SEC Filing - Mersana Therapeutics

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mrsn-20210630

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, 2021

☐ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 71,761,525 shares of Common Stock ($0.0001 par value per share) outstanding as of August 4, 2021.

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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 upifitamab rilsodotin (UpRi, 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, 2020, and this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021, particularly in the “Risk factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

In addition, the COVID-19 pandemic could 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 also 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, the emergence of new variants of the virus, 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.

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RISK FACTORS SUMMARY

Our business is subject to varying degrees of risk and uncertainty. Investors should consider the risks and uncertainties summarized below, as well as the risks and uncertainties discussed in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q.

Our business is subject to the following principal risks and uncertainties:

•We have incurred net losses since our inception, we have no products approved for commercial sale and we anticipate that we will continue to incur substantial operating losses for the foreseeable future.

•We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed could force us to delay, limit, reduce or terminate our product development or commercialization efforts.

•We have a credit facility that requires us to meet certain operating covenants and place restrictions on our operating and financial flexibility.

•We face substantial competition, which may result in others discovering, developing or commercializing products before, or more successfully than, we do.

•We only have two product candidates, upifitamab rilsodotin (UpRi, XMT-1536) and XMT-1592, in clinical studies. A failure of any of our product candidates in clinical development would adversely affect our business and may require us to discontinue development of other product candidates based on the same technology.

•We can provide no assurance that our clinical product candidates will obtain regulatory approval or that the results of clinical studies will be favorable.

•Drug discovery and development is a complex, time-consuming and expensive process that is fraught with risk and a high rate of failure. We can provide no assurance of the successful and timely development of new ADC products.

•If we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully develop our ADC product candidates, conduct our clinical studies and commercialize our ADC product candidates.

•We may encounter difficulties in managing our growth and expanding our operations successfully.

•Our activities, including our interactions with healthcare providers, third party payors, patients and government officials, are, and will continue to be, subject to extensive regulation involving health care, anti-corruption, data privacy and security and consumer protection laws. Failure to comply with applicable laws could result in substantial penalties, contractual damages, reputational harm, diminished revenues and curtailment or restructuring of our operations.

•We rely upon patents and other intellectual property rights to protect our technology. We may be unable to protect our intellectual property rights, and we may be liable for infringing the intellectual property rights of others.

•Our business is subject to risks arising from the outbreaks of disease, such as epidemics or pandemics, including the ongoing COVID-19 pandemic.

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TABLE OF CONTENTS


			Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30 , 2021 and December 31, 2020			5
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 3 0 , 2021 and 2020			6
Condensed Consolidated Statement of Stockholders’ Equity for the three and six months ended June 3 0 , 2021 and 2020			7
Condensed Consolidated Statements of Cash Flows for the six months ended June 3 0 , 2021 and 2020			8
Notes to Condensed Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			32
PART II - OTHER INFORMATION			34
Item 1. Legal Proceedings			34
Item 1A. Risk Factors			34
Item 5. Other Information			74
Item 6. Exhibits			74
Signatures			75

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Mersana Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)


	June 30, 2021		December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	227,388	$	255,094


Prepaid expenses and other current assets	6,043		3,486
Total current assets	233,431		258,580
Property and equipment, net	1,901		1,730
Operating lease right-of-use assets	13,746		10,936
Other assets	4,607		2,153
Total assets	$	253,685	$	273,399
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	10,647	$	8,340
Accrued expenses	23,383		16,146
Deferred revenue	3,966		3,987
Operating lease liabilities	2,173		1,437
Short-term debt	173		—
Other liabilities	129		93
Total current liabilities	40,471		30,003
Long-term operating lease liabilities	12,543		10,158
Long-term debt, net	4,870		4,977
Other long-term liabilities	288		174
Total liabilities	58,172		45,312
Commitments (Note 10)
Stockholders' equity:
Preferred stock, $0.0001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively	—		—
Common stock,$0.0001 par value; 175,000,000 shares authorized; 71,401,216 and 68,841,288 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively	7		7
Additional paid-in capital	551,531		508,499

Accumulated deficit	(356,025)		(280,419)
Total stockholders’ equity	195,513		228,087
Total liabilities and stockholders’ equity	$	253,685	$	273,399

