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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2021

OR

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

For the transition period from                      to                     

Commission File Number: 001-37773

 

MERUS N.V.

(Exact name of registrant as specified in its charter)

 

 

The Netherlands

Not Applicable

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

Yalelaan 62

3584 CM Utrecht

The Netherlands

Not Applicable

(Address of principal executive offices)

(Zip code)

 

+31 85 016 2500

(Registrant’s telephone number, including area code)

 

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 shares, nominal value €0.09 per share

MRUS

The Nasdaq Stock Market LLC

(Nasdaq Global 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, a 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  

As of April 30, 2021, the registrant had 38,349,553 common shares, nominal value €0.09 per share, outstanding.

 

 

 

 

 


 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

2

 

 

Condensed Consolidated Balance Sheets
as of March 31, 2021 and December 31, 2020

2

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss
for the three months ended March 31, 2021 and 2020

3

 

 

Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2021 and 2020

4

 

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity
for three months ended March 31, 2021 and 2020  

5

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

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

14

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

20

 

 

Item 4. Controls and Procedures

20

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

21

 

 

Item 1A. Risk Factors

21

 

 

Item 5. Other Information

62

 

 

Item 6. Exhibits

62

 

 

Signatures

63

 

 


 

 

Cautionary Note Regarding Forward-looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding our plans to develop and commercialize our product candidates, the timing of our ongoing or planned clinical trials, the timing of and our ability to obtain and maintain regulatory approvals, the anticipated impact of the COVID-19 pandemic on our business and operations, the clinical utility of our product candidates, our commercialization, marketing and manufacturing capabilities and strategy, our expectations surrounding our collaborations, our expectations about the willingness of healthcare professionals to use our product candidates, the sufficiency of our cash, cash equivalents and investments, and the plans and objectives of management for future operations and capital expenditures are forward-looking statements.

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of known and unknown risks, uncertainties, assumptions and other important factors, including those described under the sections in this Quarterly Report on Form 10-Q entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

 

SUMMARY RISK FACTORS

Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common shares. The principal risks and uncertainties affecting our business include the following:

 

 

We have incurred significant net losses since inception and we expect to continue to incur significant net losses for the foreseeable future.

 

 

We have a limited operating history, have not completed any clinical trials, and have no products approved for commercial sale, which may make it difficult for you to evaluate our current business and predict our future success and viability.

 

 

We will require substantial additional capital to finance our operations. If we are unable to raise such capital when needed, or on acceptable terms, we may be forced to delay, reduce or eliminate one or more of our research and drug development programs or future commercialization efforts.

 

 

The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and the results of our clinical trials may not satisfy the requirements of the FDA, EMA or other comparable foreign regulatory authorities.

 

 

The clinical trial and regulatory approval processes are lengthy, time consuming and inherently unpredictable, and we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.

 

 

Our antibody candidates may have serious adverse, undesirable or unacceptable side effects which may delay or prevent marketing approval. If such side effects are identified during the development of our antibody candidates or following approval, if any, we may need to abandon our development of such antibody candidates, the commercial profile of any approved label may be limited, or we may be subject to other significant negative consequences following marketing approval, if any.

 

 


 

 

We depend on enrollment of patients in our clinical trials for our antibody candidates, including patients having NRG1 fusion positive tumors, which are rare, tumorigenic genomic events. If we are unable to enroll patients in our clinical trials, including those having these rare tumorigenic events, our research and development efforts and business, financial condition and results of operations could be materially adversely affected.

 

 

We rely, and expect to continue to rely, on third parties, including independent clinical investigators and contract research organizations or CROs, to conduct our pre-clinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our antibody candidates and our business could be substantially harmed.

 

 

 

Due to our limited resources and access to capital, we must, and have in the past decided to, prioritize development of certain antibody candidates over other potential candidates. These decisions may prove to have been wrong and may adversely affect our revenues.

 

 

The competition for qualified personnel is particularly intense in our industry. If we are unable to retain or hire key personnel, we may not be able to sustain or grow our business.

 

 

 

We operate in highly competitive and rapidly changing industries, and if our competitors develop and market technologies or products more rapidly than we do or that are more effective, safer or less expensive than the product candidates we develop, our commercial opportunities will be negatively impacted.

