Molecular Templates, Inc. - Quarter Report: 2023 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2023  

or

For the transition period from               to             

Commission File Number: 001-32979

Molecular Templates, Inc.

(Exact name of registrant as specified in its charter)

(512) 869-1555

(Registrant’s telephone number, including area code)

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

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 May 8, 2023, there were 56,351,647 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 titled “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:

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 subsidiary.

Molecular Templates, Inc.

TABLE OF CONTENTS

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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)

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)

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)

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)

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)

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.

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.

There is substantial doubt about the Company’s ability to continue as a going concern as of the date of this Quarterly Report on Form 10-Q. This substantial doubt relates to the Company’s future compliance with the financial covenant in its Loan and Security Agreement with K2 HealthVentures LLC (the “K2 Loan and Security Agreement”), which requires the Company to certify monthly that it has cash, cash equivalents and marketable securities of at least five times the Company’s cash monthly burn as defined in the agreement (the “Financial Covenant”), as well as the Company’s ability to avoid triggering an event of default related to its solvency (an “Insolvency Event of Default”) under the K2 Loan and Security Agreement. Currently, based on anticipated cost-savings from the restructuring, discussed in Note 12 “Restructuring Related Expenses,” the Company anticipates continued compliance with the Financial Covenant and anticipates the ability to avoid triggering an event of default related to an Insolvency Event of Default late into the third quarter of 2023. However, the Company will require additional funding in order to meet its covenant requirements and ongoing operations. If the Company cannot raise additional capital to maintain its compliance thereafter or negotiate an amendment to the Financial Covenant or the Insolvency Events of Default, then the Company will be in default of the K2 Loan and Security Agreement and the repayment of the Company’s indebtedness may be accelerated in full by K2 HealthVentures LLC. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and to provide sufficient certainty that it will continue as a going concern. As of March 31, 2023, the Company had an accumulated deficit of $433.9 million.

At March 31, 2023, the Company had cash, cash equivalents, and marketable securities of $41.7 million, including borrowings of $35.0 million under the K2 Loan and Security Agreement whose scheduled maturity date for repayment is June 1, 2024, but a default of the Financial Covenant or an Insolvency Event of Default would potentially trigger accelerated repayment. There can be no assurances that the Company will be able to raise sufficient capital to fund ongoing operations and maintain compliance with the Financial Covenant, and avoid triggering an event of default related to an Insolvency Event of Default beyond the third quarter of 2023 and/or be successful at negotiating an amendment to the K2 Loan and Security Agreement. If the Company is unable to obtain

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additional capital and continue as a going concern, it might have to 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 March 31, 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 $2.5 million of restricted cash at both March 31, 2023 and December 31, 2022, 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 to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. For Level 2 securities that have market prices from multiples sources, a “consensus price” or a weighted average price for each of these securities can be derived from a distribution-curve-based algorithm which includes market prices obtained from a variety of industrial standard data providers (e.g. Bloomberg), security master files from large financial institutions, and other third-party sources. Level 2 securities with short maturities and infrequent secondary market trades are typically priced using mathematical calculations adjusted for observable inputs when available.

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. At March 31, 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% and 30% of total revenues for the three months ended March 31, 2023 and 2022, respectively. Bristol Myers Squibb accounted for approximately 92% and 70% of total revenues for the three months ended March 31, 2023 and 2022, respectively.

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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 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 does not expect this to have a material impact since there are no material convertible instruments at this time.

NOTE 2 — NET INCOME/(LOSS) PER COMMON SHARE

Basic net income/(loss) per common share is computed by dividing net income/(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 income/(loss) calculation. Diluted net income/(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, 2023 and March 31, 2022, stock options, warrants and, if converted, preferred stock totaling approximately 8,680,000 and 12,999,000 common shares, respectively, were excluded from the computation of diluted net income/(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):

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 will be 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.

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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.

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 March 31, 2023 and March 31, 2022, the Company recognized $33.6 million and $5.9 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. The Company had $19.4 million and $45.3 million of deferred revenue, current, at March 31, 2023 and December 31, 2022, respectively, related to the BMS Collaboration Agreement. The Company had $1.2 million and $5.9 million of deferred revenue, non-current at March 31, 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 March 31, 2023, the Company did not recognize research and development revenue related to the Takeda Multi-Target Agreement. For the three months ended March 31, 2022, the Company recognized $2.6 million as research and development revenue. As of March 31, 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 March 31, 2023, the Company has cumulatively recognized $12.4 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 March 31, 2023 and March 31, 2022, the Company recognized grant revenue under this award of $3.0 million and zero, respectively. Qualified expenditures submitted for reimbursement in excess of amounts received are recorded as receivables in grant revenue receivable. As of March 31, 2023 and December 31, 2022, the Company recorded grant revenue receivable of $2.8 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 —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):

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

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

The Company received no proceeds from the sale of available-for-sale securities for the three months ended March 31, 2023 and March 31, 2022, respectively, and no realized gain for the three months ended March 31, 2023 and March 31, 2022.

NOTE 6 — BALANCE SHEET COMPONENTS

Accrued liabilities consisted of the following (in thousands):

NOTE 7—PROPERTY AND EQUIPMENT

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

Depreciation expense was $2.0 million and $1.8 million for the three months ended March 31, 2023 and March 31, 2022, respectively.

In connection with the continued expansion of the Company’s facilities, at both March 31, 2023 and December 31, 2022, the Company had net Asset Retirement Obligation (ARO) assets totaling $0.3 million. The ARO assets are included in leasehold improvements.

NOTE 8 — BORROWING ARRANGEMENTS

K2 HealthVentures Loan and Security Agreement

              In May 2020, the Company entered into 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 to date the Company has 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 accrues 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 will be interest only until the loan’s maturity date of June 1, 2024, and (ii) the Financial Covenant will 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.