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 June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Collaboration revenue	$	11	$	796	$	21	$	807
Operating expenses:
Research and development	31,955		15,413		59,370		27,632
General and administrative	8,883		5,171		16,090		10,106
Total operating expenses	40,838		20,584		75,460		37,738
Other income (expense):
Interest income	9		89		21		394
Interest expense	(95)		(87)		(188)		(175)
Total other income (expense), net	(86)		2		(167)		219
Net loss	(40,913)		(19,786)		(75,606)		(36,712)
Other comprehensive loss
Unrealized gain (loss) on marketable securities	—		6		—		(23)
Comprehensive loss	$	(40,913)	$	(19,780)	$	(75,606)	$	(36,735)
Net loss attributable to common stockholders — basic and diluted	$	(40,913)	$	(19,786)	$	(75,606)	$	(36,712)
Net loss per share attributable to common stockholders — basic and diluted	$	(0.59)	$	(0.33)	$	(1.09)	$	(0.68)

Weighted-average number of shares of common stock used in net loss per share attributable to common stockholders — basic and diluted	69,616,467		60,748,225		69,303,899		54,368,429

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, 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
Exercise of stock options	88,871	—		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, 2020	68,470,081	$	7	$	504,876	$	—	$	(251,575)	$	253,308
Exercise of stock options	359,359	—		1,406		—		—		1,406
Purchase of common stock under ESPP	11,848	—		228		—		—		228
Stock-based compensation expense	—	—		1,989		—		—		1,989
Net loss	—	—		—		—		(28,844)		(28,844)
Balance at December 31, 2020	68,841,288	$	7	$	508,499	$	—	$	(280,419)	$	228,087
Exercise of stock options	148,472	—		764		—		—		764
Vesting of restricted stock units, net of employee tax obligations	61,678	—		(259)		—		—		(259)
Stock-based compensation expense	—	—		4,039		—		—		4,039
Net loss	—	—		—		—		(34,693)		(34,693)
Balance at March 31, 2021	69,051,438	$	7	$	513,043	$	—	$	(315,112)	$	197,938
Issuance of common stock from at-the-market transactions, net of issuance costs of $746	2,271,074	—		33,287		—		—		33,287
Exercise of stock options	42,506	—		202		—		—		202
Purchase of common stock under ESPP	36,198	—		417		—		—		417
Stock-based compensation expense	—	—		4,582		—		—		4,582
Net loss	—	—		—		—		(40,913)		(40,913)
Balance at June 30, 2021	71,401,216	$	7	$	551,531	$	—	$	(356,025)	$	195,513

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,
	2021		2020
Cash flows from operating activities
Net loss	$	(75,606)	$	(36,712)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	432		494

Net amortization of premiums and discounts on investments	—		(86)
Stock-based compensation	8,621		3,265

Other non-cash items	77		74
Changes in operating assets and liabilities:

Prepaid expenses and other current assets	(2,418)		(163)
Other assets	(2,296)		(650)
Accounts payable	2,270		(377)
Accrued expenses	7,139		(2,349)
Operating lease assets	972		836
Operating lease liabilities	(660)		(706)
Deferred revenue	(21)		(807)
Net cash used in operating activities	(61,490)		(37,181)

Cash flows from investing activities
Maturities of marketable securities	—		34,500

Purchase of property and equipment	(447)		(90)
Net cash provided by (used in) investing activities	(447)		34,410

Cash flows from financing activities
Net proceeds from public offering of common stock	—		164,157
Net proceeds from the at-the-market (ATM) facility	33,338		63,129
Proceeds from exercise of stock options	966		1,415
Proceeds from purchases of common stock under ESPP	417		333
Payment of employee tax obligations related to vesting of restricted stock units	(259)		—
Proceeds from issuance of debt, net of issuance costs	—		(180)

Payments under capital lease obligations	(74)		(58)
Net cash provided by financing activities	34,388		228,796

Increase (decrease) in cash, cash equivalents and restricted cash	(27,549)		226,025
Cash, cash equivalents and restricted cash, beginning of period	255,415		62,672
Cash, cash equivalents and restricted cash, end of period	$	227,866	$	288,697

Supplemental disclosures of non-cash activities:
Purchases of property and equipment in accounts payable and accrued expenses	$	46	$	10

Equity issuance costs in accounts payable and accrued expenses	$	51	$	321
Cash paid for interest	$	122	$	113
Right-of-use assets obtained in exchange for operating lease liabilities	$	3,783	$	9,980
Right-of-use assets obtained in exchange for financing lease liabilities	$	213	$	—

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 over 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 clinical candidates include upifitamab rilsodotin (UpRi, XMT-1536) and XMT-1592. The Company’s early-stage programs include XMT-1660, a potentially first-in-class Dolasynthen ADC targeting B7-H4, as well as XMT-2056, a Stimulator of Interferon Genes (STING) agonist ADC developed using the Company’s Immunosynthen platform.