 

 

Our success depends on our ability to protect our intellectual property and our proprietary technologies. If we are unable to adequately protect our intellectual property and our proprietary technologies, or obtain and maintain issued patents which are sufficient to protect our product candidates, others could compete against us more directly, which would negatively impact our business.

 

 

 

Our existing collaborations are important to our business and future licenses may also be important to us, and if we are unable to maintain any of these collaborations, or if these arrangements are not successful, our business could be adversely affected.

 

 

The COVID-19 pandemic caused by the novel coronavirus has and may continue to adversely impact our business, including our pre-clinical studies and clinical trials, financial condition and results of operations.

 

 

 

 

 

 


 

 

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

MERUS N.V.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(Amounts in thousands, except per share data)

 

 

 

March 31,

2021

 

 

December 31,

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

327,137

 

 

$

163,082

 

Marketable securities

 

 

47,248

 

 

 

44,673

 

Accounts receivable

 

 

294

 

 

 

46

 

Accounts receivable (related party)

 

 

1,631

 

 

 

1,623

 

Prepaid expenses and other current assets

 

 

9,814

 

 

 

8,569

 

Total current assets

 

 

386,124

 

 

 

217,993

 

Property and equipment, net

 

 

3,766

 

 

 

4,115

 

Operating lease right-of-use assets

 

 

3,501

 

 

 

3,907

 

Intangible assets, net

 

 

2,645

 

 

 

2,843

 

Deferred tax assets

 

 

41

 

 

 

410

 

Other assets

 

 

1,872

 

 

 

1,949

 

Total assets

 

$

397,949

 

 

$

231,217

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,715

 

 

$

3,126

 

Accrued expenses and other liabilities

 

 

22,356

 

 

 

21,803

 

Income taxes payable

 

 

 

 

 

206

 

Current portion of lease obligation

 

 

1,130

 

 

 

1,432

 

Current portion of deferred revenue

 

 

7,070

 

 

 

625

 

Current portion of deferred revenue (related party)

 

 

18,684

 

 

 

19,554

 

Total current liabilities

 

 

52,955

 

 

 

46,746

 

Lease obligation

 

 

2,397

 

 

 

2,521

 

Deferred revenue, net of current portion

 

 

34,752

 

 

 

237

 

Deferred revenue, net of current portion (related party)

 

 

71,308

 

 

 

79,450

 

Total liabilities

 

 

161,412

 

 

 

128,954

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common shares, €0.09 par value; 45,000,000 shares authorized;

38,271,641 and 31,602,953 shares issued and outstanding as at

March 31, 2021 and December 31, 2020, respectively

 

$

3,940

 

 

$

3,211

 

Additional paid-in capital

 

 

643,183

 

 

 

490,093

 

Accumulated other comprehensive income

 

 

(320

)

 

 

9,071

 

Accumulated deficit

 

 

(410,266

)

 

 

(400,112

)

Total stockholders’ equity

 

 

236,537

 

 

 

102,263

 

Total liabilities and stockholders’ equity

 

$

397,949

 

 

$

231,217

 

 

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

2


 

MERUS N.V.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

(Amounts in thousands, except per share data)

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Collaboration revenue

 

$

1,599

 

 

$

328

 

Collaboration revenue (related party)

 

 

6,751

 

 

 

5,973

 

Total revenue

 

 

8,350

 

 

 

6,301

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

20,806

 

 

 

16,987

 

General and administrative

 

 

9,333

 

 

 

8,882

 

Total operating expenses

 

 

30,139

 

 

 

25,869

 

Operating loss

 

 

(21,789

)

 

 

(19,568

)

Other income, net:

 

 

 

 

 

 

 

 

Interest (expense) income, net

 

 

(82

)

 

 

280

 

Foreign exchange gains

 

 

12,203

 

 

 

2,885

 

Other losses

 

 

(437

)

 

 

 

Total other income, net

 

 

11,684

 

 

 

3,165

 

 

 

 

 

 

 

 

 

 

Net loss before income taxes

 

 

(10,105

)

 

 

(16,403

)

Income tax expense

 

 

49

 

 

 

97

 

Net loss

 

$

(10,154

)

 

$

(16,500

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Currency translation adjustment

 

 

(9,391

)

 

 

(3,107

)

Comprehensive loss

 

$

(19,545

)

 

$

(19,607

)

