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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2019

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 001-38811
 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13052681&doc=10
TCR2 Therapeutics Inc.
(Exact name of Registrant as specified in its charter)
Delaware
 
47-4152751
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
100 Binney Street
Suite 710
Cambridge
MA
02142
(Address of Principal Executive Offices)
(Zip Code)

(617) 949-5200
(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
 
TCRR
 
The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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. (Check one):
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 Act). Yes  No 

As of July 30, 2019, there were 23,964,746 shares of the registrant’s Common Stock, $0.0001 par value per share, outstanding.
 



TCR2 Therapeutics Inc.

Table of Contents

 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 



FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q of TCR2 Therapeutics Inc. ("we," "us," and "our") contains or incorporates statements that constitute forward-looking statements within the meaning of the federal securities laws. Any statements that do not relate to historical or current facts or matters are forward looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could”, “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects”, “potential,” “continue” or the negative of these terms or other comparable terminology. Forward-looking statements appear in a number of places in this Quarterly Report on Form 10-Q and include, but are not limited to, statements about:

the timing of preclinical studies and clinical trials of TC-210, TC-110 and any other product candidates;
our need to raise additional funding before we can expect to generate any revenues from product sales;
our ability to submit our planned INDs and conduct successful clinical trials or obtain regulatory approval for TC-210, TC-110 or any other product candidates that we may identify or develop;
the ability of our TRuC-T cell platform to generate and advance additional product candidates;
our ability to establish an adequate safety, potency and purity profile for TC-210, TC-110 or any other product candidates that we may pursue;
our ability to manufacture TC-210, TC-110 or any other product candidate in conformity with the U.S. Food and Drug Administration’s requirements and to scale up manufacturing of our product candidates to commercial scale, if approved;
the implementation of our strategic plans for our business, any product candidates we may develop and our technology;
our intellectual property position, including the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology;
the rate and degree of market acceptance and clinical utility for any product candidates we may develop;
our expectations related to the use of proceeds from our initial public offering;
our estimates regarding our expenses, future revenues, capital requirements and our needs for additional financing;
our ability to maintain and establish collaborations;
our financial performance;
our ability to effectively manage our anticipated growth;
developments relating to our competitors and our industry, including the impact of government regulation;
our estimates regarding the market opportunities for our product candidates;
our ability to retain the continued service of our key professionals and to identify, hire and retain additional qualified professionals;
our estimates of our expenses, ongoing losses, future revenue, capital requirements and our needs for or ability to obtain additional financing;
our expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act, or the JOBS Act;
our financial performance; and
other risks and uncertainties, including those listed under the section titled “Risk Factors.”

Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. You are urged to carefully review the disclosures we make concerning these risks and other factors that may affect our



business and operating results under “Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2018 and in this Quarterly Report on Form 10-Q. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. We do not intend, and undertake no obligation, to update any forward-looking information to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events, unless required by law to do so.




Part I

Item 1. Financial Statements

TCR2 THERAPEUTICS INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
 
June 30,
2019
 
December 31, 2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
40,980

 
$
47,674

Investments
128,646

 
75,493

Prepaid expenses and other current assets
6,051

 
2,326

Total current assets
175,677

 
125,493

 
 
 
 
Property and equipment, net
3,172

 
1,638

Investments, non-current
11,121

 

Restricted cash
290

 
290

Deferred offering costs

 
2,012

Total assets
$
190,260

 
$
129,433

 
 
 
 
Liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit)
 
 
 
Accounts payable
$
4,044

 
$
2,663

Accrued expenses and other current liabilities
3,116

 
2,802

Total current liabilities
7,160

 
5,465

 
 
 
 
Other liabilities
464

 
434

Total liabilities
7,624

 
5,899

 
 
 
 
Commitments and contingencies (Note 7)


 


 
 
 
 
Redeemable convertible preferred stock
 
 
 
Series A preferred stock, $0.0001 par value; no shares and 45,000,000 authorized at June 30, 2019 and December 31, 2018; no shares and 44,500,001 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively.

 
72,980

Series B preferred stock, $0.0001 par value; no shares and 62,500,000 authorized, issued, or outstanding at June 30, 2019 and December 31, 2018.