UpRi, 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 being studied in UPLIFT, a single-arm registration strategy in patients with platinum-resistant ovarian cancer, as well as in UPGRADE, a Phase 1 combination dose escalation umbrella study to evaluate the safety and efficacy of UpRi in combination with other ovarian cancer therapies. The Company also continues to study UpRi in the expansion portion of a Phase 1 proof-of-concept clinical study. XMT-1592 uses the Company’s Dolasynthen platform and also targets NaPi2b and is in the dose escalation portion of a Phase 1 proof-of-concept clinical study.

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 has incurred cumulative net losses since inception. For the six months ended June 30, 2021, the net loss was $75,606, compared to net loss of $36,712 in the six months ended June 30, 2020. The Company expects to continue to incur operating losses for at least the next several years. As of June 30, 2021, the Company had an accumulated deficit of $356,025. 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.

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’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 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

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

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, 2020 and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021.

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, 2021, the results of its operations for the three and six months ended June 30, 2021 and 2020, a statement of stockholders’ equity for the three and six months ended June 30, 2021 and 2020 and cash flows for the six months ended June 30, 2021 and 2020. Such adjustments are of a normal and recurring nature. The results for the three and six months ended June 30, 2021 are not necessarily indicative of the results for the year ending December 31, 2021, 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 preclinical, manufacturing and clinical 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, 2021 are consistent with those discussed in Note 2 to the consolidated financial statements in the Company’s 2020 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.


	Six Months Ended June 30, 2021				Six Months Ended June 30, 2020
	Beginning of period		End of period		Beginning of period		End of period
Cash and cash equivalents	$	255,094	$	227,388	$	62,351	$	288,376
Restricted cash included in other assets, noncurrent	321		478		321		321
Total cash, cash equivalents and restricted cash per statement of cash flows	$	255,415	$	227,866	$	62,672	$	288,697

Other Assets

The Company recorded other assets of $4,607 and $2,153 as of June 30, 2021 and December 31, 2020, respectively, comprised of $4,129 and $1,832, respectively, held by a service provider, and restricted cash of $478 and $321, respectively, held as a security deposit for a standby letter of credit related to a facility lease.

Net Loss per Share

Basic net loss per share of common stock 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 method.

For purposes of the diluted net loss per share calculation, stock options, unvested restricted stock units (RSUs) and warrants 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.

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


	Three and Six Months Ended June 30, 2021	Three and Six Months Ended June 30, 2020
Stock options	7,977,545		5,946,503
Unvested restricted stock units	1,070,311		742,128
Warrants	39,474		39,474
	9,087,330		6,728,105

Recently Issued Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in the accounting standards. The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. The amendments in ASU 2019-12 are effective for the fiscal years beginning after December 15, 2020. The adoption of ASU 2019-12 did not have a material effect on our results of operations and financial position.

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 Merck KGaA 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 next potential milestone payment that the Company is eligible to receive is a development milestone of $500 on Merck KGaA’s designation of a preclinical development candidate for a target. Revenue will be recognized when achievement of the milestone is considered probable.

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.

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

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 performance obligations 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 approximate the time and cost incurred each period), which are 10 and 5 years, respectively. The Company is continuing to reassess the estimated remaining term at each subsequent reporting period.

As of June 30, 2021, the Company had completed its research service obligations associated with four of the six designated targets. During each of the three months ended June 30, 2021 and 2020, and the six months ended June 30, 2021 and 2020, the Company recorded collaboration revenue of $11, $796, $21, and $807, respectively, related to its efforts under the Merck KGaA Agreement. The Company did not recognize any collaboration revenue and corresponding research and development expense related to the Merck KGaA Supply Agreement during the three and six months ended June 30, 2021 and 2020.

As of June 30, 2021 and December 31, 2020, the Company had $3,966 and $3,987, respectively, in deferred revenue related to the Merck KGaA Agreement and Merck KGaA Supply Agreement that will be recognized over the remaining performance period.

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, 2021 and 2020:


	Balance at Beginning of Period		Additions		Deductions		Balance at End of Period
Six months ended June 30, 2021
Contract assets	$	—	$	—	$	—	$	—
Contract liabilities:
Deferred revenue	$	3,987	$	—	$	21	$	3,966


	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

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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 and six months ended June 30, 2021 and 2020, 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,
	2021		2020		2021		2020
Revenue recognized in the period from:
Amounts included in the contract liability at the beginning of the period	$	11	$	796	$	21	$	807
Performance obligations satisfied in previous periods	$	—	$	—	$	—	$	—

Other Revenue

The Company has provided limited services for a collaboration partner, Asana BioSciences. For each of the six months ended June 30, 2021 and 2020, the Company did not recognize revenue related to these services. 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, 2021, 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.

4. Fair value measurements

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, 2021 and December 31, 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 Credit Facility is discussed in more detail in Note 6, “Debt”.