Net loss per share attributable to common stockholders:

      Basic and diluted

 

$

(0.28

)

 

$

(0.68

)

Weighted-average common shares outstanding:

      Basic and diluted

 

 

36,210

 

 

 

28,946

 

 

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

3


 

MERUS N.V.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Amounts in thousands)

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(10,154

)

 

$

(16,500

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

 

324

 

 

 

258

 

Amortization of intangible assets

 

 

74

 

 

 

66

 

Foreign exchange gain

 

 

(12,056

)

 

 

(2,828

)

Loss on disposal of property and equipment

 

 

 

 

 

16

 

Stock-based compensation expense

 

 

3,400

 

 

 

2,291

 

Amortization of discount on investments

 

 

35

 

 

 

(47

)

Deferred tax expense

 

 

369

 

 

 

177

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(340

)

 

 

1,092

 

Operating lease right-of-use assets and lease obligations

 

 

(17

)

 

 

3

 

Prepaid expenses and other current assets

 

 

(1,574

)

 

 

(4,656

)

Accounts payable

 

 

756

 

 

 

386

 

Accrued expenses and other liabilities

 

 

1,130

 

 

 

(916

)

Deferred revenue

 

 

37,396

 

 

 

(4,602

)

Net cash provided by (used in) operating activities

 

$

19,343

 

 

$

(25,260

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

$

(20,645

)

 

$

(17,091

)

Proceeds from maturities of marketable securities

 

 

18,128

 

 

 

13,251

 

Purchases of property and equipment

 

 

(157

)

 

 

(148

)

Net cash used in investing activities

 

$

(2,674

)

 

$

(3,988

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net

 

$

129,568

 

 

$

(164

)

Proceeds from issuance of common stock - Lilly

 

 

16,477

 

 

 

 

Proceeds from stock options exercised

 

 

4,697

 

 

 

602

 

Repurchase of restricted stock units

 

 

(285

)

 

 

 

Net cash provided by financing activities

 

$

150,457

 

 

$

438

 

Foreign exchange impact on cash, cash equivalents and restricted cash

 

 

(3,070

)

 

 

(3,002

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

164,056

 

 

 

(31,812

)

Cash, cash equivalents, and restricted cash, beginning of period

 

 

163,282

 

 

 

197,813

 

Cash, cash equivalents, and restricted cash, end of period

 

$

327,338

 

 

$

166,001

 

SUPPLEMENTAL DISCLOSURES:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

66

 

 

$

 

Non-cash purchases of property, equipment and intangibles

 

$

25

 

 

$

126

 

Non-cash issuance of stock options

 

$

572

 

 

$

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

327,137

 

 

 

165,800

 

Restricted cash included in non-current other assets

 

 

201

 

 

 

201

 

 

 

$

327,338

 

 

$

166,001

 

 

See accompanying notes to the Condensed Consolidated Financial Statements.

4


 

MERUS N.V.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(Amounts in thousands, except share amounts)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

Balance at January 1, 2020

 

 

28,882,217

 

 

$

2,918

 

 

$

441,395

 

 

$

(314,599

)

 

$

1,586

 

 

$

131,300

 

Exercise of stock options and vesting of restricted stock units

 

 

127,205

 

 

 

13

 

 

 

589

 

 

 

 

 

 

 

 

 

602

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,291

 

 

 

 

 

 

 

 

 

2,291

 

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,107

)

 

 

(3,107

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(16,500

)

 

 

 

 

 

(16,500

)

Balance at March 31, 2020

 

 

29,009,422

 

 

$

2,931

 

 

$

444,275

 

 

$

(331,099

)

 

$

(1,521

)

 

$

114,586

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2021

 

 

31,602,953

 

 

$

3,211

 

 

$

490,093

 

 

$

(400,112

)

 

$

9,071

 

 

$

102,263

 

Issuance of common stock, net

 

 

5,575,757

 

 

 

610

 

 

 

128,793

 

 

 

 

 

 

 

 

 

129,403

 

Issuance of common stock - Lilly

 

 

706,834

 

 

 

77

 

 

 

16,400

 

 

 

 

 

 

 

 

 

16,477

 

Exercise of stock options and vesting of restricted stock units

 

 

386,097

 

 

 

42

 

 

 

4,782

 

 

 

 

 

