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 March 31, 2020

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 May 8, 2020, there were 45,707,785 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, including the sections entitled “Business,” “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-3724 and other engineered toxin body (ETB) biologic candidates;

 

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

 

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;

 

whether any drug or biologic 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 drug or biologic candidates suitable for clinical testing;

 

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

 

our anticipated research and development activities and projected expenditures;

 

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

 

our ability to have manufactured active pharmaceutical ingredient, or API, and drug or biologic 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 anticipated use of proceeds from any financing activities;

 

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

 

the extent to which COVID-19 may impact our business operations or financial condition;

 

our projected financial performance; and

 

the sufficiency of our cash resources; and other risks and uncertainties, including those listed under Part I, 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.

As used in this Quarterly Report on Form 10-Q, unless otherwise stated or the context otherwise indicates, references to “Molecular,” the “Company,” “we,” “our,” “us” or similar terms refer to Molecular Templates, Inc., and our wholly owned subsidiaries.

 

 


 

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

 

22

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

 

34

Item 4.

  

Controls and Procedures

 

34

PART II.

  

OTHER INFORMATION

 

35

Item 1

  

Legal Proceedings

 

35

Item 1A.

  

Risk Factors

 

35

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

 

77

Item 3.

  

Defaults Upon Senior Securities

 

77

Item 4.

  

Mine Safety Disclosures

 

77

Item 5.

  

Other Information

 

77

Item 6.

  

Exhibits

 

78

SIGNATURES

 

79

 

 

 

3


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

Molecular Templates, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

March 31,

2020 (unaudited)

 

 

December 31,

2019

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

34,444

 

 

$

85,451

 

Marketable securities, current

 

70,544

 

 

 

39,633

 

Prepaid expenses

 

3,727

 

 

 

2,318

 

Grants revenue receivable

 

9,441

 

 

 

7,100

 

Accounts receivable, related party

 

1,300

 

 

 

408

 

In-process research and development - held for sale

 

4,500

 

 

 

4,500

 

Other current assets

 

242

 

 

 

489

 

Total current assets

 

124,198

 

 

 

139,899

 

Marketable securities, non-current

 

3,010

 

 

 

1,510

 

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

 

9,617

 

 

 

9,959

 

Property and equipment, net

 

19,301

 

 

 

18,158

 

Other assets

 

4,617

 

 

 

4,676

 

Total assets

$

160,743

 

 

$

174,202

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,770

 

 

$

1,465

 

Accrued liabilities

 

11,531

 

 

 

14,544

 

Deferred revenue, current

 

11,465

 

 

 

8,511

 

Deferred revenue, current, related party

 

8,773

 

 

 

8,780

 

Other current liabilities, related party

 

7,754

 

 

 

 

Other current liabilities

 

2,543

 

 

 

2,501

 

Total current liabilities

 

43,836

 

 

 

35,801

 

Deferred revenue, long-term

 

14,523

 

 

 

18,944

 

Deferred revenue, long-term, related party

 

1,355

 

 

 

441

 

Long-term debt, net

 

2,888

 

 

 

2,940

 

Operating lease liabilities, non-current

 

11,232

 

 

 

11,682

 

Other liabilities

 

3,143

 

 

 

1,366

 

Total liabilities

 

76,977

 

 

 

71,174

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, $0.001 par value:

 

 

 

 

 

 

 

Authorized: 2,000,000 shares at March 31, 2020 and December 31, 2019; issued and

   outstanding: 250 shares at March 31, 2020 and December 31, 2019

 

 

 

 

 

Common stock, $0.001 par value:

 

 

 

 

 

 

 

Authorized: 150,000,000 shares; issued and outstanding: 45,703,934 shares at

   March 31, 2020 and 45,589,157 shares at December 31, 2019

 

46

 

 

 

46

 

Additional paid-in capital

 

269,581

 

 

 

267,089

 

Accumulated other comprehensive income

 

282

 

 

 

18

 

Accumulated deficit

 

(186,143

)

 