5. Accrued expenses

Accrued expenses consisted of the following as of June 30, 2021 and December 31, 2020:


	June 30, 2021		December 31, 2020
Accrued preclinical, manufacturing and clinical expenses	$	17,675	$	9,902
Accrued payroll and related expenses	4,555		5,412
Accrued professional fees and insurance	1,030		757
Accrued other	123		75
	$	23,383	$	16,146

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

6. Debt

On May 8, 2019, the Company entered into a loan and security agreement with Silicon Valley Bank (SVB), which has subsequently been amended on June 21, 2019, and August 28, 2020 (collectively, the Credit Facility) pursuant to which the Company can borrow term loans in an aggregate amount of $30,000, at its option, comprising (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 Credit Facility, through April 30, 2022.

As of June 30, 2021, the Company was in compliance with all covenants under the Amended Credit Facility. As such, as of June 30, 2021, the classification of the loan balance as stated on the balance sheet was based on the timing of defined future payment obligations.

As of June 30, 2021, the Company had drawn a term loan of $5,200, and debt consisted of the following:


	June 30, 2021
Total debt	$	5,200
Less: Current portion of long-term-debt	(173)
Total debt, net of current portion	5,027
Debt financing costs, net of accretion	(214)
Accretion related to final payment	57
Long-term debt, net	$	4,870

As of June 30, 2021, the estimated future principal payments due are as follows:


2021 (excluding the six months ended June 30, 2021)	$	—
2022	1,213
2023	2,080
2024	1,907
Total debt	$	5,200

During the three months ended June 30, 2021 and 2020, and the six months ended June 30, 2021 and 2020, the Company recognized $89, $51, $177, and $102, respectively, of interest expense related to the Existing Credit Facility and Amended Credit Facility, as applicable.

7. Stockholders’ equity

Preferred stock

As of June 30, 2021, the Company had 25,000,000 shares of authorized preferred stock. No shares of preferred stock have been issued.

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 could offer and sell 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.

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

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. For the three months ended June 30, 2021, the Company sold 2,271,074 shares of common stock at an average price of $14.99 per share to raise aggregate gross proceeds of $34,033 through the 2020 ATM. Net proceeds to the Company after deducting fees, commissions and other expenses related to the offering were approximately $33,287.

Follow-on offering

In June 2020, the Company sold 9,200,000 shares of common stock, in an underwritten public offering at a price to the public of $19.00 per share. Net proceeds to the Company after deducting fees, commissions and other expenses related to the offering were $163,990.

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 June 30, 2021, there were warrants to purchase 39,474 shares of common stock. During the quarter ended June 30, 2021, there were no exercises of warrants in exchange for 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).

At June 30, 2021 and December 31, 2020, there were 9,087,330 and 6,869,189, respectively, shares of common stock reserved for the exercise of outstanding stock options and warrants.


	June 30, 2021	December 31, 2020
Stock options	7,977,545	6,112,948
Restricted stock units	1,070,311	716,767
Warrants	39,474	39,474

	9,087,330	6,869,189

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

8. Stock options

Stock option plans

As of June 30, 2017, there were 3,141,625 stock options outstanding under the Company’s 2007 Stock Incentive Plan (the 2007 Plan). The 2007 Plan expired in June 2017. Any cancellations under the 2007 Stock Incentive Plan will increase the options available under the 2017 Stock Incentive Plan as described below.

In June 2017, the Company’s stockholders approved the 2017 Stock Incentive Plan (the 2017 Plan). Under the 2017 Plan initially, up to 2,255,000 shares of common stock may 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 2021, the number of shares of common stock issuable under the 2017 Plan was increased by 2,753,651 shares. As of June 30, 2021, there were 1,771,150 shares available for future issuance under the 2017 Plan. During the six months ended June 30, 2021, the Company granted 2,657,110 RSUs and options to purchase shares of common stock to employees under the 2017 Plan.

With respect to incentive stock options, the exercise price per share will equal the closing price 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 under the 2017 Plan 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.

Inducement awards

The Company grants to its employees, upon approval by the Board, options to purchase shares of common stock as an inducement to employment in accordance with Nasdaq Listing Rule 5635(c)(4). The securities are 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. As of June 30, 2021 there were 532,500 options to purchase shares of common stock granted as inducement awards outstanding.

Stock option activity

A summary of stock option activity is as follows:


	Number of Shares	Weighted- Average Exercise Price
Outstanding at January 1, 2021	6,112,948	$	7.84
Granted	2,325,657	19.27
Exercised	(190,978)	5.06
Cancelled	(270,082)	9.35
Outstanding at June 30, 2021	7,977,545	$	11.19
Exercisable at June 30, 2021	3,548,386	$	6.07

The weighted-average grant date fair value of options granted during the six months ended June 30, 2021 and 2020, was $13.45 and $4.06 per share, respectively.