 

 

 

 

4,824

 

Repurchase of restricted stock units

 

 

 

 

 

 

 

 

(285

)

 

 

 

 

 

 

 

 

(285

)

Stock-based compensation

 

 

 

 

 

 

 

 

3,400

 

 

 

 

 

 

 

 

 

3,400

 

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,391

)

 

 

(9,391

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(10,154

)

 

 

 

 

 

(10,154

)

Balance at March 31, 2021

 

 

38,271,641

 

 

$

3,940

 

 

$

643,183

 

 

$

(410,266

)

 

$

(320

)

 

$

236,537

 

 

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

5


 

MERUS N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Overview

Merus N.V. is a clinical-stage oncology company developing innovative antibody therapeutics, headquartered in Utrecht, the Netherlands. Merus US, Inc. is a wholly-owned subsidiary of Merus N.V. located at 139 Main Street, Cambridge, Massachusetts, United States (collectively, the “Company”).

Since inception, the Company has generated an accumulated deficit of $410.3 million as of March 31, 2021. The Company expects to continue to incur significant expenses and operating losses for the foreseeable future as its antibody candidates advance through discovery, pre-clinical development and clinical trials and as it seeks regulatory approval and pursues commercialization of any approved antibody candidate.

As a result, the Company may need additional financing to support its continuing operations. Until the Company can generate significant revenue from product sales, if ever, the Company expects to finance its operations through public equity offerings, debt financings, or other sources, which may include collaborations, business development and licensing opportunities with third parties. Adequate additional financing may not be available to the Company on acceptable terms, or at all. The Company’s inability to raise capital as and when needed would have a negative impact on its financial condition and ability to pursue its business strategy. The Company will need to generate significant revenues to achieve profitability and may never do so.

On January 21, 2021, the Company completed an offering of common shares in which the Company sold 5,575,757 common shares, including 727,272 common shares pursuant to the underwriters’ option to purchase additional shares, at a price to the public of $24.75 for aggregate net proceeds of $129.4 million.

Based on the Company’s current operating plan, the Company expects that its existing cash and cash equivalents and marketable securities of $374.4 million as of March 31, 2021, will fund the Company’s operations at least into the second half of 2024.

2. Summary of Significant Accounting Policies

The principal accounting policies applied in the preparation of these unaudited condensed consolidated financial statements are described in the Company’s audited financial statements as of and for the year ended December 31, 2020, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 16, 2021 (the “Annual Report on Form 10-K”). There have been no material changes in the Company’s significant accounting policies during the three months ended March 31, 2021.

Basis of Presentation

The Company prepared its unaudited consolidated condensed financial statements in compliance with generally accepted accounting principles in the U.S. ("U.S. GAAP"). Any reference in these notes to applicable guidance is meant to refer to authoritative U.S. GAAP as found in the Accounting Standards Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB").

The unaudited condensed consolidated financial statements include the accounts of Merus N.V. and its wholly owned, controlled subsidiary, Merus US, Inc. All intercompany transactions and balances of subsidiaries have been eliminated in consolidation. In the opinion of management, these financial statements reflect all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the results for the reported interim periods. The Company considers events or transactions that occur after the balance sheet date but before the unaudited condensed consolidated financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The three months ended March 31, 2021 and 2020 are referred to as the first quarter of 2021 and 2020, respectively. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or any other interim period.

The unaudited condensed consolidated financial statements presented herein do not contain the required disclosures under U.S. GAAP for annual financial statements. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and related notes as of and for the year ended December 31, 2020, included in the Annual Report on Form 10-K.

Going Concern

At each reporting period, the Company evaluates whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The Company

6


 

is required to make certain additional disclosures if it concludes substantial doubt exists and it is not alleviated by the Company’s plans or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern.

The Company’s evaluation entails analyzing prospective operating budgets and forecasts for expectations of the Company’s cash needs, and comparing those needs to the current cash, cash equivalent and marketable securities balances. After considering the Company’s current research and development plans, the timing expectations related to the progress of its clinical-stage programs and its plans to pursue commercialization of any approved antibody candidate, and after considering its existing cash, cash equivalents and marketable securities as of March 31, 2021, the Company did not identify conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date these financial statements were issued.