The K2 Loan and Security Agreement includes both financial and non-financial covenants including the Financial Covenant as well as solvency requirements, the breach of which would trigger an event of default. The Company was in compliance with the Financial Covenant and solvency requirements at March 31, 2023. The Company recorded the debt net of $2.8 million comprised of deferred financing costs, debt discount and associated exit fee which are being accreted to interest expense over the term of the K2 Loan and Security Agreement using the effective interest method. Additionally, the Company incurred $0.2 million in facilities fee related to the second tranche which was previously classified as a prepaid asset.

As of both March 31, 2023 and December 31, 2022, the K2 Loan principal balance was $35.0 million.

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As of March 31, 2023 and December 31, 2022, the carrying value of long-term debt was $36.4 million and $36.2 million, respectively.

Future required principal and final payments on the K2 Loan were as follows at March 31, 2023 ($ in thousands):

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”).

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 August 31, 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 months ended March 31, 2023 and March 31, 2022 and (in thousands):

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The following table summarizes the balance sheet classification of leases at March 31, 2023 (in thousands):

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

Maturities of lease liabilities were as follows as of March 31, 2023 (in thousands):

Supplemental cash flow information related to the Company’s leases were as follows (in thousands):

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NOTE 10 — CONTRACTUAL COMMITMENTS

The Company has entered into project work orders for each of its clinical trials with clinical research organizations (each being a “CRO”) and related laboratory vendors. Under the terms of these agreements, the Company is required to pay certain upfront fees for direct services costs. Based on the particular agreement some of the fees may be for services yet to be rendered and are reflected as a current prepaid asset and have an unamortized balance of approximately zero at March 31, 2023. The Company has entered into agreements with CROs and other external service providers for services, primarily in connection with the clinical trials and development of the Company’s drug or biologic candidates. The Company was contractually obligated for up to approximately $34.6 million of future services under these agreements at March 31, 2023, for which amounts have not been accrued as services have not been performed. The Company’s actual contractual obligations will vary depending upon several factors, including the progress and results of the underlying services.

The Company has entered into estimated purchase obligations, which include signed orders for capital equipment. These estimated purchase obligations total in range from $3.1 million to $3.3 million.

NOTE 11 — STOCK-BASED COMPENSATION

Stock-based compensation expense, which consists of the compensation cost for employee stock options and the value of options issued to non-employees for services rendered, was allocated to research and development and general and administrative in the consolidated statements of operations as follows (in thousands):

At March 31, 2023, the total unrecognized compensation cost related to unvested stock-based awards granted to employees under the Company’s equity incentive plans was approximately $13.5 million. This cost will be recorded as compensation expense on a ratable basis over the remaining weighted average requisite service period of approximately 2.60 years.

Valuation Assumptions

The Company estimated the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is being amortized ratably over the requisite service periods of the awards, which is generally the vesting period.

The fair value of employee stock options was estimated using the following weighted-average assumptions:

Equity Incentive Plans

These plans consist of the 2018 Equity Incentive Plan, the 2014 Equity Incentive Plan, as amended; the 2004 Amended and Restated Equity Incentive Plan; and the Amended and Restated 2004 Employee Stock Purchase Plan. As of May 31, 2018, the 2014 Equity Incentive Plan; and the 2004 Amended and Restated Equity Incentive Plan were terminated, and no further shares will be granted from those plans.

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The following table summarizes stock option activity under the Company’s equity incentive plans:

The total intrinsic value of stock options exercised during the three months ended both March 31, 2023 and 2022, was zero, as determined at the date of the option exercise.

Cash received from stock option exercises was zero for the three months ended both March 31, 2023 and 2022. The Company issues new shares of common stock upon exercise of options.

NOTE 12 – RESTRUCTURING RELATED EXPENSES

On March 29, 2023, the Company implemented a strategic reprioritization and corresponding reduction in workforce, designed to focus on the clinical development programs for MT-6402, MT-8421 and MT-0169, and preclinical activities related to the Company’s collaboration with Bristol Myers Squibb (the “Restructuring”). The Restructuring reduced the Company’s workforce by approximately 50%, ceased further development of the Company’s MT-5111 clinical development program, and refocused the majority of the Company’s pre-clinical efforts around activities related to the Bristol Myers Squibb collaboration. The Company incurred approximately $0.3 million in expenses related to the Restructuring in the first quarter of 2023, which is included in research and development and general and administrative operating costs in the Condensed Consolidated Statement of Operations. The Company estimates that it will incur an aggregate of approximately $0.4 million of costs in connection with the reduction in workforce related to severance pay and other related termination benefits. The Company expects the remaining costs associated with the Restructuring to be incurred during the second quarter of 2023.

The following table summarizes the activity for the three months ended March 31, 2023 for expenses related to the restructuring accruals, which are included in Accrued liabilities in the Company’s Condensed Consolidated Balance Sheets as of March 31, 2023 (in thousands):

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited financial information and the notes thereto included appearing elsewhere in this Quarterly Report on Form 10-Q, and the audited financial information and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 30, 2023. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.

Overview

Molecular Templates is a clinical-stage biopharmaceutical company focused on the discovery and development of targeted biologic therapeutics. Our proprietary drug platform technology, known as engineered toxin bodies (“ETBs”), leverages the resident biology of a genetically engineered form of Shiga-like Toxin A subunit (“SLTA”) to create novel therapies with potent and differentiated mechanisms of action (“MOA”) for cancer.

