2022; issued and outstanding: 250 shares at June 30, 2023 and December 31, 2022		—		—
Common stock, $0.001 par value:
Authorized: 150,000,000 shares as of June 30, 2023 and December 31, 2022; issued and outstanding: 56,351,647 shares at June 30, 2023 and December 31, 2022		56		56
Additional paid-in capital		436,056		429,646
Accumulated other comprehensive income/(loss)		1		(66)
Accumulated deficit		(444,791)		(444,768)
Total stockholders’ deficit		(8,678)		(15,132)
Total liabilities and stockholders’ deficit	$	35,512	$	97,548

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

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Molecular Templates, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Research and development revenue	$	6,627	$	4,417	$	40,254	$	12,903
Grant revenue		238		—		3,240		—
Total revenue		6,865		4,417		43,494		12,903
Operating expenses:
Research and development		13,413		21,365		32,455		42,862
General and administrative		5,195		6,566		10,997		14,186
Total operating expenses		18,608		27,931		43,452		57,048
Income/(loss) from operations		(11,743)		(23,514)		42		(44,145)
Interest and other income, net		365		186		820		256
Interest and other expense, net¹		(1,189)		(1,092)		(2,584)		(2,141)
Gain on extinguishment of debt		1,795		—		1,795		—
Change in valuation of contingent value right (Note 5)		303		—		303		—
Loss on disposal of property and equipment¹		(399)		—		(399)		(1)
Net loss attributable to common shareholders	$	(10,868)	$	(24,420)	$	(23)	$	(46,031)
Net loss per share attributable to common shareholders:
Basic and diluted	$	(0.19)	$	(0.43)	$	0.00	$	(0.82)
Weighted average number of shares used in net loss per share calculations:
Basic and diluted		56,351,647		56,329,585		56,351,647		56,317,384

1.	Loss in disposal of property and equipment was included in interest and other expense, net in the prior year presentation.

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

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Molecular Templates, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(in thousands, except share and per share data)

(unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net loss	$	(10,868)	$	(24,420)	$	(23)	$	(46,031)
Other comprehensive income/(loss):
Unrealized gain/(loss) on available-for-sale securities		—		(31)		67		(282)
Comprehensive income/(loss)	$	(10,868)	$	(24,451)	$	44	$	(46,313)

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

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MOLECULAR TEMPLATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(in thousands, except share data)

(unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Total Stockholders' (Deficit) Equity, beginning balances	$	(1,910)	$	47,482	$	(15,132)	$	65,662

Common Stock:
Beginning balance		56		56		56		56
Ending balance		56		56		56		56

Additional Paid-In Capital
Beginning balance		431,956		421,386		429,646		417,704
Issuance of common stock pursuant to stock plans		—		24		—		24
Stock-based compensation		1,784		2,982		4,094		6,664
Issuance of warrants		2,316		—		2,316		—
Ending balance		436,056		424,392		436,056		424,392

Accumulated Other Comprehensive Income/(Loss):
Beginning balance		1		(299)		(66)		(48)
Other comprehensive income/(loss)		—		(31)		67		(282)
Ending balance		1		(330)		1		(330)

Accumulated deficit:
Beginning balance		(433,923)		(373,661)		(444,768)		(352,050)
Net loss		(10,868)		(24,420)		(23)		(46,031)
Ending balance		(444,791)		(398,081)		(444,791)		(398,081)