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new guidance aligns the requirements for capitalizing implementation costs incurred in a cloud-based hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU became effective for the Company at the beginning of 2021, but had no impact on amounts or disclosures previously reported or during the period.

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808), which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a customer. The ASU became effective for the Company at the beginning of 2021. None of the Company’s arrangements fall within the scope of ASC 808, the adoption of this standard had no impact on amounts or disclosures previously reported or during the period.

3. Investments in Debt Securities

The following tables summarize the Company’s investments in debt securities and their presentation in the condensed consolidated balance sheet:

 

 

March 31,

2021

 

 

December 31,

2020

 

 

 

(in thousands)

 

Money market funds

 

$

10,112

 

 

$

10,156

 

Corporate paper and notes

 

 

40,228

 

 

 

27,978

 

U.S. government agency securities

 

 

 

 

 

9,150

 

U.S. treasuries

 

 

10,019

 

 

 

15,043

 

Total

 

$

60,359

 

 

$

62,327

 

 

 

 

 

 

 

 

 

 

Fair value of debt securities

 

$

60,359

 

 

$

62,328

 

 

 

 

March 31,

2021

 

 

December 31,

2020

 

 

 

(in thousands)

 

Cash equivalents

 

$

13,111

 

 

$

17,654

 

Current marketable securities

 

 

47,248

 

 

 

44,673

 

Total

 

$

60,359

 

 

$

62,327

 

 

The Company does not intend to sell and it is unlikely that the Company will be required to sell the above investments before recovery of their amortized cost bases, which may be at maturity. The Company determined that there was no material change in the credit risk of any of its investments.

 

The fair value of money market funds is determined based on publicly available market price for these funds (Level 1). The fair value of other debt securities is determined based on the publicly available inputs which includes a market price for the same or similar instruments adjusted for estimates in interest yield (Level 2).

7


 

4. Supplemental Balance Sheet Information

Prepaid expenses and other current assets consisted of the following:

 

 

March 31,

2021

 

 

December 31,

2020

 

 

 

(In thousands)

 

Prepaid clinical and manufacturing costs

 

$

2,530

 

 

$

4,971

 

Prepaid general and administrative expenses

 

 

5,889

 

 

 

2,460

 

Interest receivable

 

 

29

 

 

 

80

 

Other

 

 

1,366

 

 

 

1,058

 

Total

 

$

9,814

 

 

$

8,569

 

 

Accrued expenses and other liabilities consisted of the following:

 

 

March 31,

2021

 

 

December 31,

2020

 

 

 

(In thousands)

 

Accrued research and development expenses

 

$

17,579

 

 

$

15,372

 

Accrued general and administrative expenses

 

 

1,756

 

 

 

1,566

 

Accrued personnel costs

 

 

2,584

 

 

 

4,854

 

Other

 

 

437

 

 

 

11

 

Total

 

$

22,356

 

 

$

21,803

 

 

5. Income Taxes

The Company files income tax returns in the U.S. federal and Massachusetts jurisdictions as well as in the Netherlands. The components of the income tax expense (benefit) from continuing operations are as follows:

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

U.S. federal

 

$

(226

)

 

$

(56

)

U.S. state

 

 

(94

)

 

 

(24

)

Total current income tax benefit

 

$

(320

)

 

$

(80

)

 

 

 

 

 

 

 

 

 

U.S. federal

 

$

261

 

 

$

125

 

U.S. state

 

 

108

 

 

 

52

 

Total deferred income tax expense

 

$

369

 

 

$

177

 

 

 

 

 

 

 

 

 

 

Total income tax expense

 

$

49

 

 

$

97

 

 

After consideration of all positive and negative evidence, we believe that it is more-likely-than-not that the Netherlands deferred tax assets, that are not supported by reversing temporary differences, will not be realized. As a result, we established a full valuation allowance against deferred tax assets of the Netherlands.

6. Commitments and Contingencies

Litigation

On April 5, 2018, an unnamed third party filed a notice of opposition against the Company’s EP 2604625 patent, entitled “Generation of Binding Molecules,” in the European Opposition Division of the European Patent Office (the “EPO”). The notice asserted, as applicable, added subject matter, lack of novelty, lack of inventive step, and insufficiency. On August 20, 2018, the Company timely responded to these submissions. An opposition hearing was held in June 2019, wherein the EPO revoked the EP 2604625 patent in its entirety under Art. 123(2) EPC. The Company timely appealed that decision in December 2019 before the Technical Board of Appeals for the EPO seeking reinstatement of the patent and proposing auxiliary requests for certain amended claims, with further proceedings to be scheduled in the future. As this opposition proceeding continues, the Company cannot be certain that it will ultimately prevail.

From time to time, the Company may be involved in various other claims and legal proceedings relating to claims arising out of the Company’s operations. The Company is not currently a party to any material legal proceedings. 

8


 

7. Leases

There have been no changes in the Company’s lease arrangements since December 31, 2020.

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Lease cost

 

 

 

 

 

 

 

 

Operating lease cost

 

$

418

 

 

$

396

 

Variable lease cost

 

 

91

 

 

 

82

 

Total lease cost included in operating expenses

 

$

509

 

 

$

478

 

Other information

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities included in operating cash flows

 

$

435

 

 

$

393

 

 

8. Collaborations

Lilly

On January 18, 2021, Eli Lilly and Company, (“Lilly”) agreed to pay the Company a $40.0 million, non-refundable upfront payment, and purchased 706,834 common shares at a stated price per share of $28.295, for an aggregate purchase price of $20.0 million. The Company and Lilly agreed to collaborate with respect to the discovery and research of bispecific antibodies utilizing the Company’s proprietary Biclonics® bispecific technology platform. The collaboration encompasses up to three (3) independent programs directed to the generation of T-cell re-directing bispecific antibodies that bind CD3 and a tumor associated antigen target selected by Lilly to be the subject of each program. At inception of the arrangement, Lilly had selected its first target.

The objective of each program would be to develop a lead compound that Lilly would be able to continue to develop through clinical trials. Lilly agreed to fund the research activities the Company conducts for each program under an agreed research plan and budget. Lilly receives an exclusive, worldwide, royalty-bearing, sublicensable license, under certain patent rights and know-how to exploit certain compounds and products directed to designated targets in combination with CD3, or directed to such designated target(s) alone as a monospecific antibody or monospecific antibody drug conjugate, subject to rights granted by Merus to third parties under one or more existing third party agreements. Merus retains all rights not granted to Eli Lilly. Lilly has certain rights to replace selected targets, including the right to substitute a target selection after initial selection for a period of time. The Company may be entitled to further milestones and royalties in the future dependent on development and commercialization of any resulting product.

The initial term of the arrangement includes a three-year research term for the Company to perform research and development activities, subject to two extension terms of six months at Lilly’s discretion. While the arrangement may be terminated in its entirety or on a program-by-program basis at will by Lilly, there are no direct costs or penalties to Lilly to terminate the arrangement prior to the end of the initial term.

At inception of the arrangement, the Company identified a single performance obligation comprised of a combined delivery of a license and related activities, including research activities associated with the first target and the activities of the joint steering committee. The Company also identified two other combined performance obligations relating to options exercisable by Lilly to select a second and third target to advance selected targets through discovery and research.

The transaction price at inception was comprised of fixed consideration of $43.5 million that was derived from the $40.0 million upfront payment and $20.0 million share purchase proceeds, net of the fair value of shares of the shares delivered to Lilly of $16.5 million, and variable consideration associated with the funding of research services for the first target at inception. All other consideration under the arrangement was determined to be variable consideration and fully constrained at inception.  

The fixed consideration was allocated equally amongst the three performance obligations and the variable consideration associated with each target was allocated to the performance obligation of each respective target.  The equal allocation of the fixed consideration was based on the estimated standalone selling price of each performance obligation as each was materially the same.

On February 12, 2021, the Company and Lilly completed the initial exchange of fixed consideration and transfer of common shares. The Company initially deferred $43.5 million allocated to the performance obligations to be recognized as revenue over time using a cost-to-cost measure of progress toward the development of a lead compound for each respective target, anticipated to be recognized as revenue within the initial research term, along with research funding. Development milestones, commercialization milestones and royalties are variable consideration, fully constrained, to be included in the transaction price for each performance obligation and recognized in future periods in accordance with the Company’s revenue recognition policy. The revenue recognized relating to each combined performance obligation is presented in the notes according to the source of consideration received (upfront, reimbursement revenue, milestone), reflective of their differing timing of receipt.

