Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2018

The accompanying condensed consolidated financial statements reflect the operations of Merrimack Pharmaceuticals, Inc. and its wholly owned subsidiary. All intercompany accounts and transactions have been eliminated.

The condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 1 to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Certain reclassifications have been made to the prior year’s condensed consolidated balance sheet and condensed consolidated statement of cash flows to enhance comparability with the current year’s condensed consolidated financial statements presentation. These reclassifications had no effect on previously reported net income within the condensed consolidated statement of operations and comprehensive (loss) income.

Consolidation

The accompanying condensed consolidated financial statements reflect Merrimack Pharmaceuticals, Inc. and its wholly owned subsidiary. For the three and six months ended June 30, 2017, the condensed consolidated financial statements also include the accounts of Silver Creek Pharmaceuticals, Inc. (“Silver Creek”). For the three and six months ended June 30, 2017, Silver Creek represented a variable interest entity that the Company consolidated as the primary beneficiary. In the third quarter of 2017, the Company deconsolidated Silver Creek from its financial statements since the Company was no longer the primary beneficiary of Silver Creek. The Company’s ownership percentage decreased to less than 50% and the Company no longer controlled Silver Creek’s board of directors or directed the activities that had the most significant impact on Silver Creek’s economic performance. The Company accounts for its investment in Silver Creek under the equity method of accounting.

On April 3, 2017, the Company completed the sale of its right, title and interest in the non-cash assets, equipment, inventory, contracts and intellectual property primarily related to developing, manufacturing and commercializing ONIVYDE and MM-436 (the “Commercial Business”). As of March 31, 2017, the Commercial Business met all the conditions to be classified as a discontinued operation since the disposal of the Commercial Business represented a strategic shift that had a major effect on the Company’s operations and financial results. Therefore, the operating results of the Commercial Business are reported as a loss from discontinued operations, net of tax in the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2017. During the three and six months ended June 30, 2018, there were no discontinued operations.

Unaudited Interim Financial Information

The condensed consolidated balance sheet as of December 31, 2017 was derived from audited financial statements, but does not include all disclosures required by GAAP. The condensed consolidated balance sheet as of June 30, 2018, the condensed consolidated statements of operations and comprehensive (loss) income for the three and six months ended June 30, 2018 and 2017 and the condensed consolidated statements of cash flows for the six months ended June 30, 2018 and 2017 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, 2018, the results of its operations for the three and six months ended June 30, 2018 and 2017, and its statements of cash flows for the six months ended June 30, 2018 and 2017. The financial data and other information disclosed in the notes related to the three and six months ended June 30, 2018 and 2017 are unaudited. The results for the three and six months ended June 30, 2018 and 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2018, any other interim periods, or any future year or period.

The unaudited interim financial statements of the Company included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 12, 2018.

Condensed Consolidated Statements of Cash Flows

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows:

(in thousands)	June 30, 2018		June 30, 2017
Cash and cash equivalents	$	22,460	$	135,501
Restricted cash in prepaid expenses and other current assets		192		—
Restricted cash (short term)		—		102
Restricted cash (long term)		584		60,682
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statement of cash flows	$	23,236	$	196,285

Restricted cash included in prepaid expenses and other current assets and restricted cash long term on the statement of financial position represent amounts pledged as collateral for operating lease obligations as contractually required. This restriction will lapse when the arrangements expire.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates, assumptions and judgments reflected in these condensed consolidated financial statements include, but are not limited to, the accrual of research and development expenses and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from the Company’s estimates.

Marketable Securities

Marketable securities consist of investments with original maturities greater than ninety days. The Company has classified its investments with maturities beyond one year as short term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. The Company considers its investment portfolio of marketable debt securities as available-for-sale. Accordingly, these marketable debt securities are recorded at fair value and unrealized gains and losses are reported as a component of accumulated other comprehensive loss in stockholders’ equity. 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.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) issued the following new Accounting Standards Updates (“ASU”), which the Company adopted on January 1, 2018:

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ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” and related amendments;

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ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities”;

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ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”;

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ASU 2016-18, “Statement of Cash Flows - Restricted Cash (a consensus of the FASB Emerging Issues Task Force)”; and

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ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.”

The adoption of these standards did not have a material impact on the Company’s financial position, results of operations or statement of cash flows; however, the adoption of ASU 2016-18 resulted in the reclassification of certain prior year amounts in the Company’s condensed consolidated statements of cash flows to conform to the current year presentation.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which supersedes all existing lease accounting guidance within ASC 840, Leases. The new standard requires that lease assets and lease liabilities be recognized by lessees for those leases previously classified as operating leases under ASC 840, with limited exceptions. This update also creates a new definition of a lease and provides guidance as to whether a contract is or contains a lease. This guidance will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods, and early adoption is permitted. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases.” The amendments in ASU 2018-10 affect narrow aspects of the guidance issued in ASU 2016-02. The Company is currently evaluating the potential impact that the adoption of this guidance may have on the condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which represents a new credit loss standard that will change the impairment model for most financial assets and certain other financial instruments. Specifically, this guidance will require entities to utilize a new “expected loss” model as it relates to trade and other receivables. In addition, entities will be required to recognize an allowance for estimated credit losses on available-for-sale debt securities, regardless of the length of time that a security has been in an unrealized loss position. This guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, and early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of this guidance may have on the condensed consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220).” ASU 2018-02 addresses the effect of the change in the U.S. federal corporate tax rate due to the enactment of the December 22, 2017 Tax Cuts and Jobs Act (the “Tax Act”) on items within accumulated other comprehensive loss. The guidance will be effective for the Company in the first quarter of fiscal 2020 with early adoption permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on the condensed consolidated financial statements.

In July 2018, the FASB issued ASU 2018-09, “Codification Improvements.” The amendments in ASU 2018-09 affect a wide variety of topics in the FASB Accounting Standards Codification and XBRL Taxonomy. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in ASU 2018-09 do not require transition guidance and will be effective upon issuance of the update. However, many of the amendments in ASU 2018-09 do have transition guidance with effective dates for annual periods beginning after December 15, 2018 for public business entities. The Company is currently assessing the impact that adopting this new accounting standard will have on the condensed consolidated financial statements.

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed above, the Company does not believe that the adoption of recently issued standards has or may have a material impact on the Company’s condensed consolidated financial statements or disclosures.