Total Stockholders' (Deficit) Equity	$	(8,678)	$	26,037	$	(8,678)	$	26,037

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

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Molecular Templates, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Six Months Ended June 30,
	2023		2022
Cash flows from operating activities:
Net loss	$	(23)	$	(46,031)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and other		3,940		3,748
Stock-based compensation expense		4,094		6,664
Interest accrued on long-term debt		(376)		(24)
Amortization of debt discount and accretion related to debt		393		482
Gain on extinguishment of debt		(1,795)		—
Accretion of asset retirement obligations		54		73
Loss on disposal of property and equipment		399		1
Change in valuation of contingent value right		(303)		—
Changes in operating assets and liabilities:
Prepaid expenses		(428)		1,522
Grants revenue receivable		(274)		—
Other assets		998		(892)
Operating lease right-of-use assets and liabilities		(66)		(453)
Accounts payable		4,165		(247)
Accrued liabilities		(4,728)		(367)
Deferred revenue		(35,049)		(10,641)
Net cash used in operating activities		(28,999)		(46,165)
Cash flows from investing activities:
Purchases of property and equipment		(200)		(1,900)
Proceeds from sale of equipment		251		—
Purchase of marketable securities		(2,364)		(39,097)
Sales of marketable securities		31,400		88,389
Net cash provided by investing activities		29,087		47,392
Cash flows from financing activities:
Proceeds from stock option exercises		—		24
Repayment of long-term debt		(27,500)		—
Fees paid on loan modification		—		(298)
Net cash used in financing activities		(27,500)		(274)
Net increase/(decrease) in cash, cash equivalents, and restricted cash		(27,412)		953
Cash, cash equivalents and restricted cash, beginning of period		34,679		28,651
Cash, cash equivalents and restricted cash, end of period	$	7,267	$	29,604
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	4,952	$	26,936
Restricted cash included in other assets		2,315		2,668
Total cash, cash equivalents and restricted cash	$	7,267	$	29,604
Supplemental Cash Flow Information
Cash paid for interest	$	2,293	$	1,556
Non-Cash Investing Activities
Fixed asset additions in accounts payable and accrued expenses	$	—	$	443

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

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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, 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 accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly owned subsidiary and reflect the elimination of intercompany accounts and transactions.

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. Certain accounts in the prior financial statements have been reclassified for comparative purposes to conform to the presentation in the current financial statements. These reclassifications have no material effect on previously reported financials. In the opinion of management of the Company, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included.

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, 2022 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2023.

Going Concern

The Company has adopted as required the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements - Going Concern, which requires that management contemplate the realization of assets and liquidation of liabilities in the normal course of business, and evaluate whether there are relevant conditions and events that in aggregate raise substantial doubt about the entity’s ability to continue as a going concern and to meet its obligations as they become due within one year after the date that the financial statements are issued. Under this standard, management’s assessment shall not take into consideration the potential mitigating effects of management’s plans that have not been fully implemented as of the date the financial statements are issued.

As of June 30, 2023, the Company had an accumulated deficit of $444.8 million. There is substantial doubt about the Company’s ability to continue as a going concern as of the date of issuance of these financial statements as the Company has not yet established an ongoing source of revenues sufficient to cover its operating and cash expenditure requirements or to cover any potential payments that may become due and payable pursuant to the CVR Agreement as described in Note 8 – “Borrowing Arrangements and Debt Extinguishment” to provide sufficient certainty that it will continue as a going concern. Historically, the Company financed its operations to date primarily through partnerships, funds received from public offerings of common and preferred stock, private placements of equity securities, a reverse merger, upfront and milestone payments received from its prior and current collaboration agreements, a debt financing

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facility, as well as funding from governmental bodies and bank and bridge loans. The Company plans to address this condition through the sale of common stock in public offerings and/or private placements, debt financings, or through other capital sources, including collaborations with other companies or other strategic transactions, but there is no assurance these plans will be completed successfully or at all.

As of June 30, 2023, the Company had unrestricted cash and cash equivalents of $5.0 million. Based on the Company’s cash and cash equivalents as of June 30, 2023, the proceeds from the first tranche of the private placement described in Note 14 “Subsequent Events” and the anticipated cost-savings from the restructuring described in Note 12 “Restructuring Related Expenses”, and other assumptions, management anticipates that the Company will be able to fund its planned operating expenses and capital expenditure requirements to the third quarter of 2024. If the Company is unable to obtain additional capital when and as needed to continue as a going concern, it might have to further reduce or scale back its operations and/or liquidate its assets, and the values it receives for its assets in liquidation or dissolution could be significantly lower than the values reflected in its financial statements.

These financial statements do not give effect to any adjustments which will be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying financial statements.

Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies during the three months ended June 30, 2023, 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, 2022.

Cash and Cash Equivalents

The Company considers temporary investments having 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 $2.3 million and $2.5 million of restricted cash as of June 30, 2023 and December 31, 2022 respectively, related to letters of credit in lieu of a cash deposit for the Company’s leases.

Fair Value Measurement

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 or probability approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions

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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. Level 3 securities utilize a probability weighted expected return method or Black-Scholes option-pricing model. Significant estimates and assumptions required for these valuations include, but are not limited to, probabilities related to the timing and outcome of future financing and/or liquidity events. These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value.

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. As of June 30, 2023, the Company’s exposure to credit risk associated with non-payment will be affected principally by conditions or occurrences within Bristol Myers Squibb Company (“Bristol Myers Squibb”). In past years, the Company’s exposure to credit risk associated with non-payment were also affected principally by conditions or occurrences within Millennium Pharmaceuticals, Inc., a wholly owned subsidiary of Takeda Pharmaceutical Company Ltd. (“Takeda”). Takeda accounted for approximately 0% of total revenues for both the three months ended June 30, 2023 and 2022, and approximately 0% and 20% of total revenues for the six months ended June 30, 2023 and 2022, respectively. Bristol Myers Squibb accounted for approximately 97% and 100% of total revenues for the three months ended June 30, 2023 and 2022, respectively, and approximately 93% and 80% of total revenues for the six months ended June 30, 2023 and 2022, respectively.

Drug or biologic candidates developed by the Company 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 or biologic 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 August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (Subtopic 470-20: Debt with Conversion and Other Options and Subtopic 815-40: Derivatives and Hedging - Contracts in Entity’s Own Equity). The new guidance simplifies accounting for convertible instruments by removing major separation models, removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas. The amendment is effective for the Company for fiscal years beginning after December 15, 2023. 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 utilizing the two-class method. Preferred Stock Shareholders participate equally with Common Stock Shareholders in earnings, but do not participate in losses, and are excluded from the basic net loss calculation. Diluted net loss per share is computed by giving effect to all potential dilutive common shares, including outstanding options, warrants and convertible preferred stock. More specifically, as of June 30, 2023 and 2022, stock options, warrants, convertible common shares related to the Conversion Right as defined in the CVR Agreement and, if

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converted, preferred stock totaling approximately 19,942,000 and 11,809,000 common 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 each of the Company’s collaboration partner’s parent company headquarters. Research and development revenues disaggregated by location were as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
United States	$	6,627	$	4,417	$	40,254	$	10,317
Japan		—		—		—		2,586
Total research and development revenue	$	6,627	$	4,417	$	40,254	$	12,903

Collaboration Agreements

Bristol Myers Squibb Collaboration Agreement

In February 2021, the Company, entered into a Collaboration Agreement (the “BMS Collaboration Agreement”), as amended, with Bristol Myers Squibb to perform strategic research collaboration leveraging the Company’s ETB technology platform to discover and develop novel products containing ETBs directed to multiple targets.

Pursuant to the terms of the BMS Collaboration Agreement, the Company granted Bristol Myers Squibb a series of exclusive options to obtain one or more exclusive licenses under the Company’s intellectual property to exploit products containing ETBs directed against certain targets designated by Bristol Myers Squibb.

Bristol Myers Squibb paid the Company an upfront payment of $70.0 million. In addition to the upfront payment, the Company may receive near term and development and regulatory milestone payments of up to $874.5 million. The Company will also be eligible to receive up to an additional $450.0 million in payments upon the achievement of certain sales milestones, and subject to certain reductions, tiered royalties ranging from mid-single digits up to mid-teens as percentages of calendar year net sales, if any, on any licensed product.

The Company is responsible for conducting the research activities through the designation, if any, of one or more development candidates. Upon the exercise of its option for a development candidate, Bristol Myers Squibb will be responsible for all development, manufacturing, regulatory and commercialization activities with respect to that development candidate, subject to the terms of the BMS Collaboration Agreement.

Unless earlier terminated, the BMS Collaboration Agreement will expire (i) on a country-by-country basis and licensed product-by-licensed product basis, on the date of expiration of the royalty payment obligations under the BMS Collaboration Agreement with respect to such licensed product in such country and (ii) in its entirety upon the earlier of (a) the expiration of the royalty payment obligations under the BMS Collaboration Agreement with respect to all licensed products in all countries or (b) upon Bristol Myers Squibb’s decision not to exercise any option on or prior to the applicable option deadlines. Bristol Myers Squibb has the right to terminate the BMS Collaboration Agreement for convenience upon prior written notice to the Company. Either party has the right to terminate the BMS Collaboration Agreement (a) for the insolvency of the other party or (b) subject to specified cure periods, in the event of the other party’s uncured material breach. The Company has the right upon prior written notice to terminate the BMS Collaboration Agreement in the event that Bristol Myers Squibb or any of its affiliates asserts a challenge against the Company’s patents.

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The Company identified multiple performance obligations at the inception of the BMS Collaboration Agreement consisting of research and development services and material rights related to additional developmental targets. The transaction price of $70.0 million was allocated to the performance obligations based upon their relative stand-alone selling price and will be recognized over time as the underlying research and development services are performed.