As of March 31, 2021, research activities for the first target are on-going. No milestones have been achieved to date.

9


 

Incyte

On January 23, 2017, the Company completed the sale of shares and exchange of a license with Incyte Corporation (“Incyte”). The Company initially deferred $152.6 million of the transaction price allocated to the license and related performance obligation as deferred revenue, to be recognized as revenue over time as the primary benefit of the license to Incyte is access to the Company’s intellectual property covering its Biclonics® technology platform for the generation of potential product candidates. Development milestones, commercialization milestones and royalties are variable consideration, fully constrained, to be recognized in future periods in accordance with the Company’s revenue recognition policy. Cost reimbursements for research services are recognized as they are performed over time as these are considered a separate performance obligation.

At March 31, 2021, the Company is currently engaged in clinical development activities for MCLA-145 and developing pre-clinical candidates for the other programs. No development or commercialization milestones have been achieved to date.

ONO

On March 14, 2018, the Company granted ONO Pharmaceuticals Co. Ltd. (“ONO”) an exclusive, worldwide, royalty-bearing license, with the right to sublicense, research, test, make, use and market a limited number of bispecific antibody candidates based on the Company’s Biclonics® technology platform against two undisclosed targets directed to a particular undisclosed target combination. ONO agreed to pay the Company an upfront, non-refundable payment of €0.7 million. In addition, the Company was entitled to €0.3 million intended to compensate the Company for research services already completed upon entering into the agreement, and €0.2 million to be paid to the Company over time for full-time equivalent funding. The Company is entitled to research and development milestones in addition to royalties on future sales. The Company identified performance obligations for: (1) provision of a license for the target combination, and (2) research and development services. The Company concluded that Ono would be able to develop and benefit from the license, independent of the research and development services. Certain of the research and development services are capable of being performed by third parties with an appropriate sub-license, and are recognized over time as these services are delivered. Milestone payments are fully constrained as variable consideration to be recognized in future periods in accordance with the Company’s revenue recognition policy.

Amounts related to the provision of a license are amortized over the intended period of use.

Simcere

In January 2018, the Company granted Simcere Pharmaceuticals Group (“Simcere”) an exclusive license to develop and commercialize up to three bispecific antibodies to be produced by Merus utilizing the Company’s Biclonics® technology platform in China. The Company received an upfront, non-refundable payment of $2.75 million, relating to three separate research programs. The Company may be entitled to future development milestone payments. The Company will be eligible to receive tiered royalty payments on sales of any products resulting from the collaboration in China from Simcere. Simcere will be eligible to receive tiered royalty payments on sales outside of China from the Company.

At inception of the arrangement, the Company identified three performance obligations comprised of the combined delivery of a license and performance of research and development activities with respect to each program. The Company performs research and development activities to achieve candidate nomination. The Company concluded that these activities were not distinct from the underlying license for each program as Simcere would not be able to benefit from the license apart from research and development activities at this phase of development.

The transaction price under the arrangement comprised fixed consideration of $2.75 million. The transaction price was allocated to each separate performance obligation on a relative standalone fair value basis. The Company deferred the portion of the upfront payment allocated to the three performance obligations as deferred revenue, to be recognized over time. Compensation for research and development services prior to candidate nomination are allocated to each program performance obligation and also recognized over time. Development milestone payments allocated to each of the program performance obligations are constrained as variable consideration to be recognized in future periods in accordance with the Company’s revenue recognition policy.

To date, the Company has achieved two milestones under this agreement and has received an aggregate of $1.3 million in milestone payments At March 31, 2021, research and development for one of the programs is on-going.

10


 

Contract Assets and Liabilities

The following tables provide amounts by year indicated and by line item included in the Company's accompanying condensed consolidated financial statements attributable to transactions arising from its collaboration arrangements. The dollar amounts in the tables below are in thousands.

 

 

 

Related Party

 

 

 

Third Party

 

 

 

Incyte

 

 

 

Lilly

 

 

Other

 

 

Total

 

CONTRACT ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2021

 

$

 

 

 

$

 

 

$

46

 

 

$

46

 

Billings

 

 

1,577

 

 

 

 

60,000

 

 

 

 

 

 

60,000

 

Cash receipts

 

 

(1,577

)

 

 

 

(60,000

)

 

 

 

 

 

(60,000

)

Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange