mtem-10q_20190630.htm

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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.

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 5, 2019, there were 36,936,581 shares of common stock, par value $0.001 per share, of Molecular Templates, Inc. outstanding.

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:

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.

	June 30, 2019 (unaudited)			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	16,795		$	87,721
Marketable securities, current		55,529			10,234
Prepaid expenses		2,258			2,244
Grants revenue receivable		5,160			4,329
Accounts receivable from related party		—			240
Other current assets		98			95
Total current assets		79,840			104,863
Operating lease right-of-use assets, non-current		10,796			—
Property and equipment, net		9,151			6,851
In-process research and development		26,623			26,623
Other assets		4,737			1,821
Total assets	$	131,147		$	140,158
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,577		$	780
Accrued liabilities		7,120			5,357
Deferred revenue, current		14,561			26,231
Other current liabilities		1,435			141
Total current liabilities		25,693			32,509
Deferred revenue, non-current		1,664			2,670
Long-term debt, non-current, net		3,075			3,254
Operating lease liabilities, non-current		10,707			—
Other liabilities		748			819
Total liabilities		41,887			39,252
Commitments and contingencies (Note 9)
Stockholders’ equity
Common stock, $0.001 par value:
Authorized: 150,000,000 shares; issued and outstanding: 36,882,163 shares at June 30, 2019 and 36,736,012 shares at December 31, 2018		37			37
Additional paid-in capital		199,223			195,573
Accumulated other comprehensive income		25			—
Accumulated deficit		(110,025	)		(94,704	)
Total stockholders’ equity		89,260			100,906
Total liabilities and stockholders’ equity	$	131,147		$	140,158

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Research and development revenue - from related party	$	5,211		$	932		$	11,624		$	1,095
Research and development revenue - other		—			12			—			80
Grant revenue		236			423			831			674
Total revenue		5,447			1,367			12,455			1,849
Operating expenses:
Research and development		10,243			7,662			18,697			14,350
General and administrative		4,605			3,718			9,540			6,627
Total operating expenses		14,848			11,380			28,237			20,977
Loss from operations		9,401			10,013			15,782			19,128
Interest and other income, net		543			118			1,053			200
Interest and other expense, net		(301	)		(98	)		(594	)		(393	)
Change in fair value of warrant liabilities		6			298			2			912
Net loss attributable to common shareholders	$	9,153		$	9,695		$	15,321		$	18,409
Net loss per share attributable to common shareholders:
Basic and diluted	$	0.25		$	0.36		$	0.42		$	0.68
Weighted average number of shares used in net loss per share calculations:
Basic and diluted		36,819,846			27,062,440			36,779,638			27,026,263

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

							Accumulated					Total
					Additional		Other					Stockholders’
Three months ended June 30, 2018	Common Stock				Paid-In		Comprehensive		Accumulated			Equity
	Shares		Amount		Capital		Income		Deficit			(Deficit)
Balances, March 31, 2018		27,060,035	$	28	$	144,044	$	—	$	(73,131	)	$	70,941
Issuance of common stock pursuant to stock plans		5,163		—		9		—		—			9
Stock-based compensation		—		—		922		—		—			922
Net loss		—		—		—		—		(9,695	)		(9,695	)
Balances, June 30, 2018		27,065,198	$	28	$	144,975	$	—	$	(82,826	)	$	62,177

							Accumulated					Total
					Additional		Other					Stockholders’
Six months ended June 30, 2018	Common Stock				Paid-In		Comprehensive		Accumulated			Equity
	Shares		Amount		Capital		Income		Deficit			(Deficit)
Balances, December 31, 2017		26,898,330	$	27	$	141,733	$	—	$	(64,471	)	$	77,289
Issuance of common stock pursuant to stock plans		166,868		1		155		—		—			156
Issuance of warrant to purchase common stock in relation to term loan facility		—		—		1,522		—		—			1,522
Stock-based compensation		—		—		1,565		—		—			1,565
Cumulative-effect adjustment upon adoption of new accounting standards		—		—		—		—		54			54
Net loss		—		—		—		—		(18,409	)		(18,409	)
Balances, June 30, 2018		27,065,198	$	28	$	144,975	$	—	$	(82,826	)	$	62,177

							Accumulated					Total
					Additional		Other					Stockholders’
Three months ended June 30, 2019	Common Stock				Paid-In		Comprehensive		Accumulated			Equity
	Shares		Amount		Capital		Income		Deficit			(Deficit)
Balances, March 31, 2019		36,756,651	$	37	$	196,972	$	—	$	(100,872	)	$	96,137
Issuance of common stock pursuant to stock plans		125,512		—		809		—		—			809
Stock-based compensation		—		—		1,442		—		—			1,442
Other comprehensive income		—		—		—		25		—			25
Net loss		—		—		—		—		(9,153	)		(9,153	)
Balances, June 30, 2019		36,882,163	$	37	$	199,223	$	25	$	(110,025	)	$	89,260