 
136,250

Total redeemable convertible preferred stock

 
209,230

 
 
 
 
Stockholders' equity (deficit)
 
 
 
Preferred stock, $0.0001 par value. 10,000,000 and no shares authorized, issued or outstanding at June 30, 2019 and December 31, 2018, respectively.

 

Common stock, $0.0001 par value; 150,000,000 and 20,988,730 shares authorized at June 30, 2019 and December 31, 2018, respectively; 23,964,746 and 914,602 shares issued at June 30, 2019 and December 31, 2018, respectively; 23,856,689 and 726,994 shares outstanding at June 30, 2019 and December 31, 2018, respectively.
2

 

Additional paid-in capital
338,380

 

Accumulated other comprehensive income (loss)
212

 
(106
)
Accumulated deficit
(155,958
)
 
(85,590
)
Total stockholders’ equity (deficit)
182,636

 
(85,696
)
Total liabilities, redeemable preferred stock and stockholders’ equity (deficit)
$
190,260

 
$
129,433

 

See accompanying notes to unaudited consolidated financial statements


5


TCR2 THERAPEUTICS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per share data)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Operating expenses
 
 
 
 
 
 
 
 
Research and development
 
$
8,833

 
$
5,175

 
$
16,722

 
$
8,068

General and administrative
 
3,307

 
1,634

 
6,193

 
2,854

Total operating expenses
 
12,140

 
6,809

 
22,915

 
10,922

Loss from operations
 
(12,140
)
 
(6,809
)
 
(22,915
)
 
(10,922
)
 
 
 
 
 
 
 
 
 
Interest income, net
 
1,077

 
622

 
1,949

 
749

Net loss
 
(11,063
)
 
(6,187
)
 
(20,966
)
 
(10,173
)
 
 
 
 
 
 
 
 
 
Accretion of redeemable convertible preferred stock to redemption value
 

 
(11,145
)
 
(49,900
)
 
(21,978
)
Net loss attributable to common stockholders
 
$
(11,063
)
 
$
(17,332
)
 
$
(70,866
)
 
$
(32,151
)
 
 
 
 
 
 
 
 
 
Per share information
 
 
 
 
 
 
 
 
Net loss per share attributable to common stockholders, basic and diluted
 
$
(0.46
)
 
$
(27.97
)
 
$
(3.91
)
 
$
(56.75
)
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding, basic and diluted
 
23,818,003

 
619,749

 
18,105,142

 
566,513

 

See accompanying notes to unaudited consolidated financial statements


6


TCR2 THERAPEUTICS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(amounts in thousands)

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Net loss
 
$
(11,063
)
 
$
(6,187
)
 
$
(20,966
)
 
$
(10,173
)
Unrealized (loss) gain on investments
 
211

 
15

 
318

 
(2
)
Comprehensive loss
 
$
(10,852
)
 
$
(6,172
)
 
$
(20,648
)
 
$
(10,175
)
 

See accompanying notes to unaudited consolidated financial statements





7


TCR2 THERAPEUTICS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(amounts in thousands, except share data)

 
Redeemable Convertible Preferred Stock  
 
 
 
 
 
 
 
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders'
Equity
(Deficit)
 
Series A  
 
Series B  
 
 
Common Stock  
 
Additional
Paid-In
Capital
 
 
 
 
Shares
 
Amount 
 
Shares
 
Amount
 
 
Shares
 
Amount 
 
 
 
 
Balance at December 31, 2018
44,500,001

 
$
72,980

 
62,500,000

 
$
136,250

 
 
726,994

 
$

 
$

 
$
(85,590
)
 
$
(106
)
 
$
(85,696
)
Reclassification of shares issued and previously subject to repurchase

 

 

 

 
 
39,776

 

 

 

 

 

Exercise of stock options and warrants

 

 

 

 
 
124

 

 

 

 

 

Stock-based compensation expense

 

 

 

 
 

 

 
1,141

 

 

 
1,141

Unrealized gain (loss) on investments

 

 

 

 
 

 

 

 

 
107

 
107

Accretion of redeemable preferred stock to redemption value

 
34,789

 

 
15,111

 
 

 

 
(498
)
 
(49,402
)
 

 
(49,900
)
Conversion of shares upon IPO
(44,500,001
)
 
(107,769
)
 
(62,500,000
)
 
(151,361
)
 