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

Cash received from the exercise of stock options was $966 and $1,415 for the six months ended June 30, 2021 and 2020, respectively.

Restricted stock units (RSUs)

The Company periodically issues RSUs with a service condition to certain officers and other employees that typically vest between one year and four years from the grant date.

A summary of the RSU activity under the 2017 Plan is as follows:


			Number of Shares
Unvested at January 1, 2021			716,767
Granted			543,953
Vested			(73,954)
Forfeited			(116,455)
Unvested at June 30, 2021			1,070,311

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.

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 June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Stock options	$	3,514	$	1,272	$	6,631	$	2,505
Restricted stock units	949		318		1,755		627
Employee stock purchase plan	119		66		235		133
Stock-based compensation expense included in total operating expenses	$	4,582	$	1,656	$	8,621	$	3,265

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 June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Research and development	$	2,502	$	805	$	4,803	$	1,602
General and administrative	2,080		851		3,818		1,663
Stock-based compensation expense included in total operating expenses	$	4,582	$	1,656	$	8,621	$	3,265

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

As of June 30, 2021, there was $42,433 and $11,070 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 2.9 years and 3.3 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 June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Risk-free interest rate	1.0	%	0.5	%	0.8	%	1.5	%
Expected dividend yield	—	%	—	%	—	%	—	%
Expected term (years)	5.97		6.00		6.04		6.04
Expected stock price volatility	83	%	80	%	83	%	70	%

Expected volatility for the Company’s common stock is determined based on the historical volatility of comparable publicly traded companies. The risk-free interest rate is based on the yield of U.S. Treasury securities consistent with the expected term of the option. No dividend yield was assumed as the Company has not historically and does not expect to pay dividends on its common stock. The expected term of the options granted is based on the use of the simplified method, in which the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term.

The fair value of RSUs is determined based on the closing price of the Company’s common stock on the date of grant.

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. The Company issued 36,198 shares under the 2017 ESPP during each of the three and six months ended June 30, 2021, and issued 68,419 shares under the 2017 ESPP during each of the three and six months ended June 30, 2020. As of June 30, 2021, there were 608,620 shares available for issuance. including 450,000 shares automatically added to the 2017 ESPP on January 1, 2020.

9. Leases

The Company has an operating lease for its office and lab space in Cambridge, MA and operating and finance leases for certain equipment. The operating lease for its office and lab space (the Office Lease) was amended in March 2020 and is effective through March 2026. The Company has an option to extend the lease term of the Office Lease for an additional five years.

On April 5, 2021, the Company entered into an Eighth Amendment (the Expansion Agreement) to the Office Lease. The Expansion Agreement granted the Company additional office space in its existing building for five years, beginning July 1, 2021, committing to lease payments of $4,983 over that period (the Expansion Lease). In connection with the Expansion Lease, the Company increased the balance of the security deposit by increasing the standby letter of credit for the benefit of its landlord by $156. The Expansion Agreement also provides the Company with a tenant improvement allowance of $51. Independent from the option under the Office Lease, the Company has an option to extend the lease term of the Expansion Lease for an additional five years. The Company’s exercise of the options to extend the lease terms of both the Office Lease and Expansion Lease were not considered reasonably certain as of June 30, 2021.

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Mersana Therapeutics, Inc.

Notes to condensed consolidated financial statements (continued)

(in thousands, except share and per share data)

(unaudited)

The Expansion Agreement is a lease modification that will be accounted for as a separate contract, because it expands the scope of the Office Lease and the additional lease payments are commensurate with market rents. The Company assessed the lease classification of the Expansion Lease as of the date of signing and determined that the Expansion Lease should be accounted for as an operating lease. The right-of-use asset and corresponding operating lease liability have been calculated based on the present value of lease payments over the lease term. The Company determined the appropriate incremental borrowing rate to utilize as a discount 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 signing of the Expansion Agreement in April 2021, the Company recorded an increase of $3,783 to its right-of-use (ROU) asset and lease liabilities in the second quarter of 2021.

The Company had a standby letter of credit agreement for the benefit of its landlord in the amount of $478 in connection with the Office Lease and Expansion Lease as of June 30, 2021 and $321 in connection with the Office Lease as of December 31, 2020, collateralized by a money market account.

The Company has remaining finance lease terms of one year to five years for certain equipment, some of which include options to purchase at fair value. For the three and six month ended June 30, 2021 the Company recorded an asset under finance lease of $0 and $213, respectively, as property and equipment.

