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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, 2020
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)

Delaware04-3562403
(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 classTrading symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par valueMRSNThe 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 filerAccelerated filer
Non-accelerated filerSmaller 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 68,497,425 shares of Common Stock ($0.0001 par value per share) outstanding as of November 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.
2

Table of Contents
TABLE OF CONTENTS
Page

3

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)
September 30,
2020
December 31,
2019
Assets
Current assets:
Cash and cash equivalents$270,936 $62,351 
Short-term marketable securities 37,439 
Prepaid expenses and other current assets3,998 1,536 
Total current assets274,934 101,326 
Property and equipment, net1,698 2,164 
Operating lease right-of-use assets11,343 2,598 
Other assets2,153 1,453 
Total assets$290,128 $107,541 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$4,528 $7,296 
Accrued expenses11,173 8,986 
Deferred revenue3,998 4,815 
Operating lease liabilities1,280 2,219 
Short-term debt 667 
Other liabilities91 87 
Total current liabilities21,070 24,070 
Operating lease liabilities10,606 677 
Long-term debt, net4,944 4,201 
Other liabilities200 275 
Total liabilities36,820 29,223 
Commitments (Note 11)
Stockholders' equity:
Preferred stock, $0.0001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
  
Common stock,$0.0001 par value; 175,000,000 shares authorized; 68,470,081 and 45,388,023 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
7 5 
Additional paid-in capital504,876 270,662 
Accumulated other comprehensive income (loss) 25 
Accumulated deficit(251,575)(192,374)
Total stockholders’ equity253,308 78,318 
Total liabilities and stockholders’ equity$290,128 $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 Loss
(in thousands, except share and per share data)
(unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Collaboration revenue$11 $844 $817 $42,081 
Operating expenses:
Research and development16,546 13,701 44,179 42,610 
General and administrative5,881 4,436 15,988 13,072 
Total operating expenses22,427 18,137 60,167 55,682 
Other income (expense):
Interest income19 608 414 1,785 
Interest expense(92)(107)(267)(146)
Total other income (expense), net(73)501 147 1,639 
Net loss(22,489)(16,792)(59,203)(11,962)
Other comprehensive loss
Unrealized gain (loss) on marketable securities(2)17 (25)36 
Comprehensive loss$(22,491)$(16,775)$(59,228)$(11,926)
Net loss attributable to common stockholders — basic and diluted$(22,489)$(16,792)$(59,203)$(11,962)
Net loss per share attributable to common stockholders — basic and diluted$(0.33)$(0.35)$(1.00)$(0.28)
Weighted-average number of shares of common stock used in net loss per share attributable to common stockholders — basic and diluted68,419,192 47,833,607 59,086,202 42,011,340 
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 StockAdditional
Paid-in
Capital
Accumulated
Other Comprehensive
Income (Loss)
Accumulated
Deficit
Stockholders’
Equity
SharesAmount
Balance at December 31, 201823,234,472 $3 $172,966 $(8)$(164,166)$8,795 
Exercise of stock options12,192 — 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, 201947,684,164 $5 $266,332 $— $(142,265)$124,072 
Exercise of stock options32,693 — 58 — — 58 
Purchase of common stock under ESPP82,281 — 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, 201947,799,138 $5 $267,834 $11 $(159,336)$108,514 
Exercise of stock options and warrants83,759 — 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, 201947,882,897 $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 ESPP57,792 — 206 — — 206 
Exercise of stock options and warrants22,334 — 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, 201945,388,023 $5 $270,662 $25 $(192,374)$78,318 
Exercise of common stock warrant in exchange for common stock2,574,971 — — — —  
Exercise of stock options43,055 — 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, 202048,006,049 $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 ESPP68,419 — 333 — — 333 
Exercise of stock options206,143 — 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, 202068,381,210 $7 $502,641 $2 $(229,086)$273,564 
Exercise of stock options88,871 — 317 — — 317 
Stock-based compensation expense— — 1,918 — — 1,918 
Other comprehensive loss— — — (2)— (2)
Net loss— — — — (22,489)(22,489)
Balance at September 30, 202068,470,081 $7 $504,876 $ $(251,575)$253,308 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Mersana Therapeutics, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
September 30,
20202019
Cash flows from operating activities
Net loss$(59,203)$(11,962)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation750 963 
Net amortization of premiums and discounts on investments(86)(87)
Stock-based compensation5,183 3,610 
Other non-cash items110 65 
Changes in operating assets and liabilities:
Accounts receivable 161 
Prepaid expenses and other current assets(2,460)1,318 
Other assets(700) 
