mrsn_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-38129


Mersana Therapeutics, Inc.

(Exact name of registrant as specified in its charter)


Delaware

    

04‑3562403

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

840 Memorial Drive Cambridge, MA 02139

(Address of principal executive offices)

(Zip Code)

(617) 498‑0020

(Registrant’s telephone number, including area code)


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

 

 

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, $0.0001 par value

MRSN

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer

    

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes   No  .

 

There were 47,883,522 shares of Common Stock ($0.0001 par value per share) outstanding as of November 4, 2019.

 

 

 

Table of Contents

Unless otherwise stated or the context requires otherwise, all references to “us,” “our,” “we,” the “Company” and similar designations in this Quarterly Report on Form 10-Q refer to Mersana Therapeutics, Inc. and its consolidated subsidiary, Mersana Securities Corp.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward‑looking statements. Forward‑looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, our clinical results and other future conditions. The words “anticipate,” “believe,” “estimate,” “expect,” “goal,” “intend,” “may,” “seek,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “possible,” “could,” “should,” “continue,” “contemplate” or the negative of these terms or other similar expressions are intended to identify forward‑looking statements, although not all forward‑looking statements contain these identifying words.

These forward‑looking statements may include, among other things, statements about:

·

the initiation, cost, timing, progress and results of our current and future research and development activities, preclinical studies and clinical trials;

·

the potential benefits of strategic partnership agreements and our ability to enter into selective strategic partnership arrangements;

·

the timing of, and our ability to obtain and maintain, regulatory approvals for our product candidates;

·

our ability to quickly and efficiently identify and develop additional product candidates;

·

our ability to advance any product candidate into, and successfully complete, clinical trials;

·

our intellectual property position, including with respect to our trade secrets; and

·

our estimates regarding expenses, future revenues, capital requirements, the sufficiency of our current and expected cash resources and our need for additional financing.

We may not actually achieve the plans, intentions or expectations disclosed in our forward‑looking statements, and you should not place undue reliance on our forward‑looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward‑looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward‑looking statements that we make. Our forward‑looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

The forward‑looking statements contained herein represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments may cause our views to change. However, we disclaim any obligation to update these forward‑looking statements, except to the extent required by applicable law. You should, therefore, not rely on these forward‑looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

2

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TABLE OF CONTENTS

 

 

 

Page

PART I – FINANCIAL INFORMATION 

 

Item 1. Financial Statements (unaudited) 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 

4

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018 

5

Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2019 and 2018 

6

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 

7

Notes to Condensed Consolidated Financial Statements 

8

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

25

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

33

Item 4. Controls and Procedures 

33

PART II - OTHER INFORMATION 

35

Item 1. Legal Proceedings 

35

Item 1A. Risk Factors 

35

Item 6. Exhibits 

35

Signatures 

36

 

 

 

 

3

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PART I – FINANCIAL INFORMATION

Item 1.    Financial Statements

Mersana Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

58,196

 

$

59,634

Short-term marketable securities

 

 

53,806

 

 

10,497

Accounts receivable

 

 

298

 

 

459

Prepaid expenses and other current assets

 

 

2,397

 

 

3,715

Total current assets

 

 

114,697

 

 

74,305

Property and equipment, net

 

 

2,446

 

 

2,694

Operating lease right-of-use assets

 

 

3,059

 

 

 —

Other assets

 

 

1,453

 

 

1,503

Total assets

 

$

121,655

 

$

78,502

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

7,304

 

$

10,727

Accrued expenses

 

 

8,037

 

 

12,375

Deferred revenue

 

 

4,646

 

 

46,196

Operating lease liabilities

 

 

2,145

 

 

 —

Short-term debt

 

 

167

 

 

 —

Other liabilities

 

 

85

 

 

127

Total current liabilities

 

 

22,384

 

 

69,425

Operating lease liabilities

 

 

1,257

 

 

 —

Long-term debt, net

 

 

4,670

 

 

 —

Other liabilities

 

 

299

 

 

282

Total liabilities

 

 

28,610

 

 

69,707

Commitments (Note 11)

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

 —

 

 

 —

Common stock, $0.0001 par value; 175,000,000 shares authorized; 47,882,897 and 23,234,472 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

 5

 

 

 3

Additional paid-in capital

 

 

269,140

 

 