The components of lease expense were as follows:


	Operating leases		Finance leases
2021 (excluding the six months ended June 30, 2021)	$	1,915	$	82
2022	3,795		128
2023	3,909		121
2024	4,027		60
2025 and thereafter	5,457		56
Total lease payments	19,103		447
Present value adjustment	(4,387)		(30)
Present value of lease liabilities	$	14,716	$	417

10. Commitments

License agreements

The Company recorded research and development expense for a $900 milestone payment for the dosing of the first patient in UPLIFT during the three and six months ended June 30, 2021. The Company recorded research and development expense for a $750 milestone payment for the dosing of the first patient in the XMT-1592 trial during the three and six ended June 30, 2020.

See Note 9 for the Company’s future obligations related to leases as of June 30, 2021.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (SEC) on February 26, 2021.

Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods.

The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q, including those risks identified under Item 1A. Risk Factors.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are a clinical-stage biopharmaceutical company focused on developing antibody drug conjugates, or ADCs, that offer a clinically meaningful benefit for cancer patients with significant unmet need. We have leveraged over 20 years of industry learning in the ADC field to develop proprietary and differentiated technology platforms that enable us to design ADCs to have improved efficacy, safety and tolerability relative to existing ADC therapies.

We believe that our innovative platforms which include Dolaflexin and Dolasynthen, delivering our DolaLock payload, as well as Immunosynthen, delivering a novel stimulator of interferon genes, or STING, agonist, comprise a highly-efficient product engine that has enabled a robust discovery pipeline for us and our partners. Our ADCs in preclinical and clinical studies include first-in-class molecules that target multiple tumor types with high unmet medical need and have exhibited improved safety and efficacy compared to ADCs developed using first-generation technology.

Our goal is to become a leading oncology company by leveraging the potential of our innovative and differentiated ADC technologies and the experience and competencies of our management team to identify, acquire and develop promising ADC product candidates and to commercialize cancer therapeutics that are improvements over existing treatments.

Upifitamab rilsodotin (UpRi, XMT-1536), our first-in-class ADC targeting the sodium-dependent phosphate transport protein NaPi2b, utilizes the Dolaflexin platform to deliver about 10 DolaLock payload molecules per antibody. The NaPi2b antigen is broadly expressed in ovarian cancer and non-small cell lung cancer, or NSCLC, adenocarcinoma with limited expression in normal tissue. In April 2021, we initiated a single-arm registration strategy in platinum-resistant ovarian cancer, UPLIFT. In July 2021, we initiated UPGRADE, a Phase 1 combination dose escalation umbrella study to evaluate the safety and efficacy of UpRi in combination with other ovarian cancer therapies. The initial arm of this umbrella study is evaluating carboplatin in combination with UpRi followed by continuation of UpRi monotherapy in patients with recurrent platinum-sensitive ovarian cancer. We are continuing to study UpRi in the expansion portion of a Phase 1 proof-of-concept clinical study.

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XMT-1592 was created using our Dolasynthen platform and also targets NaPi2b. XMT-1592 comprises the same proprietary NaPi2b antibody and potent auristatin DolaLock payload with controlled bystander effect as UpRi, with the additional features of homogeneous, site-specific bioconjugation and precise drug-to-antibody ratio, or DAR. XMT-1592 is in a proof-of-concept Phase 1 dose escalation study in patients with ovarian cancer and NSCLC, adenocarcinoma.

Our early stage programs include XMT-1660, a potentially first-in-class B7-H4-targeted Dolasynthen ADC, as well as XMT-2056, a STING-agonist ADC developed using our novel Immunosynthen platform. Our objective in 2021 is to rapidly progress these candidates through IND-enabling studies and scale up manufacturing activities with third parties. We believe that these development candidates provide significant opportunities for development in areas of high unmet need such as breast cancer, NSCLC and ovarian cancer.

In addition, we have established strategic research and development partnerships with Merck KGaA and Asana Biosciences for the development and commercialization of additional ADC product candidates against a limited number of targets selected by our partners based on our Dolaflexin platform. We believe the potential of our ADC technologies, supported by our world class management team and protected by our robust intellectual property portfolio, will allow us to discover and develop life-changing ADCs for patients fighting cancer.

Since inception, our operations have focused on building our platforms, identifying potential product candidates, producing drug substance and drug product material for use in preclinical studies, conducting preclinical and toxicology studies, manufacturing clinical study material and conducting clinical studies, establishing and protecting our intellectual property, staffing our company and raising capital. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations primarily through our strategic partnerships, private placements of our convertible preferred stock and public offerings of our common stock. In April 2020, we sold approximately 10.9 million shares of common stock pursuant to an at-the-market, or ATM, equity offering program and received net proceeds of $63.0 million. In addition, in June 2020, we sold 9.2 million shares of common stock in a follow-on offering and received net proceeds of $164.0 million.