The Company recognizes revenue for research and development services under the BMS Collaboration Agreement using a cost-based input measure. In applying the cost-based input method of revenue recognition, the Company will use actual costs incurred relative to budgeted costs expected to be incurred. 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.

For the three months ended June 30, 2023 and 2022, the Company recognized $6.6 million and $4.4 million, respectively, of research and development revenue related to BMS Collaboration Agreement. For the six months ended June 30, 2023 and 2022, the Company recognized $40.3 million and $10.3 million, respectively, of research and development revenue related to BMS Collaboration Agreement, which was primarily related to the completion of the research program for one of the collaboration’s targets and the completion of the related performance obligation by the Company under the BMS Collaboration Agreement, resulting in recognition of $25.8 million of research and development revenue in the quarter ended March 31, 2023.

The Company had $16.4 million and $45.3 million of deferred revenue, current, as of June 30, 2023 and December 31, 2022, respectively, related to the BMS Collaboration Agreement. The Company had zero and $5.9 million of deferred revenue, non-current as of June 30, 2023 and December 31, 2022, respectively, related to the BMS Collaboration Agreement.

Takeda Multi-Target Agreement

In June 2017, the Company entered into a Multi-Target Collaboration and License Agreement with Millennium Pharmaceuticals, Inc., a wholly owned subsidiary of 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. In March 2022, following the Company’s request to bring the agreement to an end, the Company and Takeda mutually agreed to terminate the Takeda Multi-Target Agreement. As a result of the termination, the Company regained full rights to pursue the targets worked on under the Takeda Multi-Target Agreement. There are no ongoing activities or economic obligations in connection with the Takeda Multi-Target Agreement.

For the three months ended June 30, 2023 and 2022, the Company did not recognize research and development revenue related to the Takeda Multi-Target Agreement. For the six months ended June 30, 2023 and 2022, the Company recognized zero and $2.6 million, respectively, as research and development revenue, related to the Takeda Multi-Target Agreement. As of June 30, 2023 and December 31, 2022, there was no deferred revenue related to the Takeda Multi-Target Agreement.

Grant Agreements

In September 2018, the Company entered into a Cancer Research Agreement (the “CD38 CPRIT Agreement”) with the Cancer Prevention and Research Institute of Texas (“CPRIT”) which was extended in September 2022, under which CPRIT awarded a $15.2 million product development grant to fund research of a cancer therapy involving a CD38 targeting ETB. As of June 30, 2023, the Company has cumulatively recognized $12.6 million of grant revenue related to the CD38 CPRIT Agreement. 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.

For the three months ended June 30, 2023 and 2022, the Company recognized grant revenue under this award of $0.2 million and zero, respectively. For the six months ended June 30, 2023 and 2022, the Company recognized grant revenue under this award of $3.2 million and zero, respectively. Qualified expenditures submitted for reimbursement in excess of amounts received are recorded as receivables in grant revenue receivable. As of June 30, 2023 and December 31, 2022, the Company recorded grant revenue receivable of $0.3 million and zero, respectively.

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NOTE 4 — RELATED PARTY TRANSACTIONS

Takeda

In connection with the Takeda Multi-Target Agreement described in Note 3 “Research and Development Collaboration Agreements,” Takeda became a related party, following the Takeda Stock Purchase Agreement described in Note 11 “Stockholders’ Equity,” of the Company’s previously filed Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 30, 2023. In August 2021, Takeda ceased to be a related party after a sale of the above-mentioned shares.

NOTE 5 — FAIR VALUE MEASUREMENTS

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
	June 30, 2023		Level 1		Level 2		Level 3
Money market funds	$	2,930	$	2,930	$	—	$	—
Total	$	2,930	$	2,930	$	—	$	—
Amounts included in:
Cash and cash equivalents	$	2,930
Total cash equivalents	$	2,930


			Basis of Fair Value Measurements
	December 31, 2022		Level 1		Level 2		Level 3
Money market funds	$	24,546	$	24,546	$	—	$	—
Commercial paper		21,134		—		21,134		—
United States Treasury Bills		10,702		—		10,702		—
Cash		2,500		2,500		—		—
Total	$	58,882	$	27,046	$	31,836	$	—
Amounts included in:
Cash and cash equivalents	$	30,023
Marketable securities, current		28,859
Total cash equivalents and marketable securities	$	58,882

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


	June 30, 2023
	Cost Basis		Unrealized Gain		Unrealized Loss		Fair Value
Cash equivalents - money market funds	$	2,930	$	—	$	—	$	2,930


	December 31, 2022
	Cost Basis		Unrealized Gain		Unrealized Loss		Fair Value
Cash equivalents - money market funds, commercial paper	$	30,022	$	1	$	—	$	30,023
Marketable securities, current - commercial paper, Treasury bills	$	28,926	$	—	$	(67)	$	28,859

As of both June 30, 2023 and December 31, 2022, all of the Company’s available-for-sale investments were due in one year or less.

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The Company received no proceeds from the sale of available-for-sale securities for the three and six months ended June 30, 2023 and 2022, and no realized gain for the three and six months ended June 30, 2023 and 2022.

Contingent Value Right and Common Stock Warrant Valuation

On June 16, 2023, the Company entered into a Convertible Secured Contingent Value Right Agreement with K2 HealthVentures LLC (“K2HV”) (the “CVR Agreement”), as further described in Note 8 “Borrowing Arrangements and Debt Extinguishment.” ASC 815 “Derivatives and Hedging” requires the Conversion Right, as defined in the CVR Agreement, and Contingent Value Right, as defined in the CVR Agreement, to be accounted for as liabilities and changes to their fair value recognized in the condensed consolidated statement of operations. The Conversion Right and Contingent Value Right liability will be remeasured each reporting period. The Company utilized a probability weighted expected return method to value the Conversion Right and Contingent Value Right liability (collectively, the “CVR”). The CVR was split into two components a) the Conversion Right of the Holder to convert $3.0 million of the Remaining Value into shares and b) the Contingent Value Right liability. Various payoff scenarios were projected and weighted to determine the payoff of the CVR. Within each scenario, the stock price at each event was forecasted to determine if K2VH would convert $3.0 million of the Remaining Value, as defined below, into shares of the Company’s common stock. If K2HV elected to convert any amount up to $3.0 million into shares of the Company’s common stock, then the value of the Conversion Right was the expected stock price times the number of conversion shares; otherwise, the value was determined to be zero. The Contingent Value Right liability component was calculated as the Remaining Value less $3.0 million conversion amount if converted at the time of the event, discounted back to present value. As of June 16, 2023, the value of the Conversion Right and Contingent Value Right liability were calculated within each scenario and probability weighted to derive the total fair value of the Conversion Right and the Contingent Value Right liability was $3.3 million and $1.9 million, respectively. As of June 30, 2023, the fair value of the Conversion Right and the Contingent Value Right liability was $2.9 million and $1.9 million, respectively. For the three months ended June 30, 2023, the change in fair value related to the Conversion Right and Contingent Value Right liability was $0.3 million.

The following table sets forth the Company’s financial liabilities (convertible secured contingent value right) at fair value on a recurring basis (in thousands):


			Basis of Fair Value Measurements
	June 30, 2023		Level 1		Level 2		Level 3
Conversion right and contingent value right	$	4,856	$	—	$	—	$	4,856
Total	$	4,856	$	—	$	—	$	4,856

In satisfaction of its obligations to issue the warrant to K2HV’s affiliated holder pursuant to the CVR Agreement, the Company issued a warrant to purchase up to 5,103,343 shares of the Company’s common stock at an exercise price of $0.3919 per share. The warrant has a term of 10 years. The Company accounted for its common stock warrants under the guidance in ASC 480, “Distinguishing Liabilities from Equity” and ASC 815, “Derivatives and Hedging,” that clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify for classification as equity and will be fair valued as the date of the transaction. The fair value of these warrants was determined using a Black-Scholes option-pricing model with the following key inputs:


		June 16, 2023
Risk-free interest rate		3.77	%
Expected term (in years)		10.0
Dividend yield		—
Volatility		80.00	%
Stock price	$	0.53

On June 16, 2023, the Company determined the fair value of the warrants to be $2.3 million and classified that amount to additional paid in capital.