172,966

Accumulated other comprehensive income (loss)

 

 

28

 

 

(8)

Accumulated deficit

 

 

(176,128)

 

 

(164,166)

Total stockholders’ equity

 

 

93,045

 

 

8,795

Total liabilities and stockholders’ equity

 

$

121,655

 

$

78,502

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

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Mersana Therapeutics, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

    

 

2019

    

 

2018

    

 

2019

    

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration revenue

 

$

844

 

$

2,151

 

$

42,081

 

$

9,405

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

13,701

 

 

15,180

 

 

42,610

 

 

40,098

 

General and administrative

 

 

4,436

 

 

4,380

 

 

13,072

 

 

12,181

 

Total operating expenses

 

 

18,137

 

 

19,560

 

 

55,682

 

 

52,279

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

608

 

 

340

 

 

1,785

 

 

1,049

 

Interest expense

 

 

(107)

 

 

 —

 

 

(146)

 

 

 —

 

Total other income (expense), net

 

 

501

 

 

340

 

 

1,639

 

 

1,049

 

Net loss

 

 

(16,792)

 

 

(17,069)

 

 

(11,962)

 

 

(41,825)

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on marketable securities

 

 

17

 

 

48

 

 

36

 

 

107

 

Comprehensive loss

 

$

(16,775)

 

$

(17,021)

 

$

(11,926)

 

$

(41,718)

 

Net loss attributable to common stockholders — basic and diluted

 

$

(16,792)

 

$

(17,069)

 

$

(11,962)

 

$

(41,825)

 

Net loss per share attributable to common stockholders — basic and diluted

 

$

(0.35)

 

$

(0.74)

 

$

(0.28)

 

$

(1.82)

 

Weighted-average number of shares of common stock used in net loss per share attributable to common stockholders — basic and diluted

 

 

47,833,607

 

 

23,152,019

 

 

42,011,340

 

 

22,979,516

 

 

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

5

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Mersana Therapeutics, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Other Comprehensive

 

Accumulated

 

Stockholders’

 

    

Shares

    

Amount

    

Capital

 

Income (Loss)

    

Deficit

    

Equity

Balance at December 31, 2017

 

22,765,017

 

$

 3

 

$

168,018

 

$

(149)

 

$

(97,878)

 

$

69,994

Cumulative effect adjustment for adoption of ASC 606

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,031)

 

 

(2,031)

Exercise of stock options

 

104,945

 

 

 —

 

 

255

 

 

 —

 

 

 —

 

 

255

Stock-based compensation expense

 

 —

 

 

 —

 

 

745

 

 

 —

 

 

 —

 

 

745

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(13)

 

 

 —

 

 

(13)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(12,403)

 

 

(12,403)

Balance at March 31, 2018

 

22,869,962

 

 

 3

 

 

169,018

 

 

(162)

 

 

(112,312)

 

 

56,547

Exercise of stock options

 

247,776

 

 

 —

 

 

470

 

 

 —

 

 

 —

 

 

470

Stock-based compensation expense

 

 —

 

 

 —

 

 

958

 

 

 —

 

 

 —

 

 

958

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

72

 

 

 —

 

 

72

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(12,354)

 

 

(12,354)

Balance at June 30, 2018

 

23,117,738

 

 

 3

 

 

170,446

 

 

(90)

 

 

(124,666)

 

 

45,693

Exercise of stock options

 

43,137

 

 

 —

 

 

128

 

 

 —

 

 

 —

 

 

128

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,053

 

 

 —

 

 

 —

 

 

1,053

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

48

 

 

 —

 

 

48

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(17,069)

 

 

(17,069)

Balance at September 30, 2018

 

23,160,875

 

 

 3

 

 

171,627

 

 

(42)

 

 

(141,735)

 

 

29,853

Exercise of stock options

 

31,411

 

 

 —

 

 

65

 

 

 —

 

 

 —

 

 

65

Purchase of common stock under ESPP

 

42,186

 

 

 —

 

 

146

 

 

 —

 

 

 —

 

 

146

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,128

 

 

 —

 

 

 —

 

 

1,128

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

34

 

 

 —

 

 

34

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(22,431)

 

 

(22,431)

Balance at December 31, 2018

 

23,234,472

 

 

 3

 

 

172,966

 

 

(8)

 

 

(164,166)

 

 

8,795

Exercise of stock options

 

12,192

 

 

 —

 

 

42

 

 

 —

 

 

 —

 

 

42

Issuance of common stock under public offering, net of issuance costs of $5,587

 

24,437,500

 

 

 2

 

 

92,160

 

 

 —

 

 

 —

 

 

92,162

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,164

 

 

 —

 

 

 —

 

 

1,164

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 8

 

 

 —

 

 

 8

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

21,901

 

 

21,901

Balance at March 31, 2019

 

47,684,164

 

 

 5

 

 

266,332

 

 

 —

 

 

(142,265)

 

 

124,072

Exercise of stock options

 

32,693

 

 

 —

 

 

58

 

 

 —

 

 

 —

 

 

58

Purchase of common stock under ESPP

 

82,281

 

 

 —

 

 

283

 

 

 —

 

 

 —

 

 

283

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,161

 

 

 —

 

 

 —

 

 

1,161

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

11

 

 

 —

 

 

11

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(17,071)

 

 

(17,071)

Balance at June 30, 2019

 

47,799,138

 

 

 5

 

 

267,834

 

 

11

 

 

(159,336)

 

 

108,514

Exercise of stock options and warrants

 

83,759

 

 

 —

 

 

21

 

 

 —

 

 

 —

 

 

21

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,285

 

 

 —

 

 

 —

 

 

1,285

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

17

 

 

 —

 

 

17

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(16,792)

 

 

(16,792)

Balance at September 30, 2019

 

47,882,897

 

$

 5

 

$

269,140

 

$

28

 

$

(176,128)

 

$

93,045

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

 

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Mersana Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

September 30, 

 

    

2019

    

2018

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(11,962)

 

$

(41,825)

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

 

 

 

 

 

 

Depreciation

 

 

963

 

 

907

Loss on disposal of fixed assets

 

 

 —

 

 

20

Net amortization of premiums and discounts on investments

 

 

(87)

 

 

(288)

Stock-based compensation

 

 

3,610

 

 

2,756

Non-cash rent expense

 

 

 —

 

 

77

Non-cash interest expense

 

 

65

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

161

 

 

198

Prepaid expenses and other current assets

 

 

1,318

 

 

(1,379)

Other assets

 

 

 —

 

 

(1,433)

Accounts payable

 

 

(3,102)

 

 

3,619

Accrued expenses

 

 

(4,518)

 

 

3,568

Operating lease assets and liabilities

 

 

(66)

 

 

 —

Deferred revenue

 

 

(41,550)

 

 

(5,532)

Net cash used in operating activities

 

 

(55,168)

 

 

(39,312)

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Maturities of marketable securities

 

 

10,500

 

 

74,565

Purchase of marketable securities

 

 

(53,688)

 

 

 —

Purchase of property and equipment

 

 

(605)

 

 

(1,093)

Net cash provided by (used in) investing activities

 

 

(43,793)

 

 

73,472

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Net proceeds from public offering of common stock

 

 

92,162

 

 

 —

Proceeds from exercise of stock options

 

 

121

 

 

853

Proceeds from purchases of common stock under ESPP

 

 

283

 

 

 —

Proceeds from issuance of debt, net of issuance costs

 

 

4,965

 

 

 —

Payments under capital lease obligations

 

 

(58)

 

 

 —

Net cash provided by financing activities

 

 

97,473

 

 

853

 

 

 

 

 

 

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

 

(1,488)

 

 

35,013

Cash, cash equivalents and restricted cash, beginning of period

 

 

60,005

 

 

26,962

Cash, cash equivalents and restricted cash, end of period

 

$

58,517

 

$

61,975

 

 

 

 

 

 

 

Supplemental disclosures of non-cash activities:

 

 

 

 

 

 

Purchases of property and equipment in accounts payable and accrued expenses

 

$

 —

 

$

75

Debt financing costs in accrued expenses

 

$

180

 

$

 —

Cash paid for interest

 

$

64

 

$

 —

Property and equipment acquired under finance leases

 

$

429

 

$

 —

Adjustment to accumulated deficit and deferred revenue upon adoption of Topic 606

 

$

 —

 

$

2,031

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

 

 

 

 

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements

(in thousands, except share and per share data)

(unaudited)

1. Nature of business and basis of presentation

Mersana Therapeutics, Inc. is a clinical stage biopharmaceutical company located in Cambridge, Massachusetts. The Company is focused on developing antibody drug conjugates (ADCs) that offer a clinically meaningful benefit for cancer patients with significant unmet need. The Company has leveraged over 20 years of industry learning in the ADC field to develop proprietary technologies that enable it to design ADCs to have improved efficacy, safety and tolerability relative to existing ADC therapies. The Company’s novel platform, Dolaflexin, has been used to generate proprietary ADC product candidates to address patient populations that are not currently amenable to treatment with traditional ADC‑based therapies. The Company’s lead product candidate, XMT‑1536, is a first-in-class, wholly-owned Dolaflexin ADC targeting NaPi2b, an antigen broadly expressed in ovarian cancer and non-small cell lung cancer (NSCLC) adenocarcinoma. In August 2019, the Company announced the dosing of the first patient in the expansion portion of the Phase 1 study of XMT-1536. The expansion cohorts will assess the efficacy, safety and tolerability of XMT-1536 at 36 mg/m2 every four weeks in patients with platinum-resistant ovarian cancer and non-small cell lung cancer (NSCLC) adenocarcinoma. The Company has not yet determined a maximum tolerated dose, and it plans to continue the dose escalation portion of the study in parallel.

In January 2019, following a strategic evaluation by the Company of the competitive environment for HER2-targeted therapies, the Company and its former partner, Takeda Pharmaceutical Company Limited, or Takeda, decided to discontinue the development of XMT-1522, which was then being studied in the dose escalation portion of a Phase 1 clinical trial. The Company’s collaboration agreements with Takeda were terminated during the first quarter of 2019.

The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, the need for additional capital, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval and reimbursement for any drug product candidate that it may identify and develop, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development of technological innovations by competitors, reliance on third party manufacturers and the ability to transition from pilot-scale production to large-scale manufacturing of products.

The Company has incurred cumulative net losses since inception. For the nine months ended September 30, 2019, the net loss was $11,962, compared to $41,825 in the nine months ended September 30, 2018. The difference year over year is primarily attributable to $39,965 in revenue that was recognized in the first quarter of 2019 as a result of the discontinuation of the partnership with Takeda in the first quarter of 2019. The Company did not recognize any revenue related to the collaboration agreements with Takeda in the second or third quarter of 2019 and does not expect to have any further revenue related to these agreements.

Cash used in operations was $55,168 for the nine months ended September 30, 2019 and $39,312 for the nine months ended September 30, 2018. The Company expects to continue to incur operating losses and negative operating cash flows for the foreseeable future. As of September 30, 2019, the Company had an accumulated deficit of $176,128. The future success of the Company is dependent on its ability to identify and develop its product candidates and ultimately upon its ability to attain profitable operations. The Company has devoted substantially all of its financial resources and efforts to research and development and general and administrative expense to support such research and development. The Company’s net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative operating cash flows have had, and will continue to have, an adverse effect on the Company’s stockholders' equity and working capital. The Company believes that its cash, cash equivalents, and marketable securities, as of September 30, 2019, will enable it to fund its operating plan through at least mid-2021. Management’s belief with respect to its ability to fund operations is based on estimates that are subject to risks and uncertainties. If actual results are different from management’s estimates, the Company may need to seek additional funding.

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification

8

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

(ASC) and Accounting Standards Updates (ASU) of the Financial Accounting Standards Board (FASB). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2018 and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 8, 2019.

The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments that are necessary to present fairly the Company’s financial position as of September 30, 2019, the results of its operations for the three and nine months ended September 30, 2019 and 2018, a statement of stockholders’ equity for the nine months ended September 30, 2019 and 2018 and cash flows for the nine months ended September 30, 2019 and 2018. Such adjustments are of a normal and recurring nature, other than the adjustments associated with the adoption of ASC 842, Leases (ASC 842). The results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results for the year ending December 31, 2019, or for any future period.

Effective January 1, 2019, the Company adopted the requirements of ASC 842 using the modified retrospective method as discussed below in Note 2: Summary of Significant Accounting Policies.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include those of the Company and its subsidiary, Mersana Securities Corp. All intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses and related disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, management’s judgments with respect to the performance obligations and estimated selling prices within its revenue arrangements, accrued expenses, valuation of stock-based awards and income taxes. Actual results could differ from those estimates.