 
17,275,299

 
2

 
259,128

 

 

 
259,130

Initial public offering, net of issuance costs

 

 

 

 
 
5,750,000

 

 
77,168

 

 

 
77,168

Net loss

 

 

 

 
 

 

 

 
(9,903
)
 

 
(9,903
)
Balance at March 31, 2019

 

 

 

 
 
23,792,193

 
2

 
336,939

 
(144,895
)
 
1

 
192,047

Reclassification of shares issued and previously subject to repurchase

 

 

 

 
 
39,775

 
$

 
$
10

 
$

 
$

 
10

Exercise of stock options and warrants

 

 

 

 
 
24,721

 

 
21

 

 

 
21

Stock-based compensation expense

 

 

 

 
 

 

 
1,444

 

 

 
1,444

Unrealized gain (loss) on investments

 

 

 

 
 

 

 

 

 
211

 
211

Initial public offering, issuance costs

 

 

 

 
 

 

 
(34
)
 

 

 
(34
)
Net loss

 

 

 

 
 

 

 

 
(11,063
)
 

 
(11,063
)
Balance at June 30, 2019

 
$

 

 
$

 
 
23,856,689

 
$
2

 
$
338,380

 
$
(155,958
)
 
$
212

 
$
182,636


 

See accompanying notes to unaudited consolidated financial statements



8


TCR2 THERAPEUTICS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(amounts in thousands, except share data)

 
Redeemable Convertible Preferred Stock
 
 
 
 
 
 
 
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders'
Equity
(Deficit)
 
Series A
 
Series B  
 
 
Common Stock  
 
Additional
Paid-In
Capital
 
 
 
 
Shares
 
Amount 
 
Shares
 
Amount
 
 
Shares
 
Amount 
 
 
 
 
Balance at December 31, 2017
44,500,001

 
47,102

 

 

 
 
435,630

 

 

 
(26,324
)
 

 
$
(26,324
)
Sale of Series B preferred stock, net of issuance costs of $170

 

 
60,000,000

 
119,830

 
 

 

 

 

 

 

Reclassification of shares issued and previously subject to repurchase

 

 

 

 
 
39,778

 

 
13

 

 

 
13

Exercise of stock options and warrants

 

 

 

 
 
123,270

 

 
91

 

 

 
91

Stock-based compensation expense

 

 

 

 
 

 

 
283

 

 

 
283

Unrealized gain (loss) on investments

 

 

 

 
 

 

 

 

 
(17
)
 
(17
)
Accretion of redeemable preferred stock to redemption value

 
9,413

 

 
1,420

 
 

 

 
(387
)
 
(10,446
)
 

 
(10,833
)
Net loss

 

 

 

 
 

 

 

 
(3,986
)
 

 
(3,986
)
Balance at March 31, 2018
44,500,001

 
56,515

 
60,000,000

 
121,250

 
 
598,678

 

 

 
(40,756
)
 
(17
)
 
(40,773
)
Sale of Series B preferred stock, net of issuance costs of $170

 

 
2,500,000

 
5,000

 
 

 

 

 

 

 

Reclassification of shares issued and previously subject to repurchase

 

 

 

 
 
39,775

 

 
13

 

 

 
13

Exercise of stock options and warrants

 

 

 

 
 
2,774

 

 
2

 

 

 
2

Stock-based compensation expense

 

 

 

 
 

 

 
350

 

 

 
350

Unrealized gain (loss) on investments

 

 

 

 
 

 

 

 

 
15

 
15

Accretion of redeemable preferred stock to redemption value

 
4,895

 

 
6,250

 
 

 

 
(365
)
 
(10,780
)
 

 
(11,145
)
Net loss

 

 

 

 
 

 

 

 
(6,187
)
 

 
(6,187
)
Balance at June 30, 2018
44,500,001

 
$
61,410

 
62,500,000

 
$
132,500

 
 
641,227

 
$

 
$

 
$
(57,723
)
 
$
(2
)
 
$
(57,725
)

 

See accompanying notes to unaudited consolidated financial statements




9


TCR2 THERAPEUTICS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
 
Six Months Ended June 30,
 
2019
 
2018
Operating activities:
 
 
 
Net loss
$
(20,966
)
 
$
(10,173
)
Adjustments to reconcile net loss to cash used in operating activities:
 