During the three months ended June 30, 2021, we sold approximately 2.3 million shares of common stock at an average price of approximately $15 per share pursuant to an ATM equity offering program and received net proceeds of $33.3 million.

Since inception, we have incurred significant cumulative operating losses. For the six months ended June 30, 2021, the net loss was $75.6 million, compared to net loss of $36.7 million in the six months ended June 30, 2020. As of June 30, 2021, we had an accumulated deficit of $356.0 million. We expect to continue to incur significant expenses and operating losses over the next several years. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:

•continue clinical development activities for our clinical product candidates UpRi and XMT-1592;

•develop a diagnostic development effort for the NaPi2b biomarker;

•complete IND-enabling studies for our preclinical development candidates XMT-2056 and XMT-1660;

•continue activities to discover, validate and develop additional product candidates;

•maintain, expand and protect our intellectual property portfolio; and

•hire additional research, development and general and administrative personnel.

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Impact of COVID-19 on Our Business

We are continuing to monitor the impact of the COVID-19 pandemic on our operations and ongoing clinical and preclinical development, as well as discovery efforts. Mitigation activities to minimize COVID-19-related operation disruptions are ongoing and include:

•We are currently enrolling patients at investigational sites in different geographic areas around the world in the UpRi Phase 1/2 studies, including UPLIFT and UPGRADE, and within the United States in the XMT-1592 Phase 1 dose escalation study. We are in the process of initiating additional clinical sites both inside and outside the United States to increase enrollment, which could additionally mitigate potential regional impacts from COVID-19. Consistent with FDA guidance, we issued an administrative letter to allow for remote patient monitoring and remote testing, when possible.

•To the best of our knowledge, our contract manufacturing partners continue to operate their manufacturing facilities at or near normal levels, though sourcing of raw materials that are globally being utilized for COVID-related vaccines and therapies has become an increasing challenge for our contract manufacturers. If such raw material sourcing challenges continue, we may experience associated delays in our manufacturing, although we have not experienced any such delays to date. We believe we currently have sufficient inventory of UpRi and XMT-1592 to support our ongoing clinical studies. We have planned manufacturing runs to address all currently anticipated future needs. At this time, and subject to further COVID-19 implications, we continue to monitor our clinical supply and ongoing operations of our contract manufacturers.

The ultimate impact of the coronavirus pandemic on our business operations is highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted. While the pandemic did not materially affect our financial results and business operations in the second quarter ended June 30, 2021, we are unable to predict the impact that COVID-19 will have on our financial position and operating results in future periods due to numerous uncertainties. Management is actively monitoring this situation and the possible effects on our financial condition, operations, suppliers, industry, and our employees. For additional information about risks and uncertainties related to the COVID-19 pandemic that may impact our business, our financial condition or our results of operations, see “Part II, Item 1A—Risk Factors” below.

Financial operations overview

Revenue

To date, we have not generated any revenue from the sale of products. All of our revenue has been generated from strategic partnerships.

In June 2014, we entered into an agreement with Merck KGaA for the development and commercialization of ADC product candidates utilizing Fleximer for up to six target antigens. Merck KGaA is responsible for generating antibodies against the target antigens and we are responsible for generating Fleximer and our proprietary payloads and conjugating this to the antibody to create the ADC product candidates. Merck KGaA has the exclusive right to and is responsible for the further development and commercialization of these ADC product candidates. In May 2018, we entered into a supply agreement with Merck KGaA for the supply of materials that could be used for IND-enabling studies and clinical trials.

For each of the three and six months ended June 30, 2021, we recognized an immaterial amount of revenue related to the Merck KGaA Agreements. For the three and six months ended June 30, 2020, we recognized $0.8 million revenue related to the Merck KGaA Agreements.

We have provided limited services to Asana BioSciences. We did not record any revenue related to these services in the three and six months ended June 30, 2021 or 2020.

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For the foreseeable future, we expect substantially all of our revenue to be generated from our collaboration agreements with Merck KGaA and Asana BioSciences. Given the uncertain nature and timing of clinical development, we cannot predict when or whether we will receive further milestone payments or any royalty payments under these collaborations.

Operating expenses

Research and development expenses

Research and development expenses include our drug discovery efforts, manufacturing, and the development of our product candidates, which consist of:

•employee-related expenses, including salaries, benefits and stock-based compensation expense;

•costs of funding research and development performed by third parties that conduct research, preclinical activities, manufacturing and clinical studies on our behalf;

•laboratory supplies;

•facility costs, including rent, depreciation and maintenance expenses; and

•upfront and milestone payments under our third-party licensing agreements.