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker in deciding how to allocate resources and assess performance. The Company operates and manages its business as a single operating segment, which is the business of discovering and developing ADCs.

Summary of Accounting Policies

The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and nine months ended September 30, 2019 are consistent with those discussed in Note 2 to the consolidated financial statements in the Company’s 2018 Annual Report on Form 10-K, except as noted below with respect to the Company’s lease accounting policies and as disclosed within the “Recently Issued Accounting Pronouncements” section below.

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

Fair Value Measurements

Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability between market participants at measurement dates. ASC Topic 820 Fair Value Measurement (ASC 820) establishes a three-level valuation hierarchy for instruments measured at fair value. The hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1—Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3—Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity, or a remaining maturity at the time of purchase, of three months or less to be cash equivalents. The Company invests excess cash primarily in money market funds, commercial paper and government agency securities, which are highly liquid and have strong credit ratings. These investments are subject to minimal credit and market risks. Cash and cash equivalents are stated at cost, which approximates market value.

The following amounts were presented as cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

Nine months ended

 

September 30, 2019

 

September 30, 2018

 

Beginning

 

End

 

Beginning

 

End

 

of period

    

of period

 

of period

    

of period

Cash and cash equivalents

$

59,634

 

$

58,196

 

$

26,591

 

$

61,604

Restricted cash included in other assets, noncurrent

 

371

 

 

321

 

 

371

 

 

371

Total cash, cash equivalents and restricted cash per statement of cash flows

$

60,005

 

$

58,517

 

$

26,962

 

$

61,975

 

Marketable Securities

Short-term marketable securities consist of investments with maturities greater than three months and less than one year from the balance sheet date. Long-term marketable securities consist of investments with maturities greater than one year that are not expected to be used to fund current operations. The Company classifies all of its marketable securities as available-for-sale. Accordingly, these investments are recorded at fair value. Amortization and accretion of discounts and premiums are recorded as interest income within other income. Unrealized gains and losses on available-for-sale debt securities are included in other comprehensive income (loss) as a component of stockholders’ equity until realized. Realized gains and losses and declines in value judged to be other than temporary are included as a component of other income (expense), net, based on the specific identification method. When determining whether a decline in value is other than temporary, the Company considers various factors, including whether the Company has the intent to sell the security, and whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis. Fair value is determined based on quoted market prices.

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

Other Assets

The Company recorded other assets of $1,453 and $1,503 as of September 30, 2019 and December 31, 2018, respectively, comprised of restricted cash of $321 and $371, respectively, held as security deposits for a standby letter of credit and $1,132 at the end of each period held by a service provider.

Net Loss per Share

Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury stock and if-converted methods.

For purposes of the diluted net loss per share calculation, convertible preferred stock, warrants to purchase common stock and options to purchase common stock are considered to be potentially dilutive securities, but are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive and therefore, basic and diluted net loss per share were the same for all periods presented.

The following table sets forth the outstanding potentially dilutive securities that have been excluded from the calculation of diluted net loss per share because to include them would be anti-dilutive (in common stock equivalent shares): 

 

 

 

 

 

 

 

Three and nine months ended September 30,

 

    

2019

 

2018

Warrants

 

39,474

 

110,365

Restricted stock units

 

447,336

 

 —

Stock options

 

4,718,597

 

3,661,962

 

 

5,205,407

 

3,772,327

 

Leases

Consistent with ASC 842, the Company determines if an arrangement is a lease at inception. Operating leases are included in right-of-use lease assets (ROU assets), current portion of lease obligations and long-term lease obligations on the Company’s consolidated balance sheets. Assets subject to finance leases are included in property and equipment, and the related lease obligation is included in other current liabilities and other long-term liabilities on the Company’s consolidated balance sheets. Lease assets are tested for impairment in the same manner as long-lived assets used in operations. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while expense for financing leases is recognized as depreciation expense and interest expense using the effective interest method. The Company has elected the short-term lease recognition exemption for short-term leases, which allows the Company not to recognize lease liabilities and ROU assets on the consolidated balance sheets for leases with an original term of twelve months or less.

ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease obligations represent the Company’s obligation to make lease payments arising from the lease. Operating lease liabilities and their corresponding ROU assets are initially recorded based on the present value of lease payments over the expected remaining lease term. When determining the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Certain adjustments to the ROU asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate to discount lease payments. The incremental borrowing rate reflects the fixed rate at which the Company could borrow, on a collateralized basis, the amount of the lease payments in the same currency, for a similar term, in a similar economic environment.  Prospectively, the Company will adjust the

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

ROU assets for straight-line rent expense, or any incentives received and remeasure the lease liability at the net present value using the same incremental borrowing rate that was in effect as of the lease commencement or transition date.

 

The Company has lease agreements with lease and non-lease components, which are generally accounted for separately.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842), which replaced the guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This standard is effective for the Company in the fiscal year beginning after December 15, 2018. The Company adopted the new standard effective January 1, 2019 using the modified retrospective method as of the beginning of the period of adoption. The Company has elected the package of practical expedients permitted in ASC Topic 842. Accordingly, the Company accounted for its existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contracts contain a lease under ASC Topic 842, (b) whether classification of the operating leases would be different in accordance with ASC Topic 842, or (c) whether the unamortized initial direct costs would have met the definition of initial direct costs in ASC Topic 842 at lease commencement. The Company also elected not to include leases with an initial term of twelve months or less in the recognized ROU asset and lease liabilities. As a result of the adoption of the new lease accounting guidance, the Company recognized on January 1, 2019 (a) an operating lease liability of $4,778, and (b) an operating ROU asset of $4,369 which represents the lease liability of $4,778 adjusted for deferred rent of $409. This standard had a material impact on the Company’s balance sheets but had no impact on the Company’s results of operations and cash flows from operations. The most significant impact was the recognition of ROU assets and lease obligations for operating leases.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. This guidance simplifies the accounting for share-based payments to non-employees by aligning it with the accounting for share-based payments to employees, with certain exceptions.  This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods, and early adoption is permitted. The guidance per ASU 2018-07 is to be adopted by using a modified retrospective approach with the cumulative effect of initially applying the new standard at the date of initial application. The Company adopted the new standard effective January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808):Clarifying the Interaction between Topic 808 and Topic 606. The main provisions of ASU 2018-18 include: (i) clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account and (ii) precluding the presentation of transactions with collaborative arrangement participants that are not directly related to sales to third parties together with revenue. This guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, and early adoption is permitted. The guidance per ASU 2018-18 is to be adopted retrospectively to the date of initial application of Topic 606. The Company is currently evaluating the potential impact that ASU No. 2018-18 may have on its financial position and results of operations.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. Currently, U.S. GAAP delays recognition of the full amount of credit losses until the loss is probable of occurring. Under this ASU, the income statement will reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses will be based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down of the security. This ASU is effective for annual periods beginning after December 15, 2019, including

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

interim periods within those annual reporting periods, and early adoption is permitted. The Company is currently evaluating the potential impact that ASU 2016-13 may have on its financial position and results of operations. 

 

 

 

3. Collaboration agreements

Merck KGaA

In June 2014, the Company entered into a Collaboration and Commercial License Agreement with Merck KGaA (the Merck KGaA Agreement). Upon the execution of the agreement, Merck KGaA paid the Company a nonrefundable technology access fee of $12,000 for the right to develop ADCs directed to six exclusive targets over a specified period of time. No additional fees are due when a target is designated and the commercial license to the target is granted. Merck KGaA will be responsible for the product development and marketing of any products resulting from this collaboration.  All six targets were designated prior to 2018. The Company is eligible to receive milestones under the Merck KGaA Agreement. The next potential milestone payment is a development milestone of $500 on Merck KGaA’s designation of a preclinical development candidate for any target. Revenue for the milestone is fully constrained until it is certain the milestone would be achieved.

Under the terms of the Merck KGaA Agreement, the Company and Merck KGaA develop research plans to evaluate Merck KGaA's antibodies as ADCs incorporating the Company's technology. The Company receives fees for its efforts under the research plans. The goal of the research plans is to provide Merck KGaA with sufficient information to formally nominate a development candidate and begin IND-enabling studies or cease development on the designated target.

In May 2018, the Company entered into a Supply Agreement with Merck KGaA (the Merck KGaA Supply Agreement). Under the terms of the agreement, the Company will provide Merck KGaA with materials that could be used for IND-enabling studies and clinical trials. The Company receives fees and reimbursement for its efforts under the Merck KGaA Supply Agreement.

Accounting Analysis

The Company identified the following performance obligations under the agreement: (i) exclusive license and research services for six designated targets, (ii) rights to future technological improvements and (iii) participation of project team leaders and providing joint research committee services.

The Company recognizes revenue related to the exclusive license and the research and development services over the estimated period of the research and development services using a proportional performance model.  The Company measures proportional performance based on the costs incurred relative to the total costs expected to be incurred as the Company will satisfy the performance obligations as the research and development services are performed. To the extent that the Company receives fees for the research and development services as they are performed, these amounts are recorded as deferred revenue. Revenue related to future technological improvements and joint research committee services will be recognized ratably over the respective performance periods (which in the case of the joint research committee services approximates the time and cost incurred each quarter), which are 10 and five years, respectively.  The Company continues to reassess the estimated remaining term at each subsequent reporting period. As of December 31, 2018, the total transaction price for the Merck KGaA Agreement was $22,070, which represents the amount of consideration the Company is expected to receive for the transfer of goods and services to Merck KGaA. For each of the three and nine months ended September 30, 2019, the Company decreased the fees expected to be received for research and development activities by $570 to $6,500, resulting in a revised total transaction price for the Merck KGaA Agreement of $21,500 as of September 30, 2019.

For the three months ended September 30, 2019 and 2018 and the nine months ended September 30, 2019 and 2018, the Company recorded collaboration revenue of $800, $1,482, $836 and $2,426, respectively, related to its efforts under the Merck KGaA Agreement. During the three and nine months ended September 30, 2019, the Company recognized

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

collaboration revenue and corresponding research and development expense of $34 and $1,255, respectively, related to the Merck KGaA Supply Agreement. Included in accounts receivable as of September 30, 2019 and December 31, 2018 were $262 and $450, respectively, related to the Merck KGaA Supply Agreement.

As of September 30, 2019, the Company had $4,646 in deferred revenue related to the Merck KGaA Agreement and Merck KGaA Supply Agreement that will be recognized in accordance with the proportional performance method.

Takeda XMT-1522 Strategic Partnership

In January 2016, the Company entered into a Development Collaboration and Commercial License Agreement with Takeda through its wholly owned subsidiary, Millennium Pharmaceuticals, Inc. for the development and commercialization of XMT-1522 (the XMT-1522 Agreement). Under the XMT-1522 Agreement, Takeda was granted the exclusive right to commercialize XMT-1522 outside of the United States and Canada. Under the XMT-1522 Agreement, the Company was responsible for conducting certain Phase 1 development activities for XMT-1522, including the ongoing Phase 1 clinical trial, at its own expense. The parties agreed to collaborate on the further development of XMT-1522 in accordance with a global development plan (Post-Phase 1 Development). On January 2, 2019, the Company received notice from Takeda stating that Takeda was exercising its right to terminate the XMT-1522 Agreement upon 30 days’ prior written notice. The XMT-1522 Agreement terminated in accordance with its provisions, and the Company and Takeda wound down activities related to the XMT-1522 Agreement as of March 31, 2019.

Under the XMT-1522 Agreement, the Company and Takeda shared equally all Post-Phase 1 Development costs through the date of termination and for a period of 30 days after the effective termination date. For the applicable period within the three months ended March 31, 2019, the Company was billed $200 by Takeda, representing the Company’s share of Post-Phase 1 Development costs incurred by Takeda. This amount has been reflected as research and development costs in the consolidated statement of operations.

Takeda strategic research and development partnership

In March 2014, the Company entered into a Research Collaboration and Commercial License Agreement with Takeda through Takeda’s wholly owned subsidiary, Millennium Pharmaceuticals, Inc. (the 2014 Agreement). The 2014 Agreement was amended in January 2015 and amended and restated in January 2016 (the 2016 Restated Agreement). The agreements provided Takeda with the right to develop ADCs directed to a total of seven exclusive targets, designated by Takeda, over a specified period of time. On January 2, 2019, the Company received notice from Takeda stating that Takeda was exercising its right to terminate the 2016 Restated Agreement upon 45 days’ prior written notice. The 2016 Restated Agreement terminated in accordance with its provisions, and the Company and Takeda wound down activities related to the 2016 Restated Agreement as of March 31, 2019.

During the applicable period within the three months ended March 31, 2019, the Company billed Takeda $195 related to ASC 808 costs.