Accounts payable(2,766)(3,102)
Accrued expenses2,367 (4,518)
Operating lease assets1,235 1,290 
Operating lease liabilities(990)(1,356)
Deferred revenue(817)(41,550)
Net cash used in operating activities(57,377)(55,168)
Cash flows from investing activities
Maturities of marketable securities37,500 10,500 
Purchase of marketable securities (53,688)
Purchase of property and equipment(285)(605)
Net cash provided by (used in) investing activities37,215 (43,793)
Cash flows from financing activities
Net proceeds from public offering of common stock163,990 92,162 
Net proceeds from the at-the-market (ATM) facility62,976  
Proceeds from exercise of stock options1,732 121 
Proceeds from purchases of common stock under ESPP333 283 
Proceeds from issuance of debt, net of issuance costs(197)4,965 
Payments under capital lease obligations(87)(58)
Net cash provided by financing activities228,747 97,473 
Increase (decrease) in cash, cash equivalents and restricted cash208,585 (1,488)
Cash, cash equivalents and restricted cash, beginning of period62,672 60,005 
Cash, cash equivalents and restricted cash, end of period$271,257 $58,517 
Supplemental disclosures of non-cash activities:
Debt financing costs in accrued expenses$ $180 
Cash paid for interest$173 $64 
Right-of-use assets obtained in exchange for operating lease liabilities$9,980 $4,778 
Right-of-use assets obtained in exchange for financing lease liabilities$ $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 nine months ended September 30, 2020, the net loss was $59,203, compared to net loss of $11,962 in the nine months ended September 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 that quarter. The Company expects to continue to incur operating losses for at least the next several years. As of September 30, 2020, the Company had an accumulated deficit of $251,575. 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 U.S. GAAP as found in the Accounting Standards Codification (ASC) and 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)
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 September 30, 2020, the results of its operations for the three and nine months ended September 30, 2020 and 2019, a statement of stockholders’ equity for the three and nine months ended September 30, 2020 and 2019 and cash flows for the nine months ended September 30, 2020 and 2019. Such adjustments are of a normal and recurring nature. The results for the three and nine months ended September 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 nine months ended September 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, except as otherwise noted below in "Recently Issued Accounting Pronouncements."
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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.
Nine Months Ended
September 30, 2020
Nine Months Ended
September 30, 2019
Beginning
of period
End
of period
Beginning
of period
End
of period
Cash and cash equivalents$62,351 $270,936 $59,634 $58,196 
Restricted cash included in other assets, noncurrent321 321 371 321 
Total cash, cash equivalents and restricted cash per statement of cash flows$62,672 $271,257 $60,005 $58,517 
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. Prior to the adoption of ASU 2016-13, Financial Instruments - Credit Losses, 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 $2,153 and $1,453 as of September 30, 2020 and December 31, 2019, respectively, comprised of $1,832 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 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 for the three and nine months ended September 30, 2020 and 2019, because to include them would be anti-dilutive (in common stock equivalent shares):
Three and Nine Months Ended
September 30, 2020
Three and Nine Months Ended
September 30, 2019
Stock options6,215,368 4,718,597 
Unvested restricted stock units740,862 447,336 
Warrants39,474 39,474 
6,995,704 5,205,407 
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. Historically, U.S. GAAP delayed recognition of the full amount of credit losses until the loss was 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 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.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(in thousands, except share and per share data)
(unaudited)
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. During the nine months ended September 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.
During the nine months ended September 30, 2020, the Company completed its performance obligations associated with one of the six designated targets. For the three months ended September 30, 2020 and 2019, and the nine months ended September 30, 2020 and 2019, the Company recorded collaboration revenue of $11, $800, $817, and $836, respectively, related to its efforts under the Merck KGaA Agreement. During the three and nine months ended
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(in thousands, except share and per share data)
(unaudited)
September 30, 2019, the Company recognized $34 and $1,255, respectively, in collaboration revenue and corresponding research and development expense of $34 and $1,255, respectively, related to the Merck KGaA Supply Agreement.
As of September 30, 2020 and December 31, 2019, the Company had $3,998 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 budgeted 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 September 30, 2020 and December 31, 2019 was $2,335 related to the Takeda agreements.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(in thousands, except share and per share data)
(unaudited)
Summary of Contract Assets and Liabilities
The following table presents changes in the balances of our contract assets and liabilities during the nine months ended September 30, 2020 and 2019:
Balance at
Beginning
of Period
AdditionsDeductionsBalance at
End of Period
Nine months ended September 30, 2020
Contract assets$ $— $— $ 
Contract liabilities:
Deferred revenue$4,815 $ $817 $3,998 

Balance at
Beginning
of Period
AdditionsDeductionsBalance at
End of Period
Nine months ended September 30, 2019
Contract assets$ $— $— $ 
Contract liabilities:
Deferred revenue$46,196 $ $41,550 $4,646 
During the three and nine months ended September 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
September 30,
Nine Months Ended
September 30,
2020201920202019
Revenue recognized in the period from:
Amounts included in the contract liability at the beginning of the period$11 $834 $817 $41,550 
Performance obligations satisfied in previous periods$ $ $ $ 
Other Revenue
The Company has provided limited services for a collaboration partner, Asana BioSciences. For the three and nine months ended September 30, 2019, the Company recognized $10 and $25, respectively, of revenue related to these services. The Company did not recognize any revenue related to these services for the three and nine months ended September 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 September 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 December 31, 2019. The Company had no marketable securities as of September 30, 2020:
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 bonds12,010  12,010  
U.S. Treasuries13,489 13,489   
$37,439 $13,489 $23,950 $ 
There were no changes in valuation techniques or transfers between fair value measurement levels during the nine months ended September 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 September 30, 2020, the carrying value of the Company’s outstanding borrowing under the Amended Credit Facility (as defined below) approximated fair value (a Level 2 fair value measurement), reflecting interest rates currently available to the Company. The Amended Credit Facility is discussed in more detail in Note 7, “Debt”.
5. Marketable securities
The following table summarizes marketable securities held at December 31, 2019. The Company had no marketable securities as of September 30, 2020:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
December 31, 2019
Commercial paper$11,940 $ $ $11,940 
Corporate bonds11,990 20  12,010 
U.S. Treasuries13,484 5  13,489 
$37,414 $25 $ $37,439 


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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(in thousands, except share and per share data)
(unaudited)
6. Accrued expenses
Accrued expenses consisted of the following as of September 30, 2020 and December 31, 2019:
September 30,
2020
December 31,
2019
Accrued payroll and related expenses$3,647 $4,037 
Accrued preclinical, manufacturing and clinical expenses6,600 4,230 
Accrued professional fees and insurance861 675 
Accrued other65 44 
$11,173 $8,986 

7. Debt
On May 8, 2019, the Company entered into a loan and security agreement (the Original Agreement) with Silicon Valley Bank (SVB) pursuant to which the Company borrowed $5,000. The Original Agreement accrued interest at a floating per annum rate equal to the greater of (i) 4.0% and (ii) 1.50% below the Prime Rate. The Original Agreement had an interest-only period through August 31, 2020.
On August 28, 2020 (the Effective Date), the Company entered into a second amendment (the Amendment) to its existing loan and security agreement (as amended prior to the Amendment, the Existing Credit Facility) with SVB. Pursuant to the Amendment, the Company can borrow term loans in an aggregate amount of $30,000 (the Amended Credit Facility), at its option, (i) up to $25,000 in up to five principal advances through April 30, 2022, and (ii) an additional $5,000 in one principal advance, if the Company reaches certain development milestone events, as described in the Amendment, through April 30, 2022. The Company drew $5,200 upon execution of the Amendment, the proceeds of which were used to repay the Company’s existing balance and satisfy its obligations to SVB, including the final payment obligation under the Existing Credit Facility.
The Amended Credit Facility bears interest at a floating per annum rate equal to the greater of (i) 4.25% and (ii) 1.00% above the Prime Rate, as defined. The Company is obligated to make monthly interest-only payments on each outstanding term loan commencing on the first calendar day of the month following the funding date of such term loan, and continuing on the first calendar day of each month thereafter through May 31, 2022. The interest only period may be extended through January 31, 2023 upon the achievement of a regulatory milestone, as described in the Amendment. Following the interest-only period, the Company will be required to repay the outstanding principal balance under the term loans in equal monthly payments plus interest in arrears to SVB through November 1, 2024 (the Maturity Date).