 

(164,125

)

Total stockholders’ equity

 

83,766

 

 

 

103,028

 

Total liabilities and stockholders’ equity

$

160,743

 

 

$

174,202

 

 

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

March 31,

 

 

2020

 

 

2019

 

Research and development revenue, related party

$

333

 

 

$

6,413

 

Research and development revenue, other

 

1,467

 

 

 

 

Grant revenue

 

2,341

 

 

 

595

 

Total revenue

 

4,141

 

 

 

7,008

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

20,631

 

 

 

8,454

 

General and administrative

 

5,647

 

 

 

4,935

 

Total operating expenses

 

26,278

 

 

 

13,389

 

Loss from operations

 

22,137

 

 

 

6,381

 

Interest and other income, net

 

472

 

 

 

510

 

Interest and other expense, net

 

(348

)

 

 

(293

)

Change in fair value of warrant liabilities

 

 

 

 

(4

)

Loss before provision for income taxes

 

22,013

 

 

 

6,168

 

Provision for income taxes

 

5

 

 

 

 

Net loss

 

22,018

 

 

 

6,168

 

Net loss attributable to common shareholders

$

22,018

 

 

$

6,168

 

Net loss per share attributable to common shareholders:

 

 

 

 

 

 

 

Basic and diluted

$

0.48

 

 

$

0.17

 

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

 

 

 

 

 

 

 

Basic and diluted

 

45,649,065

 

 

 

36,738,993

 

 

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

March 31,

 

 

2020

 

 

2019

 

Net loss

$

(22,018

)

 

$

(6,168

)

Other comprehensive income:

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

264

 

 

 

 

Comprehensive loss

$

(21,754

)

 

$

(6,168

)

 

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

March 31,

 

 

2020

 

 

2019

 

Total Stockholders' Equity (Deficit), beginning balances

$

103,028

 

 

$

100,906

 

 

 

 

 

 

 

 

 

Preferred Stock:

 

 

 

 

 

 

 

Beginning balance

 

 

 

 

 

Issuance of preferred stock

 

 

 

 

 

Ending balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock:

 

 

 

 

 

 

 

Beginning balance

 

46

 

 

 

37

 

Issuance of common stock pursuant to stock plans

 

 

 

 

 

Ending balance

 

46

 

 

 

37

 

 

 

 

 

 

 

 

 

Additional Paid-In Capital

 

 

Beginning balance

 

267,089

 

 

 

195,573

 

Issuance of common stock pursuant to stock plans

 

300

 

 

 

38

 

Stock-based compensation

 

2,192

 

 

 

1,361

 

Ending balance

 

269,581

 

 

 

196,972

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income:

 

 

 

 

 

 

 

Beginning balance

 

18

 

 

 

 

Other comprehensive income

 

264

 

 

 

 

Ending balance

 

282

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit:

 

 

 

 

 

 

 

Beginning balance

 

(164,125

)

 

 

(94,704

)

Net loss

 

(22,018

)

 

 

(6,168

)

Ending balance

 

(186,143

)

 

 

(100,872

)

 

 

 

 

 

 

 

 

Total Stockholders' Equity

$

83,766

 

 

$

96,137

 

 

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)

 

 

Three Months Ended

March 31,

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

22,018

 

 

$

6,168

 

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

 

 

 

 

 

 

 

Depreciation, amortization and other

 

618

 

 

 

177

 

Stock-based compensation expense

 

2,192

 

 

 

1,360

 

Amortization of debt discount and accretion related to debt

 

148

 

 

 

105

 

Change in common stock warrant fair value

 

 

 

 

4

 

Accretion of asset retirement obligations

 

32

 

 

 

11

 

Loss on disposal of equipment

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses

 

(1,409

)

 

 

239

 

Accounts receivable, related party

 

(892

)

 

 

(55

)

Grants revenue receivable

 

(2,341

)

 

 

(2

)

Other assets

 

293

 

 

 

(338

)

Operating lease right-of-use assets and liabilities

 