Research and development costs are expensed as incurred. Costs of certain activities, such as manufacturing and preclinical and clinical studies, are generally recognized based on an evaluation of the progress to completion of specific tasks. Costs for certain development activities, such as clinical studies, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations and information provided to us by the third parties with whom we contract.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials and manufacturing costs. We expect that our total future research and development costs will continue to increase over current levels, depending on the progress of our clinical development programs. There are numerous factors associated with the successful development and commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at our current stage of development. Additionally, future commercial and regulatory factors beyond our control may impact our clinical development programs and plans.

A significant portion of our research and development costs have been external costs, which we track on a program-by-program basis following nomination as a product candidate. We have not historically tracked all of our internal research and development expenses on a program-by-program basis as they are deployed across multiple projects under development. The following table summarizes our external research and development expenses, by program, following nomination as a clinical candidate for the three and six months ended June 30, 2021 and 2020. All external research and development expenses not attributable to the UpRi and XMT-1592 programs are captured within preclinical and discovery costs. These costs relate to XMT-1592 prior to its designation in early 2020 as well as our preclinical development candidates XMT-1660 and XMT-2056, additional earlier discovery stage programs and certain unallocated costs. Our internal research and development costs are primarily personnel-related costs, stock-based compensation costs, and facility costs, including depreciation, and lab consumables.

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	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
UpRi external costs	$	10,671	$	3,535	$	20,049	$	5,905
XMT-1592 external costs	1,676		2,672		4,144		3,845

Preclinical and discovery costs	7,346		2,022		11,859		3,530
Internal research and development costs	12,262		7,184		23,318		14,352
Total research and development costs	$	31,955	$	15,413	$	59,370	$	27,632

The successful development of our product candidates is highly uncertain. As such, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of our product candidates. We are also unable to predict when, if ever, we will generate revenue from commercialization and sale of any of our product candidates that obtain regulatory approval. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

•successful completion of preclinical studies and IND-enabling studies;

•successful enrollment in and completion of clinical studies;

•receipt of marketing approvals from applicable regulatory authorities;

•establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

•obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;

•commercializing the product candidates, if and when approved, whether alone or in collaboration with others; and

•continued acceptable safety profile of the drugs following approval.

A change in the outcome of any of these variables with respect to the development, manufacture or commercialization of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate.

General and administrative expenses

General and administrative expenses consist primarily of salaries and other employee-related costs, including stock-based compensation, for personnel in executive, finance, accounting, business development, legal operations, information technology and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters and fees for accounting and consulting services.

We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities, including increased costs related to the hiring of additional personnel, fees to outside consultants and patent costs, among other expenses.

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Other income (expense)

Other income (expense) consists primarily of interest income earned on cash equivalents and marketable securities. Interest expense is related to borrowings under the credit facility that we entered into in May 2019 and amended in August 2020. These borrowings bear a floating per annum rate interest, as well as a final payment of 5.5% of the amounts drawn, that is being recorded as interest expense over the term through the maturity date using the effective-interest method. Also included in interest expense is the amortization of the deferred financing costs and the accretion of debt discount relating to the credit facility.

Results of Operations

Comparison of the three months ended June 30, 2021 and 2020

The following table summarizes our results of operations for the three months ended June 30, 2021 and 2020, together with the changes in those items:


	Three Months Ended June 30,				Dollar Change
(in thousands)	2021		2020
Collaboration revenue	$	11	$	796	$	(785)
Operating expenses:
Research and development	31,955		15,413		16,542
General and administrative	8,883		5,171		3,712
Total operating expenses	40,838		20,584		20,254
Other income (expense):
Interest income	9		89		(80)
Interest expense	(95)		(87)		(8)
Total other income (expense), net	(86)		2		(88)
Net loss	$	(40,913)	$	(19,786)	$	(21,127)

Collaboration Revenue

Collaboration revenue was immaterial during the three months ended June 30, 2021 and $0.8 million during the three months ended June 30, 2020. For the three months ended June 30, 2020 we recognized $0.8 million of revenue as a result of the completion of research services associated with a target included in the Merck KGaA Agreement, driving the decrease in collaboration revenue.

Research and Development Expense

Research and development expense increased by $16.6 million from $15.4 million for the three months ended June 30, 2020 to $32.0 million for the three months ended June 30, 2021.

The increase in research and development expense was primarily attributable to the following:

•an increase of $6.5 million related to manufacturing, clinical and regulatory activities for UpRi;

•an increase of $4.3 million related to manufacturing for the preclinical and discovery stage programs XMT-1660 and XMT-2056;

•an increase of $3.2 million related to employee compensation (excluding stock-based compensation), primarily due to an increase in headcount supporting the growth of our research and development activities;