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NOTE 6 — BALANCE SHEET COMPONENTS

Accrued liabilities consisted of the following (in thousands):


	June 30, 2023		December 31, 2022
Accrued liabilities:
General and administrative	$	317	$	855
Clinical trial related costs		2,587		1,327
Non-clinical research and manufacturing operations		579		1,779
Payroll related		17		4,828
Other accrued expenses		10		34
Total Accrued liabilities	$	3,510	$	8,823

NOTE 7—PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):


	June 30,		December 31,
	2023		2022
Laboratory equipment	$	20,695	$	21,831
Leasehold improvements		12,974		12,971
Furniture and fixtures		518		518
Computer and equipment		658		658
		34,845		35,978
Less: Accumulated depreciation		(24,687)		(21,346)
Total property and equipment, net	$	10,158	$	14,632

Depreciation expense was $2.0 million and $1.9 million for the three months ended June 30, 2023 and 2022, respectively. Depreciation expense was $4.0 million and $3.7 million for the six months ended June 30, 2023 and 2022, respectively.

As of June 30, 2023 and December 31, 2022, the Company had net Asset Retirement Obligation (“ARO”) assets totaling $0.2 million and $0.3 million, respectively. The ARO assets are included in leasehold improvements.

NOTE 8 — BORROWING ARRANGEMENTS AND DEBT EXTINGUISHMENT

K2 HealthVentures Loan and Security Agreement

In May 2020, the Company entered into a Loan and Security Agreement with K2 Health Ventures LLC (the “K2 Loan and Security Agreement”) in the amount of $45.0 million. The K2 Loan and Security Agreement was drawable in three tranches and the Company had drawn down $35.0 million with the remaining tranche of $10.0 million having lapsed as of December 31, 2021. Pursuant to the terms of the K2 Loan and Security Agreement, the principal accrued interest at an annual rate equal to the greater of 8.45% or the sum of the Prime Rate plus 5.2%. In April 2022, the K2 Loan and Security Agreement was amended in exchange for a $0.3 million amendment fee so that (i) payments would be interest only until the loan’s maturity date of June 1, 2024, and (ii) the Financial Covenant would apply for the entire term of the K2 Loan and Security Agreement. This amendment resulted in a debt modification with the $0.3 million amendment fee recorded as a debt discount.

On June 16, 2023, the Company entered into the CVR Agreement with K2HV to fully discharge and satisfy the Company’s outstanding loan obligations under the K2 Loan and Security Agreement, and to terminate the K2 Loan and Security Agreement, in exchange for an aggregate repayment in cash of $27.5 million, the granting of a contingent value right to K2HV, and the issuance of a warrant to purchase shares of common stock to K2HV’s affiliated holder. These

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contingent value rights require payments to K2HV if certain Contingent Payment Events, as defined in the CVR Agreement, occur, or if there is an Acceleration Event, as defined in the CVR Agreement. The payment due upon any Contingent Payment Event or an Acceleration Event is capped at an amount (the “Remaining Value”) which is initially $10,303,646, which amount, to the extent not repaid is subject to escalating multipliers which increases from the closing date by multiplying the Remaining Value by a multiplier ranging between 1.0 at closing to 2.5x for any Remaining Amount not yet paid as of September 16, 2024, resulting in a potential maximum payment obligation of $25,759,115. In addition, upon a Change in Control, as defined in the CVR Agreement, the Company is required to pay an additional payment of $2,500,000.

For Contingent Payment Events, the Company must pay K2HV either a specified percentage of the proceeds received, up to an amount equaling the applicable Remaining Value, 50% of such Remaining Value, or 100% of the Remaining Value, depending on the Contingent Payment Event which occurred. Upon the occurrence and continuation of any Acceleration Event, the applicable Remaining Value shall, at the election of K2HV, be due and payable in full. The Company may at any time elect to repay some or all of the Remaining Value without penalty. In lieu of a portion of these contingent value rights, K2HV may convert up to $3,000,000 of the Remaining Value into an aggregate of 6,124,011 shares of common stock, subject to adjustment for any stock splits and similar events so long as the number of shares of common stock underlying such conversion right, together with the shares of common stock underlying the warrants described below, do not exceed 19.99% of the number of shares of common stock outstanding immediate prior to the execution of the CVR Agreement.

In satisfaction of its obligations to issue the warrant to K2HV’s affiliated holder pursuant to the CVR Agreement, the Company issued a warrant to purchase up to 5,103,343 shares of the Company’s common stock at an exercise price of $0.3919 per share. The warrant has a term of 10 years. To protect its interest in any potential payment of the Remaining Value, K2HV has a security interest in, subject to certain limited exceptions, all assets (including intellectual property) of the Company. Further, the Company may not (i) incur any indebtedness for borrowed money that is structured as senior or pari passu to K2HV’s outstanding contingent payments without K2HV’s consent or (ii) permit any other liens (other than customary permitted liens) on this collateral without K2HV’s consent.

In accordance with ASC Topic 740-50 “Debt – Modifications and Extinguishments,” the transaction noted above was determined to be an extinguishment of the existing long-term debt. As a result, the Company recorded a gain on the extinguishment of long-term debt in the amount of $1.8 million in the line item “Gain on the extinguishment of debt” in the condensed consolidated statement of operations.

NOTE 9 — LEASES

The Company has operating leases for administrative offices and research and development facilities, and certain finance leases for equipment. The operating leases have remaining terms of less than three years to less than seven years. Leases with an initial term of 12 months or less will not be recorded on the condensed consolidated balance sheets as operating leases or finance leases, and the Company will recognize lease expense for these leases on a straight-line basis over the lease term. Certain leases include options to renew, with renewal terms that can extend the lease term for seven years. The exercise of lease renewal options for the Company’s existing leases is at the Company’s sole discretion and not included in the measurement of lease liability and ROU asset as they are not reasonably certain to be exercised. Certain finance leases also include options to purchase the leased equipment. 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. The leases do not contain any residual value guarantees or material restrictive covenants.

In July 2022, the Company exercised its option to extend the term for its lease of its principal executive office at 9301 Amberglen Blvd, Building J, Austin TX 78729 (the “Property”) for an additional five-year term beginning August 31, 2023 and ending August 31, 2028 pursuant to the terms and conditions of that certain lease by and between the Company and NW Austin Office Partners LLC, dated October 1, 2016, as previously amended (the “Lease Agreement”).

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In October 2022, the Company entered into that certain Fourth Amendment to Lease between the Company and NW Austin Office Partners LLC (the “Lease Amendment”) which amended the Lease Agreement to document the exercise of the Company’s option to extend the term of its lease of the Property for an additional six-year term beginning September 1, 2023 and ending August 31, 2029 (the “Extension Term”). Pursuant to the terms of the Lease Amendment, the aggregate commitments will be $6.7 million over the six-year Extension Term and the parties agreed that so long as the Company is not in default, an aggregate amount of $0.2 million shall be abated in installments from the monthly lease commitments until exhausted. The Lease Amendment also provides that prior to the expiration of the Extension Term, the Company has the option to extend the Extension Term for an additional period of seven years.

The following table summarizes the components of lease expense for the three and six months ended June 30, 2023 and 2022 (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Operating leases
Operating lease expense	$	727	$	601	$	1,454	$	1,201
Variable lease expense		142		91		245		211
Total operating lease expense	$	869	$	692	$	1,699	$	1,412

The following table summarizes the balance sheet classification of leases as of June 30, 2023 (in thousands):


	June 30,
	2023
Operating leases
Operating lease right-of-use assets	$	10,163

Operating lease liabilities, current¹	$	2,349
Operating lease liabilities, non-current		11,029
Total operating lease liabilities	$	13,378

1.	Included in other current liabilities.

The following table presents other information on leases as of June 30, 2023 and December 31, 2022:


	June 30,		December 31,
	2023		2022
Weighted average remaining lease term, operating leases	5.09	years	5.54	years
Weighted average discount rate, operating leases	8.22	%	8.21	%

Maturities of lease liabilities were as follows as of June 30, 2023 (in thousands):


	Operating Leases
2023 (remaining)	$	1,661
2024		3,369
2025		3,299
2026		2,564
2027		2,636
Thereafter		2,873
Total lease payments	$	16,402
Less:
Imputed interest		(3,024)
Total lease liabilities	$	13,378


		Page
PART I.	FINANCIAL INFORMATION	6

Item 1.	Financial Statements	6

	Condensed Consolidated Balance Sheets (Unaudited)	6

	Condensed Consolidated Statements of Operations (Unaudited)	7

	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	8

	Condensed Consolidated Statements of Stockholders’ (Deficit) Equity (Unaudited)	9

	Condensed Consolidated Statements of Cash Flows (Unaudited)	10

	Notes to Condensed Consolidated Financial Statements (Unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	37

PART II.	OTHER INFORMATION	38

Item 1	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	92

Item 3.	Defaults Upon Senior Securities	92

Item 4.	Mine Safety Disclosures	92

Item 5.	Other Information	92

Item 6.	Exhibits	93

SIGNATURES		95


	Six Months Ended June 30,
	2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows operating leases	$	1,349