Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition, changes in financial condition, plan of operations and results of operations should be read in conjunction with (i) our audited consolidated financial statements as at December 31, 2021 and December 31, 2020 and (ii) the section entitled “Business”, included in this annual report. The discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors.
Company Overview
We are a clinical-stage immuno-oncology company specializing in the development and commercialization of novel T cell-based immunotherapies and innovative peptide-based vaccines for the treatment of hematological malignancies and solid tumor indications. We developed our lead product candidates from our MultiTAA-specific T cell technology, which is based on the manufacture of non-engineered, tumor-specific T cells that recognize multiple tumor associated antigens, or TAAs. MultiTAA-specific T cells are able to recognize multiple tumor targets to produce broad spectrum anti-tumor activity. When infused into a cancer patient, the MultiTAA-specific T cells are designed to kill cancer cells expressing the TAA targets and potentially recruit the patient’s immune system to participate in the cancer killing process.
We licensed the underlying technology for MultiTAA-specific T cell therapy from BCM in March 2018. BCM had utilized the therapy in seven exploratory clinical trials. In these studies, BCM treated over 150 patients suffering from a variety of cancers including lymphoma, multiple myeloma, acute myeloid leukemia, acute lymphoblastic leukemia, pancreatic cancer, breast cancer and various sarcomas. In those studies, BCM saw evidence of clinical benefit, expansion of infused cells, epitope spreading, and decreased toxicity compared to other cellular therapies.
We are advancing three product candidates as part of our MultiTAA-specific T cell program for:
1. autologous treatment of lymphoma, and selected solid tumors
2. allogeneic T cells for the treatment of acute myeloid leukemia, or AML
3. off-the-shelf products in various indications
Our current clinical development programs are:
● MT-401 for the treatment of post-transplant AML, currently in a Phase 2 clinical trial
● MT-401-OTS for the treatment of AML, for which we expect to dose the first patient in a Phase 2 clinical trial in 2023
● MT-601 for the treatment of pancreatic cancer, for which we plan to submit an IND to the FDA in 2022 to initiate a Phase 1 trial in 2023
● MT-601 for the treatment of lymphoma, for which we plan to submit an IND to the FDA in 2022 to initiate a Phase 1 trial in 2023
We believe that the simplicity of our manufacturing process allows additional modifications to expand MultiTAA-specific T cell recognition of cancer targets. For example, we are currently analyzing the potential for a 12-antigen MultiTAA-specific T cell therapy and assessing the potential for combination therapies for our MultiTAA-specific T cell products.
We have positioned ourselves to be in full control of our research and development and clinical manufacturing needs by establishing a fully validated manufacturing facility. We believe that this has key advantages that distinguish us from our competitors, particularly because we are less reliant on contract manufacturing organizations, which are expensive and often have long lead times, shortages of skilled labor and a backlog of customers.
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Recent Development
On February 16, 2022, we received a notice from the Nasdaq Global Market that we were not in compliance with Nasdaq’s Listing Rule 5450(a)(1), as the minimum bid price of our common stock had been below $1.00 per share for 30 consecutive business days. We have 180 days, or until August 15, 2022, to regain compliance with the minimum bid price requirement. To regain compliance, the minimum bid price of our common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days during this 180-calendar day grace period. In the event we do not regain compliance with the minimum bid price requirement by August 15, 2022, we may be eligible for an additional 180-calendar day compliance period if we elect to transfer to the Nasdaq Capital Market to take advantage of the additional compliance period offered on that market. To qualify, we would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and would need to provide written notice of our intention to cure the bid price deficiency during the second compliance period.
Financial Overview
Research and Development Expenses
To date, our research and development expenses have related primarily to the development of our clinical platform and the identification and development of our product candidates. Clinical and research and development expenses consist of expenses incurred in performing research and development activities, cost of our clinical trials, including compensation, share-based compensation expense and benefits for research and development employees and consultants, facilities expenses, overhead expenses, cost of supplies, manufacturing expenses, fees paid to third parties and other outside expenses.
Clinical costs are expensed as incurred. Costs and timing of clinical trials and development of our product candidates will depend on a variety of factors that include, but are not limited to, the following:
● per patient clinical trial costs;
● the number of patients that participate in the clinical trials;
● the number of sites included in the clinical trials;
● the length of time required to enroll eligible patients;
● the number of doses that patients receive;
● the drop-out or discontinuation rates of patients;
● potential additional safety monitoring or other studies requested by regulatory agencies;
● the duration of patient follow-up;
● the efficacy and safety profile of the product candidates; and
● the ability to successfully manufacture patient doses.
In addition, the potential for success of each product candidate will depend on numerous factors, including clinical trial outcomes, acceptance by regulatory authorities, competition, manufacturing capability and commercial viability. We determine which programs to pursue and how much to fund each program in response to ongoing scientific assessments, competitive developments, clinical trial results, as well as an assessment of each product candidate's commercial potential. We anticipate our research and development costs will continue to increase over the next several years due to increased spending on the clinical development and manufacturing of our product candidates.
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General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including share-based compensation, for personnel in executive, finance, accounting, business development, legal and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters, insurance costs and professional fees for consultancy, accounting, audit and investor relations.
We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities, and the potential commercialization of our product candidates.
Income Taxes
We did not recognize any income tax expense for the years ended December 31, 2021 and 2020.
Other Income (Expense)
Other income (expense), net consists of interest income and change in fair value of warrant liabilities.
Results of Operations For the Years Ended December 31, 2021 and 2020
The following table summarizes the results of our operations (rounded to the thousand except for per share amounts) for the years ended December 31, 2021 and 2020, together with the changes to those items:
For the Years Ended
December 31,
2021
2020
Change
Revenues:
Grant income
$
1,242,000
$
467,000
$
775,000
166
%
Total revenues
1,242,000
467,000
775,000
166
%
Operating expenses:
Research and development
27,795,000
18,881,000
8,914,000
47
%
General and administrative
12,925,000
10,472,000
2,453,000
23
%
Total operating expenses
40,720,000
29,353,000
11,367,000
39
%
Loss from operations
(39,478,000)
(28,886,000)
(10,592,000)
37
%
Other income (expense):
Change in fair value of warrant liabilities
—
31,000
(31,000)
(100)
%
Loss on settlement
(2,407,000)
—
(2,407,000)
0
%
Interest income
6,000
149,000
(143,000)
(96)
%
Net loss
$
(41,879,000)
$
(28,706,000)
$
(13,173,000)
46
%
Net loss per share, basic and diluted
$
(0.55)
$
(0.61)
$
0.06
(10)
%
Weighted average number of common shares outstanding
76,506,000
47,040,000
29,466,000
63
%
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Revenue
We did not generate any revenue during the years ended December 31, 2021 and 2020, respectively, from the sales or licensing of our product candidates.
In August 2021, we received notice of a Product Development Research award totaling approximately $13.1 million from the Cancer Prevention and Research Institute of Texas, or CPRIT, to support our Phase 2 clinical trial of MT-401. During the year ended December 31, 2021, we recognized $1.2 million of revenue associated with the CPRIT grant.
During the year ended December 31, 2020, we recognized $0.5 million of revenue associated with a grant awarded to Mayo Foundation from the US Department of Defense for the Phase 2 clinical trial of TPIV200 which Mayo paid to us for clinical supplies manufactured by us and provided for the clinical trial funded by the grant. We refer to this grant as the Mayo Grant.
Operating Expenses
Operating expenses incurred during the fiscal year ended December 31, 2021 were $40.7 million compared to $29.4 million in the prior year. Significant changes and expenditures in operating expenses are outlined as follows:
Research and Development Expense
Research and development expenses increased by 47% to $27.8 million for the year ended December 31, 2021, compared to $18.9 million for the year ended December 31, 2020.