							Accumulated					Total
					Additional		Other					Stockholders’
Six months ended June 30, 2019	Common Stock				Paid-In		Comprehensive		Accumulated			Equity
	Shares		Amount		Capital		Income		Deficit			(Deficit)
Balances, December 31, 2018		36,736,012	$	37	$	195,573	$	—	$	(94,704	)	$	100,906
Issuance of common stock pursuant to stock plans		146,151		—		847		—		—			847
Stock-based compensation		—		—		2,803		—		—			2,803
Other comprehensive income		—		—		—		25		—			25
Net loss		—		—		—		—		(15,321	)		(15,321	)
Balances, June 30, 2019		36,882,163	$	37	$	199,223	$	25	$	(110,025	)	$	89,260

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

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net loss	$	15,321		$	18,409
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and other		301			187
Stock-based compensation expense		2,803			1,565
Amortization of debt discount and accretion related to debt		221			127
Change in common stock warrant fair value		(2	)		(912	)
Accretion of asset retirement obligations		25			18
Capitalized interest		—			(125	)
Loss on extinguishment of debt		—			115
Loss on disposal of equipment		—			2
Changes in operating assets and liabilities:
Prepaid expenses		(14	)		(236	)
Accounts receivable from related party		240			(663	)
Other assets		(763	)		(120	)
Operating lease right-of-use assets, non-current		678			—
Accounts payable		862			(1,935	)
Accrued liabilities		1,098			3,128
Other liabilities		(330	)		229
Deferred revenue		(12,676	)		2,893
Net cash used in operating activities		(22,878	)		(14,136	)
Cash flows from investing activities:
Purchases of property and equipment		(1,121	)		(4,190	)
Purchase of marketable securities		(55,659	)		—
Sales of marketable securities		10,893			—
Net cash used in investing activities		(45,887	)		(4,190	)
Cash flows from financing activities:
Payments of capital and finance lease obligations		(8	)		(25	)
Proceeds from issuance of long-term debt and warrants, net		—			4,537
Repayment of long-term debt		—			(3,605	)
Proceeds from stock option exercises		847			156
Net cash provided by financing activities		839			1,063
Net decrease in cash, cash equivalents, and restricted cash		(67,926	)		(17,263	)
Cash, cash equivalents and restricted cash, beginning of period		87,721			58,910
Cash, cash equivalents and restricted cash, end of period	$	19,795		$	41,647
Supplemental Cash Flow Information
Cash paid for interest	$	344		$	284
Non-Cash Investing and Financing Activities
Fixed asset additions in accounts payable	$	935		$	701
Fixed asset additions in accrued expenses	$	665		$	413

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

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”).

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 as of December 31, 2018 included herein was derived from the audited financial statements as of 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.

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.

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.

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.

There have been no material changes to the Company’s significant accounting policies during the six months ended June 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.

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.

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.

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

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

The Company performs an ongoing credit evaluation of its strategic partners’ financial conditions and generally does not require collateral to secure accounts receivable from its strategic partners. The Company’s exposure to credit risk associated with non-payment will be affected principally by conditions or occurrences within Takeda Pharmaceutical Company Ltd. (“Takeda”). Approximately 96% and 68% of total revenues for the three months ended June 30, 2019 and 2018, respectively, and approximately 93% and 59% of total revenues for the six months ended June 30, 2019 and 2018, respectively, were derived from Takeda. There were no accounts receivable due from Takeda at June 30, 2019. See also Note 3, Research and Development Agreements, regarding the collaboration agreements with Takeda.

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

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 as of 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.

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

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

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):

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 June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Takeda Collaboration Agreement	$	—	$	81	$	—	$	92
Takeda Individual Project Agreement		—		663		54		663
Takeda Development and License Agreement		5,012		—		11,126		—
Takeda Multi-Target Agreement		199		188		444		340
Total research and development revenue	$	5,211	$	932	$	11,624	$	1,095

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

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

		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		23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		34
Item 4.	Controls and Procedures		35
PART II.	OTHER INFORMATION		36
Item 1	Legal Proceedings		36
Item 1A.	Risk Factors		36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		70
Item 3.	Defaults Upon Senior Securities		70
Item 4.	Mine Safety Disclosures		70
Item 5.	Other Information		70
Item 6.	Exhibits		71
SIGNATURES			72

	June 30,
	2019		2018
Shares issuable upon exercise of warrants		3,522		3,522
Shares issuable upon exercise of stock options		5,106		4,347

	June 30, 2019		December 31, 2018
Assets
Unbilled revenue	$	—	$	240
Liabilities
Deferred revenue, current	$	14,561	$	26,231
Deferred revenue, non-current		1,664		2,670