The Company is also required to make a final payment to SVB equal to 5.5% of the original principal amount of the term loans then extended to the Company. This final payment is accreted under the effective interest method over the life of each term loan. The term loans are secured by substantially all of the Company's assets, except for its intellectual property which is subject to a negative pledge, and certain other customary exclusions.
At the Company’s option, it may prepay the outstanding principal balance of any term loans in whole but not in part, subject to a prepayment fee of: (a) 3.0% of the term loans then extended to the Company if the prepayment occurs on or prior to August 28, 2021, (b) 2.0% of the term loans then extended to the Company if the prepayment occurs after August 28, 2021 but on or prior to August 28, 2022, or (c) 1.0% of the term loans then extended to the Company if the prepayment occurs after August 28, 2022 but before November 1, 2024. The Amended Credit Facility includes customary affirmative and restrictive covenants applicable to the Company. Affirmative covenants include, among others, covenants requiring the Company to maintain its corporate existence and governmental approvals, deliver certain financial reports, maintain insurance coverage and satisfy certain requirements regarding
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(in thousands, except share and per share data)
(unaudited)
deposit accounts. The Amendment removed the requirement for the Company to maintain a minimum liquidity ratio. The restrictive covenants include, among others, requirements relating to the Company’s ability to transfer collateral, incur additional indebtedness, engage in mergers or acquisitions, pay dividends or make other distributions, make investments, create liens, sell assets and agree to a change in control, in each case subject to certain customary exceptions.
The Company’s payment obligations under the Amended Credit Facility are subject to acceleration upon the occurrence of specified events of default, which include, but are not limited to, the occurrence of a material adverse change in the Company’s business, operations, or financial or other condition. Amounts outstanding upon the occurrence of an event of default are payable upon SVB’s demand and shall accrue interest at an additional rate of 5.0% per annum of the past due amount outstanding. As of September 30, 2020, the Company was in compliance with all covenants under the Amended Credit Facility. As such, as of September 30, 2020, the classification of the loan balance as stated on the balance sheet was based on the timing of defined future payment obligations.
The unamortized issuance costs under the Existing Credit Facility were $139 as of the date of the Amendment. The Company incurred debt issuance costs paid to the lender in connection with the Amended Credit Facility of $17. The Company recorded such costs, including the settlement of the final payment obligation under the Existing Credit Facility as a discount from the carrying value of the term loans which are amortized as interest expense using the effective-interest method over the term of the Amended Credit Facility.
As of September 30, 2020, there was $5,200 in term loans outstanding under the Amended Credit Facility and the debt consisted of the following:
September 30,
2020
Total debt$5,200 
Debt financing costs, net of accretion(262)
Accretion related to final payment6 
Long-term debt, net$4,944 
As of September 30, 2020, the estimated future principal payments due are as follows:
2020 (excluding the nine months ended September 30, 2020)$ 
2021 
20221,213 
20232,080 
20241,907 
Total debt$5,200 
During the three months ended September 30, 2020 and 2019, and the nine months ended September 30, 2020 and 2019, the Company recognized $60, $51, $173 and $64, respectively, of interest expense related to the Existing Credit Facility and Amended Credit Facility, as applicable.
8. Stockholders’ equity
Preferred stock
As of September 30, 2020, the Company had 25,000,000 shares of authorized preferred stock. No shares of preferred stock have been issued.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(in thousands, except share and per share data)
(unaudited)
At-the-market equity offering program
In July 2018, the Company established an at-the-market (ATM) equity offering program (the 2018 ATM) pursuant to which it offered and sold up to $75,000 of its common stock from time to time at prevailing market prices. In April 2020, the Company sold 8,938,599 and 1,962,000 shares of common stock at $5.59 per share and $7.74 per share, respectively, to raise aggregate gross proceeds of $65,153 through the 2018 ATM facility. Net proceeds to the Company after deducting fees, commissions and other expenses related to the offering were approximately $62,976.
In May 2020, the Company terminated the 2018 ATM and established a new ATM equity offering program (the 2020 ATM) pursuant to which it is able to sell up to $100,000 of its common stock from time to time at prevailing market prices. As of September 30, 2020, the Company had not sold any shares under the 2020 ATM.
Follow-on offering
In June 2020, the Company sold 9,200,000 shares of common stock, in an underwritten public offering price to the public of $19.00 per share, resulting in gross proceeds of approximately $174,800. Net proceeds to the Company after deducting fees, commissions and other expenses related to the offering were approximately $163,991.
Warrants
In connection with a 2013 Series A-1 Preferred Stock issuance, the Company granted to certain investors warrants to purchase 129,491 shares of common stock. The warrants have a $0.05 per share exercise price and a contractual life of 10 years. The fair value of these warrants was recorded as a component of equity at the time of issuance. As of September 30, 2020, there were warrants to purchase 39,474 shares of common stock.
Exchange warrants
On November 26, 2019, the Company entered into an exchange agreement with entities affiliated with Biotechnology Value Fund, L.P. (the Exchanging Stockholders), pursuant to which the Exchanging Stockholders exchanged an aggregate of 2,575,000 shares of common stock for warrants (the Exchange Warrants) to purchase an aggregate of 2,575,000 shares of common stock (subject to adjustment in the event of any stock dividends and splits, reverse stock split, merger or consolidation, change of control, reorganization or similar transaction, as described in the Exchange Warrants), with an exercise price of $0.0001 per share.
On March 2, 2020, the Exchanging Stockholders exercised the Exchange Warrants in full on a net cashless exercise basis, resulting in the issuance of 2,574,971 shares of common stock.
Common stock
The holders of the common stock are entitled to one vote for each share held. Common stockholders are not entitled to receive dividends, unless declared by the Board of Directors (the Board).
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(in thousands, except share and per share data)
(unaudited)
At September 30, 2020 and December 31, 2019, there were 6,995,704 and 7,782,582, respectively, shares of common stock reserved for the exercise of outstanding stock options, restricted stock units and warrants, as follows:
September 30,
2020
December 31,
2019
Stock options6,215,368 4,720,772 
Restricted stock units740,862 447,336 
Warrants39,474 39,474 
Exchange warrants 2,575,000 
6,995,704 7,782,582 

9. Stock options
Stock option plans
In June 2017, the Company’s stockholders approved the 2017 Stock Incentive Plan (the 2017 Plan). Under the 2017 Plan, up to 2,255,000 shares of common stock were initially available to be granted to the Company's employees, officers, directors, consultants and advisors in the form of options, restricted stock units (RSUs) or other stock-based awards. The number of shares of common stock issuable under the 2017 Plan will be cumulatively increased annually by 4% of the outstanding shares or such lesser amount specified by the Board. The terms of the awards are determined by the Board, subject to the provisions of the 2017 Plan. Any cancellations under the 2007 Plan, which expired in June 2017, would increase the number of shares that could be granted under the 2017 Plan. In January 2020, the number of shares of common stock issuable under the 2017 Plan was increased by 1,815,520 shares. As of September 30, 2020, there were 1,320,916 shares available for future issuance under the 2017 Plan. During the nine months ended September 30, 2020, the Company granted 2,165,306 RSUs and options to purchase shares of common stock to employees under the 2017 Plan.
Inducement awards
On September 2, 2020, the Company granted its senior vice president of regulatory affairs an option to purchase up to 120,000 shares of common stock as an inducement to employment in accordance with Nasdaq Listing Rule 5635(c)(4). No underwriters were involved in this issuance of securities. The securities were issued pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended, relating to transactions by an issuer not involving any public offering. These options are subject to terms substantially the same as the 2017 Plan.
With respect to the stock option grants as described above, the exercise price per share will equal the fair market value of the common stock on the date of grant, and the vesting period is generally four years. Nonqualified stock options will be granted at an exercise price established by the Board at its sole discretion (which has not been less than fair market value on the date of grant) and the vesting periods may vary. Options granted as described above expire no later than 10 years from the date of grant. The Board may accelerate vesting or extend the expiration of granted options in the case of a merger, consolidation, dissolution, or liquidation of the Company.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(in thousands, except share and per share data)
(unaudited)
Stock option activity
A summary of the options activity under the Plans is as follows:
Number
of Shares
Weighted-
Average
Exercise Price
Outstanding at January 1, 20204,720,772 $5.24 
Granted1,960,374 9.41 
Exercised(338,069)5.13 
Cancelled(127,709)7.70 
Outstanding at September 30, 20206,215,368 $6.52 
Exercisable at September 30, 20203,256,514 $4.87 
The weighted-average grant date fair value of options granted during the nine months ended September 30, 2020 and 2019, was $6.17 and $2.47 per share, respectively.
Cash received from the exercise of stock options was $1,732 and $121 for the nine months ended September 30, 2020 and 2019, respectively.