The increase of $8.9 million in 2021 was primarily attributable to the following:
o increase of $2.2 million in headcount-related expenses as we increased the number of research and development personnel,
o increase of $1.4 million in process development expenses,
o increase of $1.0 million in sponsored research and consulting expenses from BCM agreements,
o increase of $1.1 million in rent, utility and facilities expenses,
o increase of $1.8 million in clinical trial expenses related to MT-401,
o increase of $0.4 million in professional fees,
o increase of $0.3 million in stock-based compensation expenses,
o increase of $1.6 million in depreciation expense due to increased capital investments,
o increase of $0.3 million of other expenses, and
o decrease of $1.2 million in vaccine-based clinical trial expenses.
Included in research and development expenses are expenses related to agreements with BCM.
In November 2018 and February 2020, we entered in Sponsored Research Agreements with BCM, which provided for the conduct of research for us by credentialed personnel at BCM’s Center for Cell and Gene Therapy. During the years ended December 31, 2021 and 2020, we incurred $0.03 million and $0.3 million of expenses related to these agreements, respectively.
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In September 2019, we entered in a Clinical Supply Agreement with BCM, which provided for BCM to provide to us multi tumor antigen specific products. During the years ended December 31, 2021 and 2020, we incurred $1.2 million and $0.6 million related to this agreement, respectively.
In October 2019, we entered in a Workforce Grant Agreement with BCM, which provided for BCM to provide to us manpower costs of projects for manufacturing, quality control testing and validation run activities. During the years ended December 31, 2021 and 2020, we incurred $1.1 million and $0.6 million related to this agreement, respectively.
In August 2020, we entered in a Clinical Trial Agreement with BCM, which provided for BCM to provide to us investigator-initiated research studies. During the years ended December 31, 2021 and 2020, we incurred $0.5 million and $0.3 million related to this agreement, respectively.
General and Administrative Expenses
General and administrative expenses increased by 23% to $12.9 million for the year ended December 31, 2021 from $10.5 million during the prior period. The increase in general and administrative expenses of $2.5 million mainly comprised the following:
o increase of $0.7 million in headcount-related expenses as we increased the number of administrative personnel,
o increase of $0.4 million in rent and utility expenses,
o increase of $0.2 million in insurance expenses,
o increase of $0.4 million in legal and professional expenses,
o increase of $0.3 million in recruiting expenses, and
o increase of $0.5 million in stock-based compensation.
Other Income
Change in Fair Value of Warrant Liabilities
Change in fair value of warrant liabilities for the year ended December 31, 2021 was $0 as compared to $31,000 for the fiscal year ended December 31, 2020.
Arbitration settlement
An arbitration proceeding was brought against us before the Financial Industry Regulatory Authority, Inc., or FINRA by a broker seeking to be paid compensation for two financing transactions that occurred in 2018, a warrant conversion and a private placement, each brokered by another broker. The broker’s claims were based on a placement agent agreement for a private placement it brokered in 2017, under which it alleged it was entitled to compensation for the 2018 transactions. The FINRA panel found in favor of the broker and awarded the broker $2.4 million for compensation, interest and attorney fees, which we recorded in the year ended December 31, 2021. We removed the case to the United States District Court for the Southern District of New York on September 27, 2021. On October 22, 2021, we filed a motion in federal court to vacate the award. On March 9, 2022, the Company was notified that its motion to vacate the award was denied and the broker was awarded an additional $0.1 million in interest. Post judgment interest will continue to accrue at 1.02% until the judgement is paid.
Interest Income
Interest income was $6,000 and $0.1 million for the years ended December 31, 2021 and 2020, respectively, and was attributable to interest income relating to funds that are held in U.S. Treasury notes and U.S. government agency-backed securities. As part of the reaction to the COVID-19 pandemic, the Federal Reserve cut rates in mid-March 2020 to a range of 0.0%-0.25%.
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Net Loss
The increase in our net loss during the year ended December 31, 2021 compared to the year ended December 31, 2020 was due to the continued expansion of our research and development activities, increased expenses relating to future clinical trials, and the overall growth of our corporate infrastructure. We anticipate that we will continue to incur net losses in the future as we continue to invest in research and development activities, including clinical development of our MultiTAA T cell product candidates.
Liquidity and Capital Resources
We have not generated any revenues from the sales or licensing of our product candidates since inception and only have limited revenue associated with grants. We have financed our operations primarily through public and private offerings of our stock and debt including warrants and the exercise thereof.
The following table sets forth our cash, cash equivalents and restricted cash and working capital as of December 31, 2021 and 2020:
December 31,
December 31,
2021
2020
Cash, cash equivalents and restricted cash
$
43,497,000
$
21,352,000
Working capital
$
33,081,000
$
18,009,000
Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2021 and 2020:
For the Years Ended
December 31,
2021
2020
Net cash provided by (used in):
Operating activities
$
(27,280,000)
$
(20,035,000)
Investing activities
(3,131,000)
(9,253,000)
Financing activities
52,556,000
6,736,000
Net increase (decrease) in cash, cash equivalents and restricted cash
$
22,145,000
$
(22,552,000)
Operating Activities
Net cash used in operating activities during the year ended December 31, 2021 was $27.3 million. The use of cash primarily related to our net loss of $41.9 million and a $5.5 million increase from changes in assets and liabilities. This was in addition to $6.0 million of stock-based compensation, $2.1 million of depreciation expense and $1.0 million of right-of-use asset amortization and lease liability accretion.
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Net cash used in operating activities during the year ended December 31, 2020 was $20.0 million. The use of cash primarily related to our net loss of $28.7 million and a $2.4 million increase from changes in assets and liabilities. This was in addition to $5.2 million of stock-based compensation, $0.5 million in depreciation expense and $0.6 million of right-of-use asset amortization and lease liability accretion.
Investing Activities
Net cash used in investing activities was $3.1 million and $9.3 million for the purchase of property and equipment and construction in progress for the years ended December 31, 2021 and 2020, respectively. This included the purchase of $1.6 million and $3.4 million of property and equipment as well as $1.6 million and $5.8 million for the purchase of construction in progress for the years ended December 31, 2021 and 2020 respectively.
2021 purchases of property and equipment were comprised of $1.0 million in laboratory equipment, $0.2 million of computers, software and equipment and $0.3 million of furniture and fixtures and $0.1 million of leasehold improvements. $1.6 million of purchases in construction in progress related to another modular cleanroom and the continued buildout of our manufacturing facility.
2020 purchases of property and equipment were comprised of $2.2 million of laboratory equipment, $0.6 million of computers and equipment, $0.3 million of furniture and fixtures as well as $0.3 million of leasehold improvements. $5.8 million of purchases in construction in progress related to modular cleanrooms and the initial build out of our manufacturing facility.
Financing Activities
Net cash provided by financing activities was $52.6 million during the year ended December 31, 2021, primarily due to the net proceeds received from the underwritten public offering.
Net cash provided by financing activities was $6.7 million during the year ended December 31, 2020, mainly due to the sale of 4,113,440 shares of stock under the Purchase Agreement with Aspire Capital that provided proceeds to the Company of approximately $6.2 million, along with $0.5 million of proceeds from the exercise of stock warrants.
Future Capital Requirements
To date, we have not generated any revenues from the commercial sale of approved drug products, and we do not expect to generate substantial revenue for at least the next several years. If we fail to complete the development of our product candidates in a timely manner or fail to obtain their regulatory approval, our ability to generate future revenue will be compromised. We do not know when, or if, we will generate any revenue from our product candidates, and we do not expect to generate significant revenue unless and until we obtain regulatory approval of, and commercialize, our product candidates. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, continue or initiate clinical trials of and seek marketing approval for our product candidates. In addition, if we obtain approval for any of our product candidates, we expect to incur significant commercialization expenses related to sales, marketing, manufacturing and distribution. We anticipate that we will need substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.
On March 16, 2021, we issued an aggregate of 32,282,857 shares of our common stock, for net proceeds of $52.6 million pursuant to an underwritten public offering.
In August 2021, we received notice of a Product Development Research award totaling approximately $13.1 million from CPRIT to support our Phase 2 clinical trial of MT-401. To date, we have received $2.4 million of funds from the CPRIT grant.
As of December 31, 2021, we had working capital of $33.1 million, compared to working capital of $18.0 million as of December 31, 2020. Operating expenses incurred during the fiscal year ended December 31, 2021 were $40.7 million compared to $29.4 million in the prior year. Based on our revised clinical and research and development plans and our revised timing expectations related to the progress of our programs, we expect that our cash, cash equivalents and restricted cash as of December 31, 2021 will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2023. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Furthermore, our
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operating plan may change, and we may need additional funds sooner than planned in order to meet operational needs and capital requirements for product development and commercialization. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we may enter into additional collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future funding requirements will depend on many factors, as we:
● initiate or continue clinical trials of our product candidates;
● continue the research and development of our product candidates and seek to discover additional product candidates; seek regulatory approvals for our product candidates if they successfully complete clinical trials;
● continue development of our manufacturing capabilities and our manufacturing facility;
● establish sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to commercialize any product candidates that may receive regulatory approval;
● evaluate strategic transactions we may undertake; and
● enhance operational, financial and information management systems and hire additional personnel, including personnel to support development of our product candidates and, if a product candidate is approved, our commercialization efforts.
Because all of our product candidates are in the early stages of clinical and preclinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of product candidates or whether, or when, we may achieve profitability. Until such time, if ever, that we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements.
We plan to continue to fund our operations and capital funding needs through equity and/or debt financing. We may also consider new collaborations or selectively partner our technology. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our existing stockholders’ common stock. The incurrence of indebtedness would result in increased fixed payment obligations and could involve certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates or grant licenses on terms unfavorable to us. We may also be required to pay damages or have liabilities associated with litigation or other legal proceedings involving our company.
In addition to the foregoing, based on our current assessment, we do not expect any material impact on our long-term liquidity due to the COVID-19 pandemic. However, we will continue to assess the effect of the pandemic on our operations. The extent to which the COVID-19 pandemic will impact our business and operations will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, the duration and effect of business disruptions and the short-term effects and ultimate effectiveness of the travel restrictions, quarantines, social distancing requirements and business closures in the United States and other countries to contain and treat the disease. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.
Aspire Common Stock Purchase Agreement
In February 2020, we entered into a common stock purchase agreement, or the Purchase Agreement, with Aspire Capital Fund, LLC, or Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is
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committed to purchase up to an aggregate of $30.0 million of shares of our common stock over the 30-month term of the Purchase Agreement. As of December 31, 2021, Aspire Capital had purchased 4,113,440 shares under the Purchase Agreement, providing aggregate proceeds to the Company of approximately $6.2 million. In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, the Company issued to Aspire Capital 345,357 shares of the Company’s common stock.
The Purchase Agreement provides that we and Aspire Capital shall not effect any sales under the Purchase Agreement on any purchase date where the closing sale price of our common stock is less than $0.25. There are no trading volume requirements or restrictions under the Purchase Agreement, and we will control the timing and amount of sales of our common stock to Aspire Capital. Aspire Capital has no right to require any sales by us but is obligated to make purchases from us as directed by us on future funding, rights of first refusal, participation rights, penalties, or liquidated damages in the Purchase Agreement. The Purchase Agreement may be terminated by us at any time, at its discretion, without any cost to us. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of our common stock during any time prior to the termination of the Purchase Agreement. We expect to use any proceeds under the Purchase Agreement for working capital and general corporate purposes.
The Purchase Agreement provides that the number of shares that may be sold pursuant to the Purchase Agreement will be limited to 9,232,814 shares, including the Commitment Shares, or the Exchange Cap, which represents 19.99% of our outstanding shares of common stock as of the date of the Purchase Agreement, unless stockholder approval is obtained to issue more than 19.99%. This limitation will not apply if, at any time the Exchange Cap is reached and at all times thereafter, the average price paid for all shares issued under the Purchase Agreement is equal to or greater than $2.41, which was the closing price of our shares on the Nasdaq Global Market immediately preceding the execution of the Purchase Agreement. We are not required or permitted to issue any shares of common stock under the Purchase Agreement if such issuance would breach our obligations under the rules or regulations of the Nasdaq Global Market.
ATM Agreement
In August 2021, we entered into a Controlled Equity Offering SM Sales Agreement, or the ATM Agreement, with Cantor Fitzgerald & Co. and RBC Capital Markets, LLC, or the Sales Agents, pursuant to which we can offer and sell, from time to time at our sole discretion through the Sales Agents, shares of our common stock having an aggregate offering price of up to $75.0 million. Any shares of our common stock sold will be issued pursuant to our shelf registration statement on Form S-3 (File No. 333-258687), which the SEC declared effective on August 19, 2021. The Sales Agents will be entitled to compensation under the Sales Agreement at a commission rate equal to 3.0% of the gross sales price per share sold under the ATM Agreement, and we have provided each of the Sales Agents with indemnification and contribution rights. To date, we have not sold any shares of our common stock under the ATM Agreement.
Going Concern
We have no sources of revenue to provide incoming cash flows to sustain our future operations. As outlined above, our ability to pursue our planned business activities is dependent upon our successful efforts to raise additional capital.
These factors raise substantial doubt regarding our ability to continue as a going concern. Our consolidated financial statements have been prepared on a going concern basis, which implies that we will continue to realize our assets and discharge our liabilities in the normal course of business. Our financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in conformity with U.S. GAAP, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of expenses in the periods presented.
On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under
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the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of expenses that are not readily apparent from other sources. Actual results could differ from those estimates, particularly given the significant social and economic disruptions and uncertainties associated with the ongoing coronavirus pandemic and the COVID-19 control responses.
Prior Period Reclassification
Certain reclassifications have been made to reclass certain non-cash capital expenditures on the consolidated statements of cash flows from a cash outflow from investing activity to a non-cash investing activity. The Company has evaluated the materiality of this correction and concluded it was not material to the previously issued consolidated financial statements and had no impact to the reported consolidated balance sheets, consolidated statements of operations or net loss per share.
For the year ended December 31, 2020, this immaterial adjustment had the effect of increasing net cash used in operating activities and decreasing net cash used in investing activities by $1.2 million from what was previously reported.
Property and Equipment
Leasehold improvements, furniture, equipment and software are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets, which range from three to five years. Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining lease term.
Property and equipment - Construction in Progress
In June 2020, the Company entered into a lease for a manufacturing facility in Houston, Texas. In connection with the manufacturing facility, the Company has incurred costs pursuant to an agreement with a vendor to design, engineer, build and install modular cleanrooms in a manufacturing facility. The facility’s construction was completed during December 2020, and a certificate of occupancy was delivered to the Company in January 2021, and as such was placed into service in January 2021. All costs associated with the buildout will be recorded as either manufacturing equipment and/or leasehold improvements and amortized over the estimated useful life of the asset and/or leasehold lease.
During the third and fourth quarters of 2021, and in connection with the Company’s manufacturing facility in Houston, Texas, the Company incurred $2.2 million of costs pursuant to an agreement with a vendor to build and eventually install a second modular cleanroom. Such costs were recorded in fixed assets – construction in progress on the balance sheet as of December 31, 2021. Upon completion and installation of the modular cleanroom, all costs associated with the buildout will be recorded as manufacturing equipment and amortized over the estimated useful life.
Stock-Based Compensation
The Company incurs stock-based compensation expense related to the issuance of common stock and stock options. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility and expected option life:
Expected Term — The expected life of stock options was estimated using the “simplified method,” as the Company has limited historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock options grants. The simplified method is based on the average of the vesting tranches and the contractual life of each grant.
Expected Volatility — The Company computes stock price volatility over expected terms based on its historical common stock trading prices.