Recent Developments

Partial Clinical Hold for Phase 1 Study of MT-0169

On April 7, 2023, we announced that the U.S. Food and Drug Administration (the “FDA”) informed us that it had placed a partial clinical hold on the Phase 1 study of MT-0169 based on previously disclosed cardiac adverse events noted in two patients dosed at 50 mcg/kg that prompted the dose reduction to 5 mcg/kg in early 2022. We have provided the FDA, as requested, narratives on the two patients who experienced cardiotoxicity at 50 mcg/kg, justification for the revised dose of 5 mcg/kg, and data evaluating the clinical benefit-to-risk ratio seen with the lower doses of MT-0169. We anticipate feedback from the FDA on our responses to the clinical hold by the end of May 2023. Under the partial clinical hold, current study participants may continue treatment, but no new patients will be enrolled until the partial hold is lifted by the FDA. If the FDA does not lift the partial clinical hold in the near future or at all, our clinical development of MT-0169 will be materially and adversely delayed and impaired. There can be no assurance that our current or future clinical trials will not be subject to additional partial or full clinical holds, which could delay or impair the commencement and completion of our clinical trials and the regulatory approval of our drug or biologic candidates.

Nasdaq Hearing Process regarding Potential Delisting of Common Stock

In connection with the deficiency and delisting notices received from Nasdaq as previously disclosed, we attended a hearing before the Nasdaq Hearings Panel (the “Panel”) on April 13, 2023, where we presented our plan to regain compliance with both the bid price and stockholders’ equity requirements. On May 8, 2023, we received the Panel’s decision, which granted our request for an extension to regain compliance with both the bid price and stockholders’ equity requirements by August 28, 2023, subject to certain conditions as set forth by the Panel. We continue to work diligently to regain compliance. Our plan with respect to the bid price requirement may include seeking to affect a reverse stock split, subject to obtaining stockholder approval, and to regain compliance with the stockholders’ equity requirement by raising capital. However, there can be no assurance that we will be able to raise sufficient capital to regain compliance with the applicable listing criteria such as the stockholders’ equity requirement within the extension granted by the Panel. Further, there can be no assurance that the Panel will not reconsider the terms of this extension based upon future events, conditions or circumstances that may arise with the Company, which in the opinion of the Panel, may make continued listing on the Nasdaq Capital Market inadvisable.

Process to Explore Strategic Alternatives

We have an ongoing process to explore a range of strategic and financing alternatives to maximize shareholder value.  In addition to continuing to explore available financing alternatives to maintain continued compliance with the covenants and restrictions under our Loan and Security Agreement with K2 HealthVentures LLC (“K2”) (the “K2 Loan and Security Agreement”) as described below and to lengthen our cash runway, our process will focus on identifying and evaluating any other strategic alternatives, including potentially the sale of all, or part, of our assets, or a merger.  We have retained the investment bank Stifel, Nicolaus & Company, Incorporated to act as a strategic advisor for this process. There can be no assurance that this strategic review process will result in the completion of any transaction. We have not set a timetable for completion of this strategic review process, and we do not intend to comment further unless or until our Board of Directors has approved a definitive course of action, the review process is concluded, or it is determined that other disclosure is appropriate.

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Business

ETBs use a genetically engineered version of the SLTA, a ribosome inactivating bacterial protein. In its wild-type form, Shiga-like Toxin (“SLT”) is thought to induce its own entry into a cell when proximal to the cell surface membrane, self-route to the cytosol, and enzymatically and irreversibly shut down protein synthesis via ribosome inactivation. SLTA is normally coupled to its cognate Shiga-like Toxin B subunit (“SLTB”) to target the CD77 cell surface marker, a non-internalizing glycosphingolipid. In our scaffold, a genetically engineered SLTA subunit with no cognate SLTB component is genetically fused to antibody domains or fragments specific to a target, resulting in a biologic therapeutic that can identify the particular target and specifically kill the cell. The antibody domains may be substituted with other antibody domains having different specificities to allow for the rapid development of new drugs to selected targets in cancer.

ETBs combine the specificity of an antibody with SLTA’s potent mechanism of cell destruction. Based on the disease setting, we have created ETBs that have a reduced propensity for triggering innate immunogenicity and attendant toxicities like capillary leak syndrome (“CLS”). To date, there have been no instances of CLS or other manifestations of innate immunity observed with any of our next-generation ETBs.

ETBs have relatively predictable pharmacokinetic (“PK”) profiles and can be rapidly screened for desired activity in robust cell-based and animal-model assays. Because SLTA can induce internalization against non- and poorly-internalizing receptors, the universe of targets for ETBs should be substantially larger than that seen with antibody drug conjugates (“ADCs”), which are not likely to be effective if the target does not readily internalize the ADC payload.

ETBs have a differentiated mechanism of cell kill in cancer therapeutics (the inhibition of protein synthesis via ribosome destruction), and we have preclinical and clinical data demonstrating the utility of these molecules in chemotherapy-refractory cancers. ETBs have shown good tolerability in multiple animal models as well as a generally favorable tolerability profile in our clinical studies to date. We believe the target specificity of ETBs, their ability to self-internalize, their potent and differentiated mechanism of cell kill and their tolerability profile provide opportunities for the clinical development of these agents to address multiple cancer types.

We have developed ETBs to various targets, including PD-L1, CD38, and CTLA-4. PD-L1 and CTLA-4 are key immune checkpoint pathways and are validated targets expressed in a variety of solid tumor cancers and immune cells. The differentiated mechanism of action of our ETBs allows for a novel approach to mediating anti-tumor T-cell activity against immuno-oncology targets by: (i) dismantling the tumor micro-environment (“TME”) through the depletion of immunosuppressive immune cells and (ii) delivering high avidity major histocompatibility complex-I (“MHC-I”) antigens to the tumor to directly alter the tumor’s immunophenotype. The altering of the tumor’s immunophenotype is unique and leverages the intrinsic intracellular routing properties of ETBs through a mechanism we call Antigen Seeding.