Restricted stock units (RSUs)
In July 2019, the Company issued RSUs with service conditions to employees. The awards cliff-vest two years after the grant date. In January 2020, the Company issued 324,932 RSUs with a service condition to employees for which the vesting term is annually over four years. Vesting of these awards is contingent on the fulfillment of the service conditions during the vesting term.
A summary of the RSU activity under the 2017 Plan is as follows:
Number of Shares
Unvested at January 1, 2020447,336 
Granted324,932 
Vested 
Forfeited(31,406)
Unvested at September 30, 2020740,862 
Stock-based compensation expense
The Company uses the provisions of ASC 718, Stock Compensation, to account for all stock-based awards to employees and non-employees.
The measurement date for employee awards is generally the date of grant. Stock-based compensation expense is recognized over the requisite service period, which is generally the vesting period, using the straight-line method.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(in thousands, except share and per share data)
(unaudited)
The following table presents stock-based compensation expense by award type included within the Company’s condensed consolidated statement of operations and comprehensive loss:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Stock options$1,520 $1,055 $4,025 $3,240 
Restricted stock units335 184 962 184 
Employee stock purchase plan63 46 196 186 
Stock-based compensation expense included in Total operating expenses$1,918 $1,285 $5,183 $3,610 
The following table presents stock-based compensation expense as reflected in the Company’s condensed consolidated statements of operations and comprehensive loss:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Research and development$952 $587 $2,554 $1,636 
General and administrative966 698 2,629 1,974 
Stock-based compensation expense included in Total operating expenses$1,918 $1,285 $5,183 $3,610 
As of September 30, 2020, there was $15,007 and $2,269 of unrecognized stock compensation expense related to unvested stock options and unvested RSUs, respectively, that is expected to be recognized over a weighted-average period of 2.5 years and 2.6 years, respectively.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Risk-free interest rate0.4 %1.9 %1.3 %2.4 %
Expected dividend yield % % % %
Expected term (years)6.106.116.045.99
Expected stock price volatility81 %75 %72 %74 %
Employee Stock Purchase Plan
During the year ended December 31, 2017, the Board adopted, and the Company’s stockholders approved the 2017 employee stock purchase plan (the 2017 ESPP). The Company initially reserved 225,000 shares of common stock for issuance under the 2017 ESPP. In January 2020, the number of shares of common stock for issuance under the 2017 ESPP was increased by 450,000 shares. For the nine months ended September 30, 2020 and 2019, the Company issued 68,419 and 82,281, respectively, shares under the 2017 ESPP. The Company did not issue any shares under the 2017 ESPP for the three months ended September 30, 2020 and 2019. As of September 30, 2020, there were 656,666 shares available for issuance under the 2017 ESPP.
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Mersana Therapeutics, Inc.
Notes to condensed consolidated financial statements (continued)
(in thousands, except share and per share data)
(unaudited)
10. Leases
The Company has an operating lease for its office space in Cambridge, MA and operating and finance leases for certain equipment. In March 2020, the Company entered into the Seventh Amendment to the office space lease to extend the term of the lease through March 2026 and to provide the Company with a tenant improvement allowance of $172. The current rate per square foot that is in place through March 2021 (the original expiration date of the lease) did not change. After March 2021, there are predetermined fixed escalations of the rate as outlined in the amendment. The Company has an option to extend the lease term for an additional five years. The Company’s exercise of this option was not considered reasonably certain as of September 30, 2020.
The extension is accounted for as a lease modification. The Company assessed the lease classification of the amended office space lease at the modification date and determined that the amended office space lease should be accounted for as an operating lease. The right-of-use asset and corresponding operating lease liability have been remeasured based on the present value of remaining lease payments over the remaining extended lease term, using the incremental borrowing rate applicable as of the lease modification date. The Company determined the appropriate incremental borrowing rate by using a synthetic credit rating which was estimated based on an analysis of outstanding debt of companies with similar credit and financial profiles. Since the operating lease is a net lease, as the non-lease components (i.e., common area maintenance) are paid separately from rent based on actual costs incurred, such non-lease components were not included in the right-of-use asset and liability and are reflected as an expense in the period incurred.
As a result of the modification in March 2020, the Company recorded an increase of $9,980 to its right-of-use (ROU) asset and lease liabilities in the first quarter of 2020.
Following the change, the Company's future minimum lease payments under non-cancellable leases as of September 30, 2020 were as follows:
Operating leasesFinance leases
2020 (excluding the nine months ended September 30, 2020)$604 $29 
20212,772 116 
2022