Risk-Free Interest Rate — The Company bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon issues with an equivalent remaining term.
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Expected Dividend — The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.
The Company amortizes the fair value of the awards expected to vest on a straight-line basis over the requisite service period of the awards. The Company recognizes fair value of stock options granted to nonemployees as stock-based compensation expense over the period in which the related services are received as if the Company had paid cash for those services. Forfeitures are accounted for as incurred.
Grant Income
The Company recognizes grant income in accordance with the terms stipulated under the grant awarded to the Company’s collaborators at the Mayo Foundation from the U. S. Department of Defense. In various situations, the Company receives certain payments from the Mayo Foundation for reimbursement of clinical supplies. These payments are non-refundable and are not dependent on the Company’s ongoing future performance. The Company has adopted a policy of recognizing these payments when received and as revenue in accordance with Accounting Standards Update No. 2014 09, “Revenue from Contracts with Customers (Topic 606)” issued by the Financial Accounting Standards Board (“FASB”).
In August 2021, we received notice of a Product Development Research award totaling approximately $13.1 million from CPRIT to support our Phase 2 clinical trial of MT-401.
In accordance with ASC 730-20-25-8, the extent the financial risk associated with the research and development has been transferred to CPRIT, because repayment of the grant depends solely on the results of research and development having future economic benefit, the Company accounts for this obligation as a contract to perform research and development for others. The funds received from CPRIT will initially be recorded as a deferred credit in the Company’s balance sheet.
Cash received from grants in advance of incurring qualifying costs is recorded as deferred revenue and recognized as revenue when qualifying costs are incurred. During the fourth quarter of 2021, the Company received $2.4 million advancement of funds in relation to the CPRIT grant. The Company recorded $1.2 million of grant income related to CPRIT grant as revenue for the year ended December 31, 2021. At December 31, 2021 approximately $1.1 million was recorded as deferred revenue on the Company’s consolidated financial statements.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Tax Loss and Credit Carryforwards
As of December 31, 2021, we have approximately $130.5 million of federal and $38.6 million of state net operating loss carryforwards that may be available to offset future taxable income, if any. The federal net operating loss carryforwards of $41.6 million, if not utilized, will expire between 2029 and 2037. The federal net operating loss carryforwards of $88.9 million generated in 2018 and thereafter are subject to an 80% limitation on taxable income, do not expire and will carry forward indefinitely. The state net operating loss carryforwards of $21.9 million, if not utilized, will begin to expire in 2035. The state net operating loss carryforwards of $16.7 million generated in 2018 and thereafter are subject to an 80% limitation on taxable income, do not expire and will carry forward indefinitely. Any change in ownership greater than 50% under Section 382 of the Internal Revenue Code places significant annual limitations on the use of such net operating loss carryforwards.
At December 31, 2021 and 2020, we recorded a 100% valuation allowance against our deferred tax assets of approximately $36.4 million and $27.6 million, respectively, as our management believes it is uncertain that they will be fully realized. If we determine in the future that we will be able to realize all or a portion of our net operating loss carryforwards, an adjustment to valuation allowance against our deferred tax assets would increase net income in the period in which we make such a determination.
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Inflation
Inflation affects the cost of raw materials, goods and services that we use. In recent years, inflation has been modest. However, fluctuations in energy costs and commodity prices can affect the cost of all raw materials and components. The competitive environment somewhat limits our ability to recover higher costs resulting from inflation by raising prices. Although we cannot precisely determine the effects of inflation on our business, it is management’s belief that the effects on future revenues and operating results will not be significant. We do not believe that inflation has had a material impact on our results of operations for the periods presented, except with respect to payroll-related costs and other costs arising from or related to government-imposed regulations.
ITEM 7A. 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 8. FINANCIAL STATEMENTS
The Financial Statements are incorporated herein by reference to pages F-1 to F-21 at the end of this report and the supplementary data is not applicable.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
We have had no changes in, or disagreements with our principal independent accountants.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.