Accounting Analysis

The Company concluded that the termination of the XMT-1522 Agreement and the 2016 Restated Agreement resulted in the completion of all of its remaining performance obligations. As a result, $39,965 of previously deferred revenue related to the Takeda agreements as of December 31, 2018 was recognized as revenue during the three months ended March 31, 2019. The Company did not recognize any revenue related to the XMT-1522 Agreement or the 2016 Restated Agreement in the second quarter and will not have any further revenue related to these agreements.

Included in accounts receivable as of September 30, 2019 and December 31, 2018 was $26 and $9, respectively, related to the Takeda agreements. Included in accounts payable as of September 30, 2019 and December 31, 2018 was $2,754 and $2,749, respectively, related to the Takeda agreements.

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

Summary of Contract Assets and Liabilities

The following table presents changes in the balances of our contract assets and liabilities during the nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

 

 

 

 

 

 

 

Beginning

 

 

 

 

 

Balance at

 

    

of Period

    

Additions

    

Deductions

    

End of Period

Nine months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Contract assets

 

$

 —

 

$

 —

 

$

 —

 

$

 —

Contract liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

$

46,196

 

$

 —

 

$

41,550

 

$

4,646

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

 

 

 

 

 

 

 

Beginning

 

 

 

 

 

Balance at

 

 

of Period

    

Additions

    

Deductions

    

End of Period

Nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Contract assets

 

$

 —

 

$

 —

 

$

 —

 

$

 —

Contract liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

$

52,439

 

$

2,373

 

$

7,906

 

$

46,906

During the three months ended September 30, 2019 and 2018 and the nine months ended September 30, 2019 and 2018, the Company recognized the following revenues as a result of changes in the contract asset and the contract liability balances in the respective periods:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

September 30, 

 

September 30, 

 

 

2019

 

2018

 

2019

    

2018

Revenue recognized in the period from:

 

 

 

 

 

 

 

 

 

 

 

 

Amounts included in the contract liability at the beginning of the period

 

$

834

 

$

1,760

 

$

41,550

 

$

7,515

Performance obligations satisfied in previous periods

 

$

 —

 

$

 —

 

$

 —

 

$

 —

Other Revenue

The Company has provided limited services for a collaboration partner, Asana BioSciences. For the three months ended September 30, 2019 and 2018 and nine months ended September 30, 2019 and 2018, the Company recognized revenue of $10, $587, $25 and $782, respectively, related to these services. In addition, during the nine months ended September 30, 2018, the Company recognized revenue of $1,500 related to a milestone achieved upon the completion of a GLP toxicology study by Asana BioSciences. The Company did not recognize any revenue related to milestones in the three and nine months ended September 30, 2019. The next potential milestone the Company is eligible to receive is $2,500 upon dosing the fifth patient in a Phase 1 clinical trial by Asana BioSciences. As of September 30, 2019, the Company considers this next milestone to be fully constrained as there is considerable judgment involved in determining whether it is probable that a significant revenue reversal would occur. As part of its evaluation of the constraint, the Company considered numerous factors, including the fact that achievement of the milestone is outside the control of the Company and there is a high level of uncertainty in achieving this milestone, as this would require initiation of clinical trials by the collaboration partner. The Company reevaluates the probability of achievement of a milestone subject to constraint at each reporting period and as uncertain events are resolved or other changes in circumstances occur.

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

4. Fair value measurements

The following table presents information about the Company's assets and liabilities regularly measured and carried at a fair value and indicates the level within fair value hierarchy of the valuation techniques utilized to determine such value as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

Quoted Prices

 

Other

 

Significant

 

 

 

 

 

in Active

 

Observable

 

Unobservable

 

 

Fair

 

Markets

 

Inputs

 

Inputs

 

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

14,871

 

$

 —

 

$

14,871

 

$

 —

Corporate bonds

 

 

12,010

 

 

 —

 

 

12,010

 

 

 —

U.S. Treasuries

 

 

26,925

 

 

 —

 

 

26,925

 

 

 —

 

 

$

53,806

 

$

 —

 

$

53,806

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

Quoted Prices

 

Other

 

Significant

 

 

 

 

 

in Active

 

Observable

 

Unobservable

 

 

Fair

 

Markets

 

Inputs

 

Inputs

 

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

  

Marketable securities: