SEC Filing - Mersana Therapeutics

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mrsn-20200630

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 June 30, 2020

☐ 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 incorporation or organization)			(I.R.S. Employer 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 68,415,100 shares of Common Stock ($0.0001 par value per share) outstanding as of August 4, 2020.

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 “aim,” “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “on track,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would” 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 include, among other things, statements about:

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

•the adequacy of our inventory of XMT-1536 and XMT-1592 to support our ongoing clinical studies, as well as the outcome of planned manufacturing runs;

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

•unmet need of ovarian cancer and non-small cell lung cancer;

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

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

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

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

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

•the potential impact of the ongoing COVID-19 pandemic.

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 our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, particularly in the “Risk Factors” sections, 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.

In addition, while we expect that the COVID-19 pandemic might adversely affect our preclinical and clinical development efforts, business operations and financial results, the extent of the impact and the value of and market for our common stock will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, physical distancing and business closure requirements in the U.S. and in other countries, and the effectiveness of actions taken globally to contain and treat the disease.

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 will cause our views to change. 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.

Table of Contents

TABLE OF CONTENTS


			Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30 , 2020 and December 31, 2019			4
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss ) for the three and six months ended June 3 0 , 2020 and 2019			5
Condensed Consolidated Statement of Stockholders’ Equity for the three and six months ended June 3 0 , 2020 and 2019			6
Condensed Consolidated Statements of Cash Flows for the six months ended June 3 0 , 2020 and 2019			7
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			34
Item 4. Controls and Procedures			34
PART II - OTHER INFORMATION			36
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 6. Exhibits			36
Signatures			37

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Mersana Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)


	June 30, 2020		December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	288,376	$	62,351
Short-term marketable securities	3,002		37,439

Prepaid expenses and other current assets	3,526		1,536
Total current assets	294,904		101,326
Property and equipment, net	1,768		2,164
Operating lease right-of-use assets	11,742		2,598
Other assets	2,103		1,453
Total assets	$	310,517	$	107,541
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	7,159	$	7,296
Accrued expenses	8,372		8,986
Deferred revenue	4,008		4,815
Operating lease liabilities	1,127		2,219
Short-term debt	1,667		667
Other liabilities	90		87
Total current liabilities	22,423		24,070
Operating lease liabilities	11,042		677
Long-term debt, net	3,263		4,201
Other liabilities	225		275
Total liabilities	36,953		29,223
Commitments (Note 12)
Stockholders' equity:
Preferred stock, $0.0001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively	—		—
Common stock,$0.0001 par value; 175,000,000 shares authorized; 68,381,210 and 45,388,023 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively	7		5
Additional paid-in capital	502,641		270,662
Accumulated other comprehensive income	2		25
Accumulated deficit	(229,086)		(192,374)
Total stockholders’ equity	273,564		78,318
Total liabilities and stockholders’ equity	$	310,517	$	107,541

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 Income (Loss)

(in thousands, except share and per share data)

(unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Collaboration revenue	$	796	$	202	$	807	$	41,237
Operating expenses:
Research and development	15,413		13,766		27,632		28,909
General and administrative	5,171		4,192		10,106		8,635
Total operating expenses	20,584		17,958		37,738		37,544
Other income (expense):
Interest income	89		725		394		1,177
Interest expense	(87)		(40)		(175)		(40)
Total other income (expense), net	2		685		219		1,137
Net income (loss)	(19,786)		(17,071)		(36,712)		4,830
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities	6		11		(23)		19
Comprehensive income (loss)	$	(19,780)	$	(17,060)	$	(36,735)	$	4,849
Net income (loss) attributable to common stockholders — basic and diluted	$	(19,786)	$	(17,071)	$	(36,712)	$	4,830
Net income (loss) per share attributable to common stockholders — basic	$	(0.33)	$	(0.36)	$	(0.68)	$	0.12
Net income (loss) per share attributable to common stockholders — diluted	$	(0.33)	$	(0.36)	$	(0.68)	$	0.12
Weighted-average number of shares of common stock used in net income (loss) per share attributable to common stockholders — basic	60,748,225		47,708,085		54,368,429		39,051,958
Weighted-average number of shares of common stock used in net income (loss) per share attributable to common stockholders — diluted	60,748,225		47,708,085		54,368,429		40,184,374

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

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Mersana Therapeutics, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

(unaudited)