Immuno-Oncology ETBs

MT-6402 – ETB Targeting PD-L1

We filed an Investigational New Drug (“IND”) application for MT-6402, our ETB targeting PD-L1, in December 2020 and the IND was accepted in January 2021. A Phase I study of MT-6402 in relapsed/refractory patients with PD-L1 expressing tumors began in July 2021 at a starting dose of 16 mcg/kg. The Phase I study for MT-6402 is a multi-center, open-label, dose escalation and dose

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expansion trial. Patients with confirmed PD-L1 expressing tumors or confirmed PD-L1 expression in the TME are eligible for enrollment, irrespective of HLA genotype or CMV status. Following a review of the safety data from cohort 6 (83 mcg/kg), which was well tolerated, patient enrollment in cohort 7 initiated and is continuing at a dose of 100 mcg/kg. In November 2021, MT-6402 was granted Fast Track designation for the treatment of patients with advanced NSCLC expressing PD-L1. For MT-6402, dose escalation in the Phase I study continues as planned for 2023, with one expansion for patients with high PD-L1 tumor expression (≥ 50%) and the other expansion for patients with low (1-49%) PD-L1 tumor expression.

As of May 2023, patients have been treated across six dose escalation cohorts of 16 mcg/kg, 24 mcg/kg, 32 mcg/kg, 42 mcg/kg, 63 mcg/kg and 83 mcg/kg in the MT-6402 study of patients with relapsed/refractory tumors that express PD-L1. Dose escalation continues with patients being recruited at 100 mcg/kg. We continue to observe pharmacodynamic (“PD”) effects including the depletion of PD-L1+ monocytes, MDSCs, PD-L1+ dendritic cells, as well as T cell activation.

One patient with high tumor PD-L1 expression who also had Antigen Seeding capability, demonstrated tumor regression while being dosed with MT-6402 for over 7 months. This patient, with non-small cell lung cancer (“NSCLC”), was treated in cohort 1 (16 mcg/kg) and demonstrated resolution of three osseous lesions and a reduction in uptake in the remaining lesion. This patient also experienced grade 2 cytokine release syndrome (“CRS”) consistent with T-cell activation and was dose reduced to 8 mcg/kg. This patient had evaluable-only multiple sites of bone disease that appeared to have resolved on bone scan after 3-4 months on MT-6402 with only one remaining site which showed decreased uptake.

One patient in cohort 5 (63 mcg/kg) with metastatic squamous cell nasopharynx carcinoma with disease progression after radiation therapy, chemotherapy, and pembrolizumab had a Partial Response (“PR”) (RECIST) with a 63% reduction in the index lesion after cycle 2. The PR was confirmed after cycle 4 with a 66% reduction and the patient remains on treatment and in a response in cycle 7. This patient had 2% PD-L1 expression and was not HLA-A*02, suggesting the response is due to T-cell activation through the clearance of PD-L1+ immune cells. The patient showed a >250% increase in CD8/CD4 T-cell ratios. To date, treatment-related adverse events (“AEs”) including immune related AEs have been largely restricted to grade 1 or grade 2.

MT-8421—ETB Targeting CTLA-4

We filed an IND for MT-8421, our ETB targeting CTLA-4, in February 2023 and the IND was accepted in March 2023. MT-8421, along with MT-6402, represent our unique approach to immuno-oncology based on dismantling the TME through direct cell-kill of tumor and immune cells and not only the blocking of ligand-ligand interactions seen with current antibody therapeutics. The ETB approach includes potent destruction of CTLA-4+ regulatory T cells (“Tregs”) via enzymatic ribosome destruction, and the mechanism of cell kill is independent of TME. MT-8421 preferentially destroys high CTLA-4 expressing Tregs in the TME relative to peripheral Tregs which are lower CTLA-4 expressing. We expect to initiate a first-in-human Phase 1 study by mid-year 2023.

Hematologic Malignancy Targeted ETBs

MT-0169—ETB Targeting CD38

MT-0169, our ETB targeting CD38, had its IND filed in May 2019 and was accepted in June 2019. The Phase I study for MT-0169 in relapsed/refractory multiple myeloma initiated in the fourth quarter of 2019, with the first patient dosed in February 2020. In December 2019, the FDA granted Orphan Drug Designation to MT-0169 for the treatment of multiple myeloma.

The revised protocol for the ongoing Phase I study for MT-0169 in patients with relapsed/refractory multiple myeloma opened in January 2022. The revised protocol began at the lower dose of MT-0169 at 5 mcg/kg to reduce the risk of AEs observed at the initial dose level of 50 mcg/kg and to enable patients to continue MT-0169 therapy for a longer duration that may drive tumor benefit. We opened new sites for the Phase I study and enrollment resumed in July 2022. Following a review of the safety data from cohorts 1 (5 mcg/kg) and 2 (10 mcg/kg) in which no cardiac AEs were observed, dose escalation began in cohort 3 at 15 mcg/kg. In April 2023, the FDA placed the Phase I study for MT-0169 on a partial clinical hold based on previously disclosed cardiac AEs noted in two patients dosed at 50 mcg/kg that prompted the dose reduction to 5 mcg/kg last year. Under the partial clinical hold, current study participants may continue treatment, but no new patients will be enrolled until the partial hold is lifted by the FDA. We submitted our response to the partial clinical hold to the FDA in May 2023. Of the patients treated, one patient with extramedullary IgA myeloma treated at 5 mcg/kg has had a marked reduction in IgA serum protein, conversion from immunofixation positive to negative and resolution of uptake on bone scan of skeletal lesions demonstrating a stringent Complete Response (“CR”). The patient’s disease was quad-agent refractory including CD38-targeting, proteosome inhibitor, IMiD, and a BCMA bispecific antibody. The patient continues on study in a stringent CR at cycle 9.

We expect to provide periodic updates on MT-6402, MT-8421, and MT-0169 throughout 2023.

We have built up multiple core competencies around the creation and development of ETBs. We developed the ETB technology in-house and continue to make iterative improvements in the scaffold and identify new uses of the technology. We also developed the proprietary process for manufacturing ETBs under Current Good Manufacturing Process (“cGMP”) regulatory standards and continue to make improvements to our manufacturing processes.

We have conducted multiple cGMP manufacturing runs with our compounds and believe this process is robust and could support commercial production with gross margins that are similar to those seen with antibodies.

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Financial Operations Overview

Revenue

To date, we have not generated any revenue from product sales to customers. We do not expect to receive any revenue from any ETB candidates that we or our current or future collaboration partners develop, including MT-6402, MT-8421, and MT-0169, until we obtain regulatory approval and commercialize such biologics. Our revenue consists principally of collaboration revenue and grant revenue.

Research and Development revenue primarily relates to our collaboration agreement with Bristol Myers Squibb which is accounted for using the percentage-of-completion cost-to-cost method.

Grant revenue relates to our CPRIT grant for a CD38 ETB (MT-0169). CPRIT grant funds for MT-0169 are provided to us in arrears as cost reimbursement where revenue is recognized as allowable costs are incurred. Revenue recognized in excess of amounts collected are recorded as grant receivable. Funds received in excess of expenditures are recorded as deferred revenue.

For more information about our revenue recognition policy, please see Note 1, “Organization and Summary of Significant Accounting Policies” to our audited consolidated financial statements for the year ended December 31, 2022, included in our Annual Report on Form 10-K.

Research and Development Expenses

Research and development expenses consist principally of:

Our research and development expenses may vary substantially from period to period based on the timing of our research and development activities, including the initiation and enrollment of subjects in clinical trials and manufacture of drug or biologic materials for clinical trials. We expect research and development expenses to increase as we advance the clinical development of MT-6402, MT-8421, and/or MT-0169. The successful development of our ETB candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing and costs of the efforts that will be necessary to complete the development of, or the period, if any, in which material net cash inflows may commence from any of our ETB candidates. This is due to numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

Any of these variables with respect to the development of MT-6402, MT-8421, MT-0169, or any other ETB candidate that we may develop could result in a significant change in the costs and timing associated with the development of such candidates. For example, if the FDA, the European Medicines Agency (“EMA”) or other regulatory authority were to require us to conduct pre-clinical and clinical studies beyond those which we currently anticipate will be required for the completion of clinical development or if we experience significant delays in enrollment in any clinical trials, we could be required to expend significant additional financial resources and time on the completion of our clinical development programs.

General and Administrative Expenses

Our general and administrative expenses consist principally of:

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Other Income (Expense)

Other income (expense) mainly includes interest income earned on our cash and marketable securities balances held and interest expense on our outstanding borrowings.

Results of Operations

Revenues

The table below summarizes our revenues as follows (in thousands):

Research and Development Revenue 

The increase in research and development revenue for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to the completion of the research program for one of the collaboration’s targets and the completion of the related performance obligations under our BMS Collaboration Agreement, resulting in recognition of $25.8 million of research and development revenue.

For more information about our prior and current collaboration agreements, please see Note 3 “Research and Development Agreements” to our unaudited consolidated financial statements for the three months ended March 31, 2023, included in this Quarterly Report on Form 10-Q.

Grant Revenue 

The increase in grant revenue for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to recognizing revenue for the CD38 CPRIT Agreement grant during the period.

Operating Expenses

The table below summarizes our operating expenses as follows (in thousands):

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Research and Development Expenses

The table below summarizes our research and development expenses as follows (in thousands):

Research and development (“R&D”) expenses decreased $2.5 million during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 and was primarily due to a decrease in employee compensation and program costs and partially offset by increases in laboratory costs.

Program costs decreased $0.9 million during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The program costs primarily driving the decrease for the three months ended March 31, 2023 were $0.7 million for MT-8421, $0.4 million for Bristol Myers Squibb, $0.3 million for MT-5111 and $0.1 million for MT-3724, partially offset by increases of $0.5 million for MT-0169 and $0.1 million for MT-6402.

Employee compensation costs decreased by $2.5 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 as a result of the decrease in R&D headcount.

Laboratory costs increased by $1.7 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The main driver of this increase is laboratory expansion costs, supplies and equipment.

General and Administrative Expenses

General and administrative expenses decreased $1.8 million during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The main driver of this decrease was primarily related to a decrease in employee compensation costs.

Nonoperating activities

The table below summarizes our nonoperating activities as follows (in thousands):

Interest and Other Income and Interest Expense

The increase in interest and other income, net for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to higher interest related to our marketable securities.

The increase in interest expense for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to the increase in our interest rate related to our debt holdings.

Liquidity and Capital Resources

Sources of Funds and Liquidity

Historically, we have funded our operations by raising capital from external sources, especially through the sale of common stock and our borrowings under the K2 Loan and Security Agreement. However, we are currently facing substantial doubt about our ability to continue as a going concern, given that our continued compliance with the financial covenant in the K2 Loan and Security Agreement, which requires us to certify monthly that we have cash, cash equivalents and marketable securities of at least five times our cash monthly burn as defined in the agreement (the “Financial Covenant”), and our ability to avoid triggering an event of default related to our solvency (an “Insolvency Event of Default”) beyond the third quarter of 2023 is dependent on us raising capital before

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such time or being successful at negotiating an amendment to the K2 Loan and Security Agreement, see “−Recent Developments− Substantial Doubt about Going Concern related to Future Debt Compliance” in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 30, 2023. If we cannot raise additional capital by then to maintain ourselves in compliance or negotiate an amendment to the Financial Covenant or the Insolvency Events of Default, then we will be in default of the K2 Loan and Security Agreement and the repayment of our indebtedness may be accelerated in full by K2 HealthVentures LLC. At March 31, 2023, we had cash, cash equivalents, and marketable securities of $41.7 million, including borrowings of $35.0 million under the K2 Loan and Security Agreement whose scheduled maturity date for repayment is June 1, 2024, but a default of the Financial Covenant or an Insolvency Event of Default would potentially trigger accelerated repayment. There can no assurances that we will be able to raise sufficient capital to fund ongoing operations and maintain compliance with the Financial Covenant and avoid triggering an Insolvency Event of Default beyond the third quarter of 2023 and/or be successful at negotiating an amendment to the K2 Loan and Security Agreement thereafter.

Future Funding Requirements and Liquidity

Based on our cash, cash equivalents and marketable securities as of March 31, 2023 (approximately $41.7 million) and the anticipated cost-savings of the Restructuring and other assumptions, we anticipate that we will be able to fund our planned operating expenses and capital expenditure requirements pursuant to the priorities of our strategic refocusing into the second quarter of 2024. However, the foregoing is subject to our continued compliance with the Financial Covenant in the K2 Loan and Security Agreement, which requires us to certify monthly that we have cash, cash equivalents and marketable securities of at least five times our cash monthly burn as defined in the agreement, as well as our ability to avoid triggering an Insolvency Event of Default under the K2 Loan and Security Agreement. Currently, based on anticipated cost-savings from the Restructuring, we are anticipating continued compliance with the Financial Covenant and our ability to avoid triggering an Insolvency Event of Default late into the third quarter of 2023. If we cannot raise additional capital to maintain itself in compliance thereafter or negotiate an amendment to the Financial Covenant or to the Insolvency Events of Default, then we will be in default of the K2 Loan and Security Agreement and the repayment of our indebtedness may be accelerated in full by K2 HealthVentures LLC. As of March 31, 2023, we had $35.0 million outstanding under K2 Loan and Security Agreement, whose maturity date for repayment is June 1, 2024.

Our financial statements are prepared using U.S. generally accepted accounting principles (“U.S. GAAP”) applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have not yet established an ongoing source of revenues sufficient to cover our operating costs and to provide sufficient certainty that we will continue as a going concern.

Cash Flows

Comparison of Three Months Ended March 31, 2023 and 2022  

The table below summarizes our cash flows for the three months ended March 31, 2023 and 2022 (in thousands):

The decrease in net cash used in operating activities for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to decreases in headcount and program expenses.  

The increase in net cash provided by investing activities for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to changes of investment activity of marketable securities.

Operating and Capital Expenditure Requirements

We have not achieved profitability since our inception and had an accumulated deficit of $433.9 million at March 31, 2023. We expect to continue to incur significant operating losses for the foreseeable future as we continue our research and development efforts and seek to obtain regulatory approval and commercialization of our ETB candidates.

We expect our expenses to increase substantially in connection with our ongoing development activities related to MT-6402, MT-8421, MT-0169, and our collaboration with Bristol Myers Squibb. In addition, we expect to incur additional costs associated with operating as a public company. We anticipate that our expenses will increase substantially if and as we:

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Because of the numerous risks and uncertainties associated with the development of MT-6402, MT-8421, MT-0169, and our collaboration with Bristol Myers Squibb, and because the extent to which we may enter into collaborations with third parties for development of these ETB candidates is unknown, we are unable to estimate the amount of increased capital outlays and operating expenses associated with completing the research and development of our ETB candidates. Our future capital requirements for MT-6402, MT-8421, or MT-0169 will depend on many factors, including:

Identifying potential ETB candidates and conducting pre-clinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our ETB candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of drugs or biologics that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.

Adequate additional funds may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, stockholders’ ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect their rights as stockholders. Additional debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute stockholders’ ownership interest.

If we raise additional funds through collaborations, governmental grants, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or ETB candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development programs or any future

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commercialization efforts or grant rights to develop and market ETB candidates that we would otherwise prefer to develop and market ourselves.

Critical Accounting Policies and Use of Estimates

Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses based on historical experience and on various assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For further information on our critical accounting policies, see the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2022, which we filed with the SEC on March 30, 2023.

Recently Adopted Accounting Pronouncements

For a discussion of recently adopted accounting pronouncements see the discussion in our Annual Report on Form 10-K for the year ended December 31, 2022, which we filed with the SEC on March 30, 2023.

Recent Accounting Pronouncements Not Yet Adopted

For a discussion of recently issued accounting pronouncements and interpretations not yet adopted by us, see Note 1, “Organization and Summary of Significant Accounting Policies”, to our unaudited condensed financial statements for the quarter ended March 31, 2023, included in this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures at March 31, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures at March 31, 2023, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of such date.

Changes in internal controls over financial reporting.

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are subject to various legal proceedings, claims and administrative proceedings that arise in the ordinary course of our business activities. Although the results of the litigation and claims cannot be predicted with certainty, as of the date of this report, we do not believe we are party to any claim, proceeding or litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

ITEM 1A. RISK FACTORS

We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. The risks described below are not the only ones we face. Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time may also significantly impair our business operations. Our business could be harmed by any of these risks. Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and the related notes, before making any decision to purchase our common stock. If any of the possible adverse events described below actually occurs, we may be unable to conduct our business as currently planned and our prospects, financial condition, operating results and cash flows could be materially harmed. In addition, the trading price of our common stock could decline due to the occurrence of any of the events described below, and you may lose all or part of your investment. In assessing these risks, you should refer to the other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes.

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Summary Risk Factors

We are subject to a number of risks that if realized could affect our business, financial condition, results of operations and cash flows. As a clinical stage biopharmaceutical company, certain elements of risk are inherent to our business. Accordingly, we encounter risks as part of the normal course of our business. Some of the more significant challenges and risks include the following:

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The above list is not exhaustive, and we face additional challenges and risks. Please carefully consider all of the information in this Form 10-Q including matters set forth in this “Risk Factors” section.

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Risks Related to Our Financial Condition and Capital Requirements

We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern, including our continued compliance with the financial covenant under our debt facility, and the ability to avoid triggering an event of default related to, our solvency under our debt facility beyond the third quarter of 2023. Our independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited consolidated financial statements for the year ended December 31, 2022 included in our Annual Report on Form 10-K filed with the SEC on March 30, 2023.

We believe there is substantial doubt about our ability to continue as a going concern as of the date of this Quarterly Report on Form 10-Q. See Note 1 to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for additional information on our assessment. This substantial doubt relates to our future compliance with the financial covenant in our Loan and Security Agreement with K2 HealthVentures LLC (the “K2 Loan and Security Agreement”) which requires us to certify monthly that we have cash, cash equivalents and marketable securities of at least five times our cash monthly burn as defined in the agreement (the “Financial Covenant”), as well as our ability to avoid triggering an event of default related to our solvency (an “Insolvency Event of Default”) under the K2 Loan and Security Agreement. Currently, based on anticipated cost-savings from the Restructuring, we anticipate continued compliance with the Financial Covenant and continued ability to avoid triggering an Insolvency Event of Default late into the third quarter of 2023. However, we will require additional funding in order to meet our covenant requirements and ongoing operations.

If we cannot raise additional capital by then to maintain ourselves in compliance or negotiate an amendment to the Financial Covenant or the Insolvency Events of Default, then we will be in default of the K2 Loan and Security Agreement and the repayment of our indebtedness may be accelerated in full by K2 HealthVentures LLC. At March 31, 2023, we had cash, cash equivalents, and marketable securities of $41.7 million, including borrowings of $35.0 million under the K2 Loan and Security Agreement whose scheduled maturity date for repayment is June 1, 2024, but a default of the Financial Covenant or an Insolvency Event of Default may trigger accelerated repayment.

There can no assurances that we will be able to raise sufficient capital to fund ongoing operations and maintain the Financial Covenant and avoid triggering an Insolvency Event of Default beyond the third quarter of 2023 and/or be successful at negotiating an amendment to the K2 Loan and Security Agreement. If we are unable to obtain additional capital and continue as a going concern, we might have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.

Our lack of cash resources and our conclusion that we may be unable to continue as a going concern may materially adversely affect our share price and our ability to raise new capital or to enter into critical contractual relations with third parties.

We may be unsuccessful in raising the capital necessary to address our going concern issues, or if we are successful, it may be on terms that are highly dilutive to existing stockholders.

Historically, we funded our operations by raising capital from external sources, especially through the sale of common stock and our borrowings under the K2 Loan and Security Agreement. However, we are currently facing significant challenges to our ability to raise capital through the sale of common stock, including the following factors:

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Given these factors, there can be no assurances we will be successful at raising sufficient capital to address our going concern issues. However, if we are successful, it may be on terms that are very highly dilutive to existing stockholders.

If we fail to execute successfully on our recently announced strategic reprioritization and restructuring, our business prospects and our financial condition may be adversely affected. Further, the Restructuring could result in disruptions to our business during transitional periods and thereafter.

There can be no assurances that we will be successful at executing on this strategic reprioritization or that the Restructuring will achieve the cost savings, operating efficiencies or other benefits that we may initially expect, which underlie our current cash runway expectations and our projection that we will remain in compliance with the Financial Covenant under the K2 Loan and Security Agreement and avoid triggering an Insolvency Event of Default under the K2 Loan and Security Agreement late into the third quarter of 2023. The restructuring activities may also result in a loss of continuity, accumulated knowledge and inefficiency during transitional periods and thereafter. In addition, internal restructurings can require a significant amount of time and focus from management and other employees, which may divert attention from operations. Further, the Restructuring may result in unexpected expenses or liabilities and/or write-offs. If the Restructuring fails to achieve some or all of the expected cost-savings and benefits therefrom, our cash resources may not last as long as estimated and our business, results of operations and financial condition could be materially and adversely affected.

A delisting of our common stock from Nasdaq could adversely affect our ability to raise additional capital through the public or private sale of equity securities and for investors to dispose of, or obtain accurate quotations as to the market value of, our common stock.

If our common stock is ultimately delisted by Nasdaq, our common stock may be eligible to trade on the OTC Bulletin Board or another over-the-counter market. Any such alternative would likely result in it being more difficult for us to raise additional capital through the public or private sale of equity securities and for investors to dispose of, or obtain accurate quotations as to the market value of, our common stock. In addition, there can be no assurance that our common stock would be eligible for trading on any such alternative exchange or markets.

Unless our common stock is listed on a national securities exchange, such as the Nasdaq Capital Market, our common stock may also be subject to the regulations regarding trading in “penny stocks,” which are those securities trading for less than $5.00 per share, and that are not otherwise exempted from the definition of a penny stock under other exemptions provided for in the applicable regulations. The following is a list of the general restrictions on the sale of penny stocks:

These requirements can severely limit the liquidity of securities in the secondary market because fewer brokers or dealers are likely to be willing to undertake these compliance activities. If our common stock is not listed on a national securities exchange, the rules and restrictions regarding penny stock transactions may limit an investor’s ability to sell to a third party and our trading activity in the secondary market may be reduced.

We may seek to effect a reverse stock split, subject to obtaining stockholder approval, in order to address the $1.00 minimum bid price requirement under Nasdaq rules. In the event a reverse stock split is implemented, we cannot predict the effect that such reverse stock split would have on the market price for shares of our common stock, and the history of similar reverse stock splits for companies in like circumstances has varied. Some investors may have a negative view of a reverse stock split. Even if such reverse stock split were to have a positive effect on the market price for shares of our common stock, performance of our business and

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financial results, general economic conditions and the market perception of our business, and other adverse factors which may not be in our control could lead to a decrease in the price of our common stock following such reverse stock split.

We have incurred losses since inception, have a limited operating history on which to assess our business, and anticipate that we will continue to incur significant losses for the foreseeable future.

We are a clinical development-stage biopharmaceutical company with a limited operating history. We currently generate no revenue from sales of any products, and we may never be able to develop or commercialize a drug or biologic candidate. We have incurred net losses in each year since 2009, excluding the current period. The net income attributable to common shareholders was $10.8 million for the three months ended March 31, 2023. At March 31, 2023, we had an accumulated deficit of $433.9 million.

We have devoted substantially all of our financial resources to identify, acquire, and develop our drug or biologic candidates, including conducting clinical trials and providing general and administrative support for our operations. To date, we have financed our operations primarily through the sale of equity securities, debt financing and collaborations. The amount of our future net losses will depend, in part, on the rate of our future expenditures and our ability to obtain funding through equity or debt financings, strategic collaborations or grants. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk.

Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”) could have a material adverse effect on our stock price.

Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC require annual management assessments of the effectiveness of our internal control over financial reporting. If we fail to maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC. If we cannot favorably assess the effectiveness of our internal control over financial reporting, investor confidence in the reliability of our financial reports may be adversely affected, which could have a material adverse effect on our stock price.

We have never generated any revenue from product sales and may never become profitable.

We have no products approved for commercialization and have never generated any revenue. Our ability to generate revenue and achieve profitability depends on our ability, alone or with strategic collaboration partners, to successfully complete the development of, and obtain the regulatory and marketing approvals necessary to commercialize one or more of our drug or biologic candidates. We do not anticipate generating revenue from product sales for the foreseeable future. Our ability to generate future revenue from product sales depends heavily on our success in many areas, including but not limited to:

Even if one or more of the drug or biologic candidates that we develop is approved for commercial sale, we anticipate incurring significant costs associated with launching and commercializing any approved drug or biologic candidate. We also will have to further develop or acquire manufacturing capabilities or continue to contract with contract manufacturing organizations (“CMOs”), in order to

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continue development and potential commercialization of our drug or biologic candidates. For instance, if our costs of manufacturing our drug products are not commercially feasible, then we will need to develop or procure our drug products in a commercially feasible manner to successfully commercialize any future approved product, if any. Additionally, if we are not able to generate revenue from the sale of any approved products, we may never become profitable.

We hold a portion of our cash and cash equivalents that we use to meet our working capital and operating expense needs in deposit accounts that could be adversely affected if the financial institutions holding such funds fail.

We hold a portion of cash and cash equivalents that we use to meet our working capital and operating expense needs in deposit accounts. The balance held in these accounts may exceed the Federal Deposit Insurance Corporation (“FDIC”) standard deposit insurance limit of $250,000. If a financial institution in which we hold such funds fails or is subject to significant adverse conditions in the financial or credit markets, we could be subject to a risk of loss of all or a portion of such uninsured funds or be subject to a delay in accessing all or a portion of such uninsured funds. Any loss or lack of access to these funds could adversely impact our short-term liquidity and ability to meet our operating expense obligations.

Changes in interpretation or application of U.S. generally accepted accounting principles (“U.S. GAAP”) may adversely affect our operating results.

We prepare our consolidated financial statements to conform to U.S. GAAP. These principles are subject to interpretation by the Financial Accounting Standards Board (“FASB”) American Institute of Certified Public Accountants, the SEC and various other regulatory and accounting bodies. A change in interpretations of, or our application of, these principles can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. In addition, when we are required to adopt new accounting standards, our methods of accounting for certain items may change, which could cause our results of operations to fluctuate from period to period and make it more difficult to compare our financial results to prior periods.

Risks Related to the Development of Our Drug or Biologic Candidates

Manufacturing difficulties, disruptions or delays could limit supply of our drug or biologic candidates and adversely affect our clinical trials.

We currently have a current good manufacturing practices (“cGMP”) manufacturing facility and we have developed the capability to manufacture drug or biologic candidates for use in the conduct of our clinical trials. We may not be able to manufacture drug or biologic candidates or there may be substantial technical or logistical challenges to supporting manufacturing demand for drug or biologic candidates. We may also fail to comply with cGMP requirements and standards which would require us to not utilize the manufacturing facility to make clinical trial supply.

We plan to rely in part on third-party contract manufacturers, and their responsibilities will include purchasing from third-party suppliers the materials necessary to produce our drug or biologic candidates for our clinical trials and to support future regulatory approval. We expect there to be a limited number of suppliers for some of the raw materials that we expect to use to manufacture our drug or biologic candidates, and we may not be able to identify alternative suppliers to prevent a possible disruption of the manufacture of our drug or biologic candidates for our clinical trials, and, if approved, ultimately for commercial sale.

Although we generally do not expect to begin a clinical trial unless we believe we have a sufficient supply of a drug or biologic candidate to complete the trial, any significant delay or discontinuity in the supply of a drug or biologic candidate, or the raw materials or other material components used in the manufacture of the drug or biologic candidate, could delay completion of our clinical trials and potential timing for regulatory approval of our drug or biologic candidates, which would materially harm our business and results of operations. We do not yet have sufficient information to reliably estimate the cost of the commercial manufacturing of our drug or biologic candidates and our current costs to manufacture our drug products may not be commercially feasible, and the actual cost to manufacture our drug or biologic candidates could materially and adversely affect the commercial viability of our drug or biologic candidates. As a result, we may never be able to develop a commercially viable product.

In addition, as a drug or biologic candidate manufacturer with one manufacturing facility, we are exposed to the following additional risks:

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