(60

)

 

 

 

Accounts payable

 

260

 

 

 

802

 

Accrued liabilities

 

(3,912

)

 

 

622

 

Other liabilities

 

1,746

 

 

 

(204

)

Other liabilities, related party

 

7,754

 

 

 

 

Deferred revenue

 

(1,467

)

 

 

 

 

Deferred revenue, related party

 

907

 

 

 

(7,529

)

Net cash used in operating activities

 

(18,149

)

 

 

(10,976

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(938

)

 

 

(625

)

Purchase of marketable securities

 

(50,463

)

 

 

(36,588

)

Sales of marketable securities

 

18,450

 

 

 

1,293

 

Net cash used in investing activities

 

(32,951

)

 

 

(35,920

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Repayment of long-term debt

 

(200

)

 

 

 

Proceeds from stock option exercises

 

300

 

 

 

38

 

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

 

(7

)

 

 

(8

)

Net cash provided by financing activities

 

93

 

 

 

30

 

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

 

(51,007

)

 

 

(46,866

)

Cash, cash equivalents and restricted cash, beginning of period

 

88,451

 

 

 

87,721

 

Cash, cash equivalents and restricted cash, end of period

$

37,444

 

 

$

40,855

 

Reconciliation of cash, cash equivalents and restricted cash

 

 

 

 

 

 

 

Cash and cash equivalents

$

34,444

 

 

$

37,855

 

Restricted cash included in Other assets

 

3,000

 

 

 

3,000

 

Total cash, cash equivalents and restricted cash

$

37,444

 

 

$

40,855

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

Cash paid for interest

$

163

 

 

$

174

 

Non-Cash Investing and Financing Activities

 

 

 

 

 

 

 

Fixed asset additions in accounts payable and accrued expenses

$

944

 

 

 

 

Right-of-use asset obtained in exchange for operating lease obligations

 

 

 

 

7,234

 

Adoption of ASC 842

 

 

 

$

4,179

 

Total non-cash investing and financing activities

$

944

 

 

$

11,413

 

 

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”).

On August 1, 2017, the Company, formerly known as Threshold Pharmaceuticals, Inc. (Nasdaq: THLD) (“Threshold”), completed its business combination with Private Molecular, in accordance with the terms of the Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), dated as of March 16, 2017, by and among Threshold, the Merger Sub, a wholly owned subsidiary of Threshold, and Private Molecular, pursuant to which Merger Sub merged with and into Private Molecular, with Private Molecular, surviving as a wholly-owned subsidiary of Threshold (the “Merger”). Immediately upon completion of the Merger, the former stockholders of Private Molecular held a majority of the voting interest of the combined company.

 

In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization. While the COVID-19 pandemic has not had a material adverse impact on the Company’s operations to date, the full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain.  Additionally, the economic impact of COVID-19 on local, regional, national and international customers and markets may have a material adverse impact on the Company. Refer to Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q for a complete description of risks.

Basis of Presentation

The accompanying unaudited 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.

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, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 13, 2020.

Reclassifications

Certain amounts in the prior year’s presentation have been reclassified to conform to the current presentation. The condensed consolidated balance sheet at December 31, 2019 included herein was derived from the audited financial statements at that date, but includes a reclassification of $8.8 million from Deferred revenue, current to Deferred revenue, current, related party and $0.4 million from Deferred revenue, non-current to Deferred revenue, non-current, related party in order to conform to current period presentation.  The condensed consolidated statements of cash flow for the three months ended March 31, 2019 included herein includes a reclassification of $7.5 million from Deferred revenue to Deferred revenue, related party.

Liquidity

At March 31, 2020, we had cash, cash equivalents, and marketable securities of $108.0 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. We expect that our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditure requirements into 2022.

9


 

Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2020, 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, 2019.

 

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 $3.0 million of restricted cash at March 31, 2020.

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. Vertex accounted for approximately 35% and 0% of total revenues for the three months ended March 31, 2020 and 2019, respectively. The Company’s exposure to credit risk associated with non-payment will be affected principally by conditions or occurrences within Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Ltd. (“Takeda”).  Takeda accounted for approximately 8% and 92% of total revenues for the three months ended March 31, 2020 and 2019, respectively.

Drug or biologic 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 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 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 is intended to improve the effectiveness of disclosures in the notes to financial statements related to fair value measurements in Topic 820. This ASU was effective for annual periods beginning after December 15, 2019, including interim periods within that period. The impact of the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software -Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. This ASU was effective for annual periods beginning after December 15, 2019, including interim periods within that period, and early adoption is permitted. The impact of the adoption of this standard did not have a material impact on the Company’s 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 was effective for the Company beginning January 1, 2020. The impact of the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which requires recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new guidance applies to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. The new guidance also applies to debt securities and other financial assets measured at fair value through other comprehensive income. This guidance was effective for the Company beginning January 1, 2020. The impact of the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

10


 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740: Simplifying the Accounting for Income Taxes), which removes certain exceptions to the general principles in Topic 740. ASU 2019-12 is effective for the fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848: Facilitation of the Effects of Reference Rate Reform on Financial Reporting). The new guidance provides optional guidance for a limited period of time for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance will be effective prospectively as of March 12, 2020 through December 31, 2022 and interim periods within those fiscal years. 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, at March 31, 2020 and March 31, 2019, stock options, warrants and, if converted, preferred stock totaling approximately 9,688,920 and 8,817,000 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 our collaboration partner's parent company headquarters.  Research and development revenues disaggregated by location were as follows (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Japan

 

$

333

 

 

$

6,413

 

United States

 

 

1,467

 

 

 

 

Total research and development revenue

 

$

1,800

 

 

$

6,413

 

 

 

Related Party Collaboration Agreement - Takeda

Research and development revenue from related party relates to revenue from research and development agreements with Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Ltd. (“Takeda”) and were as follows (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Takeda Individual Project Agreement

 

 

 

 

 

54

 

Takeda Development and License Agreement

 

 

147

 

 

 

6,114

 

Takeda Multi-Target Agreement

 

 

186

 

 

 

245

 

Total research and development revenue

 

$

333

 

 

$

6,413

 

 

11


 

At March 31, 2020 and December 31, 2019, the Company had $36.1 million and $36.7 million, respectively, of Deferred revenue related to research and development agreements. Deferred revenue, other liabilities for co-share payments and accounts receivable balances from the research and development agreements with Takeda, who is a related party, were as follows (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Accounts receivable

 

$

1,300

 

 

$

408

 

Liabilities

 

 

 

 

 

 

 

 

Other current liabilities

 

$

7,754

 

 

 

 

Deferred revenue, current

 

 

8,773

 

 

 

8,780

 

Deferred revenue, non-current

 

 

1,355

 

 

 

441

 

Other liabilities

 

 

1,746

 

 

 

 

Total liabilities

 

$

19,628

 

 

$

9,221

 

 

Takeda Development and License Agreement

On September 18, 2018, the Company entered into a Development Collaboration and Exclusive License Agreement with Millennium Pharmaceuticals, Inc., a wholly owned subsidiary of Takeda Pharmaceutical Company Limited (“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, exercised its co-development option in July 2019 and as a result 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.

The Company 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 following the Company’s exercise of its option to co-develop, and from high-single digits to low teens if the Company elects to end its co-development.

The Company identified one performance obligation at the inception of the Takeda Development and License Agreement, the research and development services for the CD38-targeted SLT-A fusion protein, 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 $29.8 million consists of (1) the $30.0 million upfront payment, (2) a $10.0 million development milestone payment that was received in the first quarter of 2020, (3) minus $10.2 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 judgement was involved in determining transaction consideration, including the determination of the variable consideration, including the constraint on consideration.  

At March 31, 2020, 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 March 31, 2020.

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.

12


 

In July 2019, the Company exercised its co-development option and 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.

At March 31, 2020 and December 31, 2019, total deferred revenue related to the performance obligation was $7.2 million and $6.1 million, respectively.

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 Pharmaceutical Company Limited (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.

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:

 

 

$30.0 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 all option periods (three months after the completion of the evaluation of materials for the designated targets) for the designated targets if Takeda does not exercise its options, or, following exercise of any option, on the expiration of the last Royalty Term (the latest of the expiration of patent rights claiming the licensed ETB, expiration of regulatory exclusivity for the licensed ETB or ten years from first commercial sale of the licensed ETB). The Takeda Multi-Target Agreement may be terminated sooner by Takeda for convenience or upon a material change of control of the Company, 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 immediately upon written notice, under certain defined circumstances.

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

The Company determined that the promised goods and services under the Takeda Multi-Target Agreement were the background IP license, the research and development services, 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.

At March 31, 2020 and December 31, 2019, deferred revenue related to the performance obligation was $2.9 million and $3.1 million, respectively.

13


 

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 Millennium Pharmaceuticals, Inc., a wholly owned subsidiary of Takeda Pharmaceutical Company Ltd., in June 2018, that was amended and restated 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 received $2.2 million in compensation that included 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, the Company recognized $0.0 million and less than $0.1 million of research and development revenue for the three months ended March 31, 2020 and March 31, 2019 respectively. This revenue is deemed to be revenue from a related party (as discussed further in Note 7, Related Party Transactions).  

Vertex Collaboration Agreement

In November 2019, the Company entered into a Master Collaboration Agreement (the “Vertex Collaboration Agreement”) with Vertex Pharmaceuticals Incorporated (“Vertex”), to perform strategic research leveraging the Company’s engineered toxin body (“ETB”) technology platform to discover and develop novel targeted biologic therapies for applications outside of oncology.

Pursuant to the terms of the Vertex Collaboration Agreement, the Company granted Vertex an exclusive option to obtain an exclusive license under the Company’s licensed technology to exploit one or more ETB products that are discovered by the Company against up to two designated targets. Vertex has selected an initial target and has the option to designate one additional target within specified time limits.

Vertex payed the Company an upfront payment of $38 million, consisting of $23 million in cash and a $15 million equity investment pursuant to a Share Purchase Agreement (the “SPA”). In addition to the upfront payments, the Company may also receive an additional $22 million through the exercise of the options to license ETB products or to add an additional target. Additionally, Vertex will reimburse the Company for certain mutually agreed manufacturing technology transfer activities. The Company had $11.5 million of Deferred revenue, current, and $14.5 million of Deferred revenue, non-current, at March 31, 2020 related to the Vertex Collaboration Agreement. The Company had $8.5 million of Deferred revenue, current, and $19.0 million of Deferred revenue, non-current, at December 31, 2019 related to the Vertex Collaboration Agreement.

The Company may, for each target under the Vertex Collaboration Agreement, receive up to an additional $180 million in milestone payments upon the achievement of certain development and regulatory milestone events and up to an additional $70 million in milestone payments upon the achievement of certain sales milestone events. The Company will also be entitled to receive, subject to certain reductions, tiered mid-single digit royalties as percentages of calendar year net sales, if any, on any licensed product.

The Company will be responsible for conducting the research activities through the designation, if any, of one or more development candidates. Upon the exercise by Vertex of its option for a development candidate, Vertex will be responsible for all development, manufacturing, regulatory and commercialization activities with respect to that development candidate.

Unless earlier terminated, the Vertex Collaboration Agreement will expire (i) on a country-by-country basis and licensed product-by-licensed product basis on the date of expiration of all payment obligations under the Vertex Collaboration Agreement with respect to such licensed product in such country and (ii) in its entirety upon the expiration of all payment obligations thereunder with respect to all licensed products in all countries or upon Vertex’s decision not to exercise any option on or prior to the applicable deadlines. Vertex has the right to terminate the Vertex Collaboration Agreement for convenience upon prior written notice to the Company. Either party has the right to terminate the Vertex 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 identified one performance obligation at the inception of the Vertex Collaboration Agreement consisting of research and development services. The Company recognizes revenue under the Vertex 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.

14


 

In connection with the Vertex Collaboration Agreement, the Company and Vertex entered into a SPA pursuant to which Vertex agreed to purchase 1,666,666 shares of the Company’s common stock, par value $0.001 per share, at a price per share of $9.00. As the price per share was in excess of the fair value of the Company’s common stock, the Company allocated $4.5 million of this consideration to the Vertex Collaboration Agreement. The issuance of these shares were pursuant to a private placement exemption from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D thereunder.

In addition to the SPA, the Vertex Collaboration Agreement contemplates that the Company may enter into certain other ancillary arrangements with Vertex.

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”).  The CD38 CPRIT Agreement was extended in November 2019, 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 2011, the Company entered into a Cancer Research Agreement (the “CPRIT Agreement”) with CPRIT under which CPRIT awarded a $10.6 million product development grant for the CD20-targeting ETB MT-3724. This product development grant ended in November 2019. At March 31, 2020 the Company had received $9.6 million and has a remaining receivable of $1.0 million.

During the three months ended March 31, 2020 and March 31, 2019, the Company recognized $2.3 million and $0.6 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 March 31, 2020 and December 31, 2019, the Company had $9.4 million and $7.1 million, respectively, recorded in Grants revenue receivable.

NOTE 4 — RELATED PARTY TRANSACTIONS

Takeda Agreements

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, 2019 filed with the SEC on March 13, 2020. Refer to Note 3, Research and Development Collaboration Agreements, for more details about the Takeda Collaboration Agreement, the Takeda Multi-Target Agreement and the Takeda Development and License Agreement. Jonathan Lanfear, a director of the Company, is the Vice President and Global Head of Oncology and Neuroscience Business Development for Takeda.

 

NOTE 5 —MARKETABLE SECURITIES AND 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

 

 

March 31, 2020

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

$

24,973

 

 

$

24,973

 

 

$

 

 

$

 

Commercial paper

 

37,821

 

 

 

 

 

 

37,821

 

 

 

 

United States Treasury Bills

 

31,427

 

 

 

 

 

 

31,427

 

 

 

 

United States government-related debt securities

 

10,057

 

 

 

 

 

 

10,057

 

 

 

 

Corporate bonds

 

1,250

 

 

 

 

 

 

1,250

 

 

 

 

Total

$

105,528

 

 

$

24,973

 

 

$

80,555

 

 

$

 

Amounts included in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

31,974

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities, current

 

70,544

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities, non-current

 

3,010

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents and marketable securities

$

105,528

 

 

 

 

 

 

 

 

 

 

 

 

 

15


 

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

December 31, 2019

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

$

79,970

 

 

$

79,970

 

 

$

 

 

$

 

Commercial paper

 

20,436

 

 

 

 

 

 

20,436

 

 

 

 

United States Treasury Bills

 

16,738

 

 

 

 

 

 

16,738

 

 

 

 

United States government-related debt securities

 

7,010

 

 

 

 

 

 

7,010

 

 

 

 

Corporate bonds

 

1,351

 

 

 

 

 

 

1,351

 

 

 

 

Total

$

125,505

 

 

$

79,970

 

 

$

45,535

 

 

$

 

Amounts included in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

84,362

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities, current

 

39,633

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities, non-current

 

1,510

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents and marketable securities

$

125,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

March 31, 2020

 

 

Cost Basis

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

Cash equivalents - money market funds, commercial

   paper and corporate bonds

$

31,972

 

 

$

2

 

 

$

 

 

$

31,974

 

Marketable securities, current  - commercial paper,

   Treasury bills and corporate bonds

 

70,274

 

 

 

273

 

 

 

(3

)

 

 

70,544

 

Marketable securities, non-current  - Treasury bills

$

3,000

 

 

$

10

 

 

$

 

 

$

3,010

 

 

 

December 31, 2019

 

 

Cost Basis

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

Cash equivalents - money market funds, commercial

   paper and corporate bonds

$

84,361

 

 

$

1

 

 

$

 

 

$

84,362

 

Marketable securities, current  - commercial paper,

   Treasury bills and corporate bonds

 

39,616

 

 

 

17

 

 

 

 

 

 

39,633

 

Marketable securities, non-current - Treasury bills

 

1,510

 

 

 

 

 

 

 

 

 

1,510

 

 

The following summarized the contractual maturities of the Company’s available-for-sale investments:

 

 

 

March 31, 2020

 

 

 

Cost Basis

 

 

Fair

Value

 

Due in one year or less

 

$

102,247

 

 

$

102,518

 

Due after one year through five years

 

 

3,000

 

 

 

3,010

 

Total

 

$

105,247

 

 

$

105,528

 

 

 

 

December 31, 2019

 

 

 

Cost Basis

 

 

Fair

Value

 

Due in one year or less

 

$

123,977

 

 

$

123,995

 

Due after one year through five years

 

 

1,510

 

 

 

1,510

 

Total

 

$

125,487

 

 

$

125,505

 

 

The Company received no proceeds and $1.3 million of proceeds from the sale of available-for-sale securities for the three months ended March 31, 2020 and March 31, 2019, respectively, with an immaterial realized gain for the three months ended March 31, 2019. The basis on which the cost of the security sold was determined is specific identification.

16


 

NOTE 6 BALANCE SHEET COMPONENTS

Accrued liabilities consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Accrued liabilities:

 

 

 

 

 

 

 

 

General and administrative

 

$

2,034

 

 

$

4,521

 

Clinical trial related costs

 

 

1,696

 

 

 

1,383

 

Non-clinical research and manufacturing operations

 

 

6,119

 

 

 

5,774

 

Payroll related

 

 

1,659

 

 

 

2,849

 

Other accrued expenses

 

 

23

 

 

 

17

 

Total Accrued liabilities

 

$

11,531

 

 

$

14,544

 

 

NOTE 7—PROPERTY AND EQUIPMENT

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Laboratory equipment

 

$

11,604

 

 

$

10,587

 

Leasehold improvements

 

 

11,212

 

 

 

10,383

 

Furniture and fixtures

 

 

150

 

 

 

150

 

Computer and equipment

 

 

368

 

 

 

331

 

 

 

 

23,334

 

 

 

21,451

 

Less: Accumulated depreciation

 

 

(4,033

)

 

 

(3,293

)

Total property and equipment, net

 

$

19,301

 

 

$

18,158

 

 

Depreciation expense was $0.7 million and $0.4 million for the three months ended March 31, 2020 and March 31, 2019, respectively.

 

In connection with the continued expansion of the Company’s facilities, at March 31, 2020 and December 31, 2019, the Company had net ARO assets totaling $0.9 million and $1.0 million, respectively. The ARO assets are included in Leasehold improvements.  

 

NOTE 8 — BORROWING ARRANGEMENTS

Perceptive Credit Facility

 

On February 27, 2018, the Company entered into a term loan facility with Perceptive Credit Holdings II, LP (“Perceptive”) in the amount of $10.0 million (the “Perceptive Credit Facility”). The Perceptive Credit Facility consists of a $5.0 million term loan, which was drawn on the effective date of the Perceptive Credit Facility, and an additional $5.0 million term loan that can be drawn down at a future date. The principal on the facility accrues interest at an annual rate equal to a three-month LIBOR plus the Applicable Margin. The Applicable Margin is 11.00%. Upon the occurrence, and during the continuance, of an event of default, the Applicable Margin, defined above, will be increased by 4.00% per annum. The interest rate at March 31, 2020 was 12.91%. Payments for the first 24 months are interest only and are paid quarterly. After the second anniversary of the closing date of the Perceptive Credit Facility, principal payments of $0.2 million are due each calendar quarter, with a final payment of $3.4 million due on February 27, 2022. This term loan facility matures on February 27, 2022 and includes both financial and non-financial covenants, including a minimum cash balance requirement. The Company is required to pay an exit fee of $100,000 on a pro rata basis on the maturity date or the earlier date of repayment of the term loans in full. Additionally, the Company incurred $0.5 million in deferred finance costs and issued the debt net of a $1.5 million discount. The exit fee, deferred finance costs and discount are being accreted to interest expense over the term of the Perceptive Credit Facility using the effective interest method.

 

For the three months ended March 31, 2020 and March 31, 2019, the Company recorded $0.2 million and $0.2 million of interest expense, respectively. For the three months ended March 31, 2020 and March 31, 2019, the Company recorded $0.1 million and $0.1 million of amortization of debt discount related to the Perceptive Credit Facility for both periods.

17


 

In connection with the Perceptive Credit Facility, on February 27, 2018 the Company issued Perceptive a warrant to purchase 190,000 shares of the Company’s common stock. The warrant is exercisable for a period of seven years from the date of issuance at an exercise price per share of $9.5792, subject to certain adjustments as specified in the Warrant. For more information refer to Note 11, “Stockholders Equity” included in the Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 13, 2020. The fair value of the warrant of $1.5 million was recorded as a debt discount, which is being amortized to interest expense over the term of the Perceptive Credit Facility using the effective interest method.

 

As of March 31, 2020 and December 31, 2019 the Perceptive Credit Facility principal balance was $4.8 million and $5.0 million, respectively, with principal payment due one calendar year, or more, from the balance sheet being classified as non-current. As of March 31, 2020, the Company was in compliance with the non-financial covenants of the Perceptive Credit Facility.

As of March 31, 2020 and December 31, 2019 the carrying value of the long-term debt was $3.7 million and $3.7 million, respectively.

Future required principal and final payments on the Perceptive Credit Facility were as follows at March 31, 2020 (in thousands):

 

2020 (remaining)

 

 

600

 

2021

 

 

800

 

2022

 

 

3,500

 

2023

 

 

 

Total

 

 

4,900

 

 

 

NOTE 9 – LEASES

 

On January 1, 2019, the Company adopted a new accounting standard that amends the guidance for the accounting and reporting of leases. Required disclosures have been made on a modified retrospective basis in accordance with the guidance of the standard. See Note 1, “Organization and Summary of Significant Accounting Policies” of the Company’s previously filed Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 13, 2020 for further discussion of the Company’s Lease accounting policy.

 

The Company has operating leases for administrative offices and R&D facilities, and certain finance leases for equipment. The operating leases have remaining terms of three years to eight years, and the finance leases have remaining terms of less than one year. 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. For leases commencing in 2019 and later, the Company will account for lease components (e.g., fixed payments including rent, real estate taxes, and insurance costs) with non-lease components (e.g. common area maintenance costs). Certain leases include options to renew, with renewal terms that can extend the lease term from three to five years. The exercise of lease renewal options for our existing leases is at our 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 January 2019, the Company entered into a lease agreement for an additional 57,000 square feet of administrative office and R&D space in Austin, Texas. The lease commenced March 2019 and expires August 2028 and does not contain an option to renew. The tables below include the impact of this lease. Upon the commencement of the lease, the Company recorded an operating lease ROU asset and a lease liability of $7.2 million. In connection with entering into the lease and in lieu of a cash deposit, the Company obtained a letter of credit of $3.0 million. Additionally, the Company has recorded an asset retirement obligation as a result of this lease which has a balance of $0.4 million at March 31, 2020.

 

At March 31, 2020, the Company did not have any operating and finance leases that have not yet commenced.

 

18


 

The components of lease expense were as follows (in thousands):

 

 

Three Months Ended

March 31,

 

 

2020

 

Operating leases

 

 

 

Operating lease expense

$

561

 

Variable lease expense

 

130

 

Total operating lease expense

$

691

 

 

 

 

 

Finance leases

 

 

 

Amortization of right-of-use asset

$

2

 

Interest on lease liabilities