	Common Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Stockholders’ Equity
	Shares	Amount
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
Retirement of common stock in exchange for common stock warrant	(2,575,000)	—		(8,986)		—		—		(8,986)
Issuance of common stock warrant in exchange for retirement of common stock	—	—		8,986		—		—		8,986
Purchase of common stock under ESPP	57,792	—		206		—		—		206
Exercise of stock options and warrants	22,334	—		54		—		—		54
Stock-based compensation expense	—	—		1,262		—		—		1,262
Other comprehensive loss	—	—		—		(3)		—		(3)
Net loss	—	—		—		—		(16,246)		(16,246)
Balance at December 31, 2019	45,388,023	$	5	$	270,662	$	25	$	(192,374)	$	78,318
Exercise of common stock warrant in exchange for common stock	2,574,971	—		—		—		—		—
Exercise of stock options	43,055	—		119		—		—		119
Stock-based compensation expense	—	—		1,609		—		—		1,609
Other comprehensive loss	—	—		—		(29)		—		(29)
Net loss	—	—		—		—		(16,926)		(16,926)
Balance at March 31, 2020	48,006,049	$	5	$	272,390	$	(4)	$	(209,300)	$	63,091
Issuance of common stock from at-the-market transactions, net of issuance costs of $2,176	10,900,599	1		62,976		—		—		62,977
Issuance of common stock under public offering, net of issuance costs of $10,809	9,200,000	1		163,990		—		—		163,991
Purchase of common stock under ESPP	68,419	—		333		—		—		333
Exercise of stock options	206,143	—		1,296		—		—		1,296
Stock-based compensation expense	—	—		1,656		—		—		1,656
Other comprehensive income	—	—		—		6		—		6
Net loss	—	—		—		—		(19,786)		(19,786)
Balance at June 30, 2020	68,381,210	$	7	$	502,641	$	2	$	(229,086)	$	273,564

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)


	Six Months Ended June 30,
	2020		2019
Cash flows from operating activities
Net income (loss)	$	(36,712)	$	4,830
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation	494		653

Net amortization of premiums and discounts on investments	(86)		(9)
Stock-based compensation	3,265		2,325
Change in deferred rent	—		(20)
Other non-cash items	74		27
Changes in operating assets and liabilities:
Accounts receivable	—		171
Prepaid expenses and other current assets	(163)		(536)
Other assets	(650)		—
Accounts payable	(377)		(3,916)
Accrued expenses	(2,349)		(1,694)
Operating lease assets	836		—
Operating lease liabilities	(706)		—
Deferred revenue	(807)		(40,715)
Net cash used in operating activities	(37,181)		(38,884)

Cash flows from investing activities
Maturities of marketable securities	34,500		10,500
Purchase of marketable securities	—		(11,947)
Purchase of property and equipment	(90)		(578)
Net cash provided by (used in) investing activities	34,410		(2,025)

Cash flows from financing activities
Net proceeds from public offering of common stock	164,157		92,162
Net proceeds from the at-the-market (ATM) facility	63,129		—
Proceeds from exercise of stock options	1,415		100
Proceeds from purchases of common stock under ESPP	333		283
Proceeds from issuance of debt, net of issuance costs	(180)		4,965
Payments under capital lease obligations	(58)		(29)
Net cash provided by financing activities	228,796		97,481

Increase in cash, cash equivalents and restricted cash	226,025		56,572
Cash, cash equivalents and restricted cash, beginning of period	62,672		60,005
Cash, cash equivalents and restricted cash, end of period	$	288,697	$	116,577

Supplemental disclosures of non-cash activities:
Purchases of property and equipment in accounts payable and accrued expenses	$	10	$	26
Debt financing costs in accrued expenses	$	—	$	180
Equity issuance costs in accounts payable and accrued expenses	$	321	$	—
Cash paid for interest	$	113	$	20
Right-of-use assets obtained in exchange for operating lease liabilities	$	9,980	$	4,369
Right-of-use assets obtained in exchange for financing lease liabilities	$	—	$	429

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 focused on developing antibody drug conjugates (ADCs) that offer a clinically meaningful benefit for cancer patients with significant unmet need. The Company has leveraged 20 years of industry learning in the ADC field to develop proprietary and differentiated technology platforms that enable it to design ADCs to have improved efficacy, safety and tolerability relative to existing ADC therapies. The Company’s innovative platforms, which include Dolaflexin and Dolasynthen, each delivering its DolaLock payload, as well as Immunosynthen, delivering a novel stimulator of interferon genes (STING) agonist, provide an efficient product engine that has enabled a robust discovery pipeline for the Company and its partners. The Company’s product candidates include XMT-1536 and XMT-1592. The Company's early stage programs include a potentially first-in-class B7-H4-targeted DolaLock ADC as well as candidates leveraging the Immunosynthen platform.

XMT-1536, an ADC utilizing the Company’s Dolaflexin platform and targeting NaPi2b, an antigen broadly expressed in ovarian cancer and non-small cell lung cancer (NSCLC) adenocarcinoma, is currently in the expansion portion of a Phase 1 study in patients with ovarian cancer and NSCLC adenocarcinoma. XMT-1592 uses one of the Company’s new platforms, Dolasynthen, and also targets NaPi2b. The Company filed an Investigational New Drug (IND) application in the first quarter of 2020 and initiated the Phase 1 dose escalation study of XMT-1592 in the second quarter of 2020.

The Company has incurred cumulative net losses since inception. For the six months ended June 30, 2020, the net loss was $36,712, compared to net income of $4,830 in the six months ended June 30, 2019. The difference year over year is primarily attributable to $39,965 in deferred 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 expects to continue to incur operating losses for at least the next several years. As of June 30, 2020, the Company had an accumulated deficit of $229,086. The future success of the Company is dependent on, among other factors, 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. 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.

In April 2020, the Company sold 10,900,599 shares of common stock and received net proceeds of $62,976. In addition, in June 2020, the Company sold 9,200,000 shares of common stock and received net proceeds of $163,991. The Company believes that its currently available funds will be sufficient to fund the Company’s operations through at least the next twelve months from the issuance of this Quarterly Report on Form 10-Q. 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 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 and clinical studies, 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’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

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

Codification (ASC) and Accounting Standards Updates (ASU) of the Financial Accounting Standards Board (FASB). All dollar amounts, except per share data in the text and tables herein, are stated in thousands unless otherwise indicated. Certain information and footnote disclosures normally included in annual 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, 2019 and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 28, 2020.

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 June 30, 2020, the results of its operations for the three and six months ended June 30, 2020 and 2019, a statement of stockholders’ equity for the three and six months ended June 30, 2020 and 2019 and cash flows for the six months ended June 30, 2020 and 2019. Such adjustments are of a normal and recurring nature. The results for the three and six months ended June 30, 2020 are not necessarily indicative of the results for the year ending December 31, 2020, or for any future period.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include those of the Company and its wholly-owned 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 identification of performance obligations and standalone selling prices of those performance obligations 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, or decision making group, in deciding how to allocate resources and assess performance. The Company views its operations 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 six months ended June 30, 2020 are consistent with those discussed in Note 2 to the consolidated financial statements in the Company’s 2019 Annual Report on Form 10-K.

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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.


	Six Months Ended June 30, 2020						Six Months Ended June 30, 2019
	Beginning of period		End of period		Beginning of period		End of period
Cash and cash equivalents	$	62,351	$	288,376	$	59,634	$	116,206
Restricted cash included in other assets, noncurrent	321		321		371		371
Total cash, cash equivalents and restricted cash per statement of cash flows	$	62,672	$	288,697	$	60,005	$	116,577

Marketable Securities

Short-term marketable securities consist of investments in debt securities with maturities greater than three months and less than one year from the balance sheet date. 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 securities are included in other accumulated 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.

Other Assets

The Company recorded other assets of $2,103 and $1,453 as of June 30, 2020 and December 31, 2019, respectively, comprised of $1,782 and $1,132, respectively, held by a service provider, and restricted cash of $321 at the end of each period held as security deposits for a standby letter of credit related to a facility lease.

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

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 shares of common stock outstanding during the period, without further 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 shares of common stock 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, stock options, unvested restricted stock units (RSUs), 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. Therefore, basic and diluted net loss per share were the same for the three months ended June 30, 2020 and 2019 and the six months ended June 30, 2020.

The following table sets forth the outstanding potentially dilutive securities that have been excluded from the calculation of diluted net loss per share for the three and six months ended June 30, 2020 and the three months ended June 30, 2019, because to include them would be anti-dilutive (in common stock equivalent shares):


	Three and Six Months Ended June 30, 2020	Three Months Ended June 30, 2019

Stock options	5,946,503	4,564,093
Unvested restricted stock units	742,128	—
Warrants	39,474	110,365
	6,728,105	4,674,458

For the six months ended June 30, 2019, the Company reported net income. Diluted earnings per share was computed using the "treasury method" by dividing the net income by the weighted-average number of shares of common stock and potentially dilutive securities outstanding during the period. The weighted-average number of shares of common stock were adjusted for the potential dilutive effect of the exercise of stock options and warrants to purchase common stock. Refer to Note 7, "Earnings per share."

Recently Issued Accounting Pronouncements

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 is 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 adopted the new standard effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

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

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

losses rather than as a direct write-down of the security. This ASU is effective for annual periods beginning after December 15, 2019, including interim periods within those annual reporting periods, and early adoption is permitted. The Company adopted the new standard effective January 1, 2020 using the modified retrospective method. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

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 a 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 reimbursement 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 Merck KGaA Supply Agreement, the Company will provide Merck KGaA preclinical non-GMP ADC Drug Substance and clinical GMP Drug Substance for use in clinical trials associated with one of the antibodies designated under the Merck KGaA Agreement. The Company receives fees for its efforts under the Merck KGaA Supply Agreement and reimbursement equal to the supply cost. The Company may also enter into future supply agreements to provide clinical supply material should Merck KGaA pursue clinical development of any other candidates nominated under the Merck KGaA Agreement.

Accounting Analysis

The Company identified the following performance obligations under the Merck KGaA 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 is recognizing revenue related to the exclusive license and 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. To the extent that the Company receives fees for the research 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 period (which in the case of the joint research committee services approximates the time and cost incurred each period), which are 10 and five years, respectively. The Company is continuing to reassess the estimated remaining term at each subsequent reporting period. As of December 31, 2019, the total transaction price for the Merck KGaA Agreement was $21,500, which represented the amount of consideration the Company was expected to receive for the transfer of goods and services to Merck KGaA. For each of the three and six months ended June 30, 2020, the Company decreased the fees expected to be received for research and development activities by $175 to $6,325, resulting in a revised total transaction price for the Merck KGaA Agreement of $21,325 as of June 30, 2020.

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

During the three months ended June 30, 2020, the Company completed its performance obligations associated with one of the six designated targets. For the three months ended June 30, 2020 and 2019, and the six months ended June 30, 2020 and 2019, the Company recorded collaboration revenue of $796, $18, $807, and $36, respectively, related to its efforts under the Merck KGaA Agreement. During the three and six months ended June 30, 2019, the Company recognized $184 and $1,221, respectively, in collaboration revenue and corresponding research and development expense of $184 and $1,221, respectively, related to the Merck KGaA Supply Agreement.

As of June 30, 2020 and December 31, 2019, the Company had $4,008 and $4,815, respectively, in deferred revenue related to the Merck KGaA Agreement and Merck KGaA Supply Agreement that will be recognized over the remaining performance period.

Takeda XMT-1522 Strategic Partnership

In January 2016, the Company entered into a Development Collaboration and Commercial License Agreement with Takeda's 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’s collaboration agreements with Takeda were terminated following receipt of written notices during the first quarter of 2019. As there are no further performance obligations, the Company recognized the remaining deferred revenue of $39,965 related to the termination of the Takeda agreements in the first quarter of 2019.

Included in accounts payable as of June 30, 2020 and December 31, 2019 was $2,335 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 six months ended June 30, 2020 and 2019:


	Balance at Beginning of Period		Additions		Deductions		Balance at End of Period
Six months ended June 30, 2020
Contract assets	$	—	$	—	$	—	$	—
Contract liabilities:
Deferred revenue	$	4,815	$	—	$	807	$	4,008


	Balance at Beginning of Period		Additions		Deductions		Balance at End of Period
Six months ended June 30, 2019
Contract assets	$	—	$	—	$	—	$	—
Contract liabilities:
Deferred revenue	$	46,196	$	—	$	40,715	$	5,481

During the three and six months ended June 30, 2020 and 2019, 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 June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Revenue recognized in the period from:
Amounts included in the contract liability at the beginning of the period	$	796	$	123	$	807	$	40,715
Performance obligations satisfied in previous periods	$	—	$	—	$	—	$	—

Other Revenue

The Company has provided limited services for a collaboration partner, Asana BioSciences. For the six months ended June 30, 2019, the Company recognized $15 of revenue related to these services. The Company did not recognize any revenue related to these services for the three months ended June 30, 2020 and 2019 and the six months ended June 30, 2020. The next potential milestone the Company is eligible to receive is $2,500 upon dosing the fifth patient in a Phase 1 clinical study by Asana BioSciences. As of June 30, 2020, 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 successful 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 June 30, 2020 and December 31, 2019:


	Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2020
Marketable securities:

Corporate bonds	$	3,002	$	—	$	3,002	$	—

	$	3,002	$	—	$	3,002	$	—


	Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2019
Marketable securities:
Commercial paper	$	11,940	$	—	$	11,940	$	—
Corporate bonds	12,010		—		12,010		—
U.S. Treasuries	13,489		13,489		—		—
	$	37,439	$	13,489	$	23,950	$	—

There were no changes in valuation techniques or transfers between fair value measurement levels during the six months ended June 30, 2020 and 2019.

The carrying amounts reflected in the consolidated balance sheets for prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values due to their short-term nature.

As of June 30, 2020, the carrying value of the Company’s outstanding borrowing under the Credit Facility approximated fair value (a Level 2 fair value measurement), reflecting interest rates currently available to the Company. The Credit Facility is discussed in more detail in Note 8, “Debt”.

5. Marketable securities