 
 
Depreciation and amortization
300

 
188

Stock-based compensation expense
2,585

 
633

Loss on fixed asset disposal

 
2

Accretion on investments
(252
)
 
(76
)
Changes in operating assets and liabilities:
 
 
 
Interest receivable on investments
(325
)
 
(78
)
Prepaid expenses and other current assets
(3,158
)
 
153

Accounts payable
180

 
1,165

Accrued expenses and other liabilities
646

 
493

Cash used in operating activities
(20,990
)
 
(7,693
)
 
 
 
 
Investing activities:
 
 
 
Purchase of investments
(106,566
)
 
(32,343
)
Proceeds from sale or maturity of investments
42,619

 
5,530

Purchases of equipment
(941
)
 
(772
)
Cash used in investing activities
(64,888
)
 
(27,585
)
 
 
 
 
Financing activities:
 
 
 
Proceeds from the sale of Series B preferred stock

 
125,000

Proceeds from initial public offering, net of issuance costs
80,213

 

Proceeds from the exercise of stock options
18

 
219

Deferred offering costs
(1,047
)
 
(57
)
Payment of issuance costs

 
(150
)
Cash provided by financing activities
79,184

 
125,012

 
 
 
 
Net change in cash, cash equivalents, and restricted cash
(6,694
)
 
89,734

Cash, cash equivalents, and restricted cash at beginning of year
47,964

 
20,101

Cash, cash equivalents, and restricted cash at end of period
$
41,270

 
$
109,835

 
 
 
 
Supplemental disclosure of noncash investing and financing activities:
 
 
 
Conversion of redeemable convertible preferred stock to common stock
259,130

 

Accretion of redeemable convertible preferred stock to redemption value
49,900

 
21,978

Deferred offering costs included in accounts payable
309

 
254

Property and equipment additions in accounts payable
893

 
19

Reclassification of early exercise liability upon vesting of options
26

 
26

 
See accompanying notes to unaudited consolidated financial statements


10


TCR2 Therapeutics Inc.
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands, excluding share and per share items)



1. Organization and Description of Business

TCR2 Therapeutics Inc. (the Company) is a clinical-stage immunotherapy company developing the next generation of novel T cell therapies for patients suffering from cancer. The Company was incorporated under the laws of the State of Delaware on May 29, 2015 under the name TCR2, Inc. In November 2016, the Company changed its name to TCR2 Therapeutics Inc. The Company’s principal operations are located in Cambridge, Massachusetts.

Initial Public Offering

In February 2019, the Company completed the initial public offering of its common stock (the IPO) pursuant to which it issued and sold 5,750,000 shares of its common stock at a price to the public of $15.00 per share. The shares began trading on The Nasdaq Global Select Market on February 14, 2019. The aggregate net proceeds received by the Company from the offering were approximately $77,134, after deducting underwriting discounts and commissions and other offering expenses payable by the Company of $9,116. Upon the closing of the IPO, all outstanding shares of redeemable convertible preferred stock converted into 17,275,299 shares of common stock. Additionally, as of the closing of the IPO, the Company is authorized to issue 150,000,000 shares of common stock and 10,000,000 shares of preferred stock.

Reverse Stock Split

On February 1, 2019, the Company effected a 1-for-6.1938 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s redeemable convertible preferred stock. Accordingly, all share and per share amounts for all periods presented in the accompanying unaudited consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the redeemable convertible preferred stock conversion ratios.

2. Liquidity

The Company’s operations to date have focused on organization and staffing, business planning, raising capital, acquiring technology and assets, manufacturing and conducting preclinical studies. The Company does not have any product candidates approved for sale and has not generated any revenue from product sales. The Company’s product candidates are subject to long development cycles and the Company may be unsuccessful in its efforts to develop, obtain regulatory approval for or market its product candidates.

The Company is subject to a number of risks including, but not limited to, the need to obtain adequate additional funding for the ongoing and planned clinical development of its product candidates. Because of the numerous risks and uncertainties associated with pharmaceutical products and development, the Company is unable to accurately predict the timing or amount of funds required to complete development of its product candidates, and costs could exceed the Company’s expectations for a number of reasons, including reasons beyond the Company’s control.

The Company expects to continue to generate losses for the foreseeable future. The Company expects that its cash, cash equivalents and investments as of June 30, 2019 of $180,747 will be sufficient to fund its operating expenses and capital expenditure requirements through at least twelve months from the date of issuance of these unaudited consolidated financial statements.



11


TCR2 Therapeutics Inc.
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands, excluding share and per share items)


3. Summary of Significant Accounting Policies

Principles of consolidation and basis of presentation

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and in accordance with Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC), and reflect the financial position, results of operations and cash flows of the Company's business. Accordingly, they do not include all of the disclosures required by U.S. GAAP for a complete set of annual audited financial statements. All significant intercompany accounts and transactions are eliminated in consolidation.

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K filed with the SEC on March 29, 2019 for the year ended December 31, 2018 (the 2018 Form 10-K). In the opinion of the Company's management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included.

Use of estimates

The preparation of the accompanying unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these unaudited consolidated financial statements include, but are not limited to, the fair value of the royalty transfer agreement obligations, the valuation of redeemable convertible preferred and common stock prior to the IPO, and the fair value of stock-based compensation awards granted under the Company’s equity-based compensation plans. Due to the uncertainty of factors surrounding the estimates or judgments used in the preparation of the unaudited consolidated financial statements, actual results may materially vary from these estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.

Concentrations of credit risk and of manufacturing risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and investments. The Company’s cash, cash equivalents and investments are held by financial institutions in the United States. Amounts on deposit may at times exceed federally insured limits. Management believes that the financial institutions are financially sound, and accordingly, minimal credit risk exists with respect to the financial institutions.

As of June 30, 2019, the Company has manufacturing arrangements with vendors for the supply of materials for use in preclinical and clinical studies. If the Company were to experience any disruptions in either party’s ability or willingness to continue to provide manufacturing services, the Company may experience significant delays in its product development timelines and may incur substantial costs to secure alternative sources of manufacturing.

Fair value of financial instruments

At June 30, 2019 and December 31, 2018, the Company’s financial instruments consist of money market funds, commercial paper, asset-backed securities, agency, and corporate bonds and are included in


12


TCR2 Therapeutics Inc.
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands, excluding share and per share items)


investments. The carrying value of investments is the estimated fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Cash equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. As of June 30, 2019 and December 31, 2018, cash equivalents consisted of U.S treasuries, corporate bonds and government-backed money market funds.

Investments

As of June 30, 2019, all investments were classified as available-for-sale and were carried at their estimated fair value. Unrealized gains and losses are recorded as a component of accumulated other comprehensive income (loss) until realized. The Company determines the appropriate classification of its investments in debt securities at the time of purchase and re-evaluates such determination at each balance sheet date. The Company periodically reviews its investments in debt securities for impairment and adjusts these investments to their fair value when a decline in market value is deemed to be other than temporary. If losses on these securities are considered to be other than temporary, the loss is recognized in earnings. The Company classifies its available-for-sale marketable securities as current or non-current based on each instrument’s underlying effective maturity date and for which the Company has the intent and ability to hold the investment for a period of greater than 12 months. Marketable securities with maturities of less than 12 months are classified as current and are included in investments in the consolidated balance sheets. Marketable securities with maturities greater than 12 months for which the Company has the intent and ability to hold the investment for greater than 12 months are classified as non-current and are included in investments, non-current in the consolidated balance sheets.

Deferred offering costs

The Company capitalizes costs that are directly associated with in-process equity financings until such financings are consummated at which time such costs are recorded against the gross proceeds of the offering. Should the in-process equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the unaudited consolidated statements of operations.

Restricted cash

Cash accounts that are restricted as to withdrawal or usage are presented as restricted cash. Restricted cash includes amounts held as a security deposit in the form of a letter of credit for the Company’s leased facility.

Classification and accretion of redeemable convertible preferred stock

Through the date of the IPO, the Company had classified redeemable convertible preferred stock outstanding and classified outside of stockholders’ equity (deficit) because the shares contain certain redemption features that are not solely within the control of the Company. The carrying value of the redeemable convertible preferred stock was accreted to redemption value at the end of each reporting period, up to the date of the IPO, as if the end of the reporting period were the redemption date. Increases to the carrying value of redeemable convertible preferred stock were charged to additional paid-in capital or, in the absence of additional paid-in capital, charged to accumulated deficit. Upon completion of the IPO during February 2019, all redeemable convertible preferred stock was converted to common stock.


13


TCR2 Therapeutics Inc.
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands, excluding share and per share items)



Stock-based compensation

The Company measures employee stock-based awards at grant-date fair value and records compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. Generally, the Company issues awards with only service-based vesting conditions. The Company accounts for forfeitures as they occur.

The Company measures the fair value of stock-based awards granted to non-employees on the date at which the related service is complete. Compensation expense is recognized over the period during which services are rendered by such non-employee consultants until completed. In the second quarter of 2019, the Company adopted ASU 2018-07 on a retrospective basis effective January 1, 2019, the beginning of the fiscal year of adoption. Prior to the adoption of ASU 2018-07, share-based payments awards granted to non-employees were measured at fair value on their grant date, subject to periodic remeasurement at each reporting period, and share-based compensation expense was recognized over their vesting terms. After the adoption of ASU 2018-07, the fair value of all outstanding and unvested previously granted non-employee awards was established on January 1, 2019, the effective date of adoption, and share-based compensation expense will continue to be recorded on a straight-line basis over their remaining vesting period, consistent with share-based payment awards granted to employees.

Common shares issued and stock-options exercised prior to vesting are subject to repurchase by the Company until vested by the Company at the lesser of the initial exercise price and the fair market value of the Company’s common stock at the time of repurchase. The proceeds from the shares subject to repurchase are classified as a liability and reclassified to equity as the shares vest.

Estimating the fair value of stock-based awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and, for stock options and warrants, the expected life of the options and stock price volatility. The Company uses the Black-Scholes option pricing model to value its stock option awards and warrants. The assumptions used in calculating the fair value of stock-based awards represent management’s estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.

The Company classifies stock-based compensation expense in its statements of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.

Research and development expenses

Research and development costs are expensed as incurred and consist primarily of funds paid to third parties for the provision of services for product candidate development, clinical and preclinical development and related supply and manufacturing costs, and regulatory compliance costs. At the end of the reporting period, the Company compares payments made to third party service providers to the estimated progress toward completion of the research or development objectives. Such estimates are subject to change as additional information becomes available. Depending on the timing of payments to the service providers and the progress that the Company estimates has been made as a result of the service provided, the Company may record net prepaid or accrued expense relating to these costs.

Upfront milestone payments made to third parties who perform research and development services on the Company’s behalf are expensed as services are rendered.



14


TCR2 Therapeutics Inc.
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands, excluding share and per share items)


Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A reduction in the carrying value of the deferred tax assets is required when it is not more likely than not that such deferred tax assets are not realizable.

Net loss per share

Basic and diluted net loss per common share is determined by dividing net loss attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. The Company’s outstanding redeemable convertible preferred stock contractually entitles the holders of such shares to participate in distributions but contractually does not require the holders of such shares to participate in losses of the Company. Similarly, restricted stock awards granted by the Company entitle the holder of such awards to dividends declared or paid by the board of directors, regardless of whether such awards are unvested, as if such shares were outstanding shares of common stock at the time of the dividend. However, the unvested restricted stock awards are not entitled to share in the residual net assets (deficit) of the Company. Accordingly, in periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive shares of common stock are not assumed to have been issued if their effect is anti-dilutive. Therefore, the weighted-average shares used to calculate both basic and diluted loss per share are the same.

The following potentially dilutive securities, on an as converted basis have been excluded from the computation of diluted weighted-average shares outstanding as of June 30, 2019 and 2018, as they would be antidilutive:
 
As of
 
June 30,
 
2019
 
2018
Series A redeemable convertible preferred stock

 
7,184,588

Series B redeemable convertible preferred stock

 
10,090,711

Stock options outstanding
3,343,357

 
1,167,172

Employee stock purchase plan
7,408

 

Unvested shares of restricted stock
3,320

 
92,602

Common stock warrants
203,676

 
203,678

Total
3,557,761

 
18,738,751



Comprehensive loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources (which excludes investments from owners). The Company’s only element of other comprehensive loss is unrealized gains and losses on investments.



15


TCR2 Therapeutics Inc.
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands, excluding share and per share items)


Reconciliation of cash and cash equivalents and restricted cash as presented in the statements of cash flows

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the unaudited consolidated balance sheets to the total of the same such amounts shown in the unaudited consolidated statements of cash flows for the six months ended June 30, 2019 and 2018.

 
 
As of
 
 
June 30,
 
 
2019
 
2018
Cash and cash equivalents
 
$
40,980

 
$
109,542

Restricted cash
 
290

 
293

Cash, cash equivalents, and restricted cash shown in the statements of cash flows
 
$
41,270

 
$
109,835



JOBS Act accounting election

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it is (i) no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, these consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

Recently issued accounting pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which will require lessees to record most operating leases on their balance sheets, but recognize the expenses in the statements of operations in a manner similar to current practice. Under the new standard, lessees will be required to recognize a lease liability for the obligation to make lease payments, and an asset for the right to use the underlying asset for the lease term, for all leases with terms longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statements of operations. Expenses related to operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile, in which interest and amortization are presented separately in the statements of operations. The principal effect on the Company’s financial statements will be an increase in assets and liabilities.

The standard will be effective for public business entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company will adopt the new standard beginning January 1, 2020. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to apply the standard either (1) on the January 1, 2020 effective date, or (2) the beginning of the earliest comparative period presented in its financial statements. The standard includes a number of practical expedients that the Company is evaluating and may elect to apply. Early adoption is permitted. The Company is currently evaluating the potential impact of the adoption of this standard on its consolidated financial statements and related disclosures.



16


TCR2 Therapeutics Inc.
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands, excluding share and per share items)


Recently adopted accounting pronouncements

Beginning January 1, 2019, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. Entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The standard requires retrospective application in the consolidated statements of cash flows.

In June 2018, the FASB issued ASU 2018-07, Compensation — Stock Compensation (Topic 718) Improvements to Non-employee Share-Based Payment Accounting. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. Under this ASU, an entity should apply the requirements of Topic 718 to non-employee awards except for specific guidance on inputs to an option pricing model and the attribution of costs (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The guidance is applicable to public business entities for fiscal years beginning after December 15, 2018 including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

In June 2019, the Company adopted ASU 2018-07 on a retrospective basis effective January 1, 2019, the beginning of the fiscal year of adoption. Prior to the adoption of ASU 2018-07, share-based payments awards granted to non-employees were measured at fair value on their grant date, subject to periodic remeasurement at each reporting period, and share-based compensation expense was recognized over their vesting terms. After the adoption of ASU 2018-07,the fair value of all outstanding and unvested previously granted non-employee awards was established on January 1, 2019, the effective date of adoption, and share-based compensation expense will continue to be recorded on a straight-line basis over their remaining vesting period, consistent with share-based payment awards granted to employees. As a result of the adoption of ASU 2018-07, there was no material impact to the financial statements.

4. Investments and Fair Value Measurements

As of June 30, 2019, investments were comprised of the following:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Investments
 
Investments, non-current
Corporate bonds
$
123,410

 
$
205

 
$
(4
)
 
$
123,611

 
$
112,490

 
$
11,121

Agency bonds
6,450

 
10

 

 
6,460

 
6,460

 

Commercial paper
7,447

 
1

 

 
7,448

 
7,448

 

Asset-backed securities
2,248

 

 

 
2,248

 
2,248

 

 
$
139,555

 
$
216

 
$
(4
)
 
$
139,767

 
$
128,646

 
$
11,121


As of December 31, 2018, investments were comprised of the following:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Investments
 
Investments, non-current
Corporate bonds
$
58,029

 
$
1

 
$
(94
)
 
$
57,936

 
$
57,936

 
$

Agency bonds
9,966

 

 
(9
)
 
9,957

 
9,957

 

Commercial paper
7,214

 

 
(4
)
 
7,210

 
7,210

 

Asset-backed securities
390

 

 

 
390

 
390

 

 
$
75,599

 
$
1

 
$
(107
)
 
$
75,493

 
$
75,493

 
$




17


TCR2 Therapeutics Inc.
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands, excluding share and per share items)



The amortized cost and estimated fair value of marketable securities, by contractual maturity:
 
 
June 30, 2019
 
 
Amortized Cost
 
Fair Value
Due within one year
 
$
128,455

 
$
128,646

Due after one year through five years
 
11,100

 
11,121

 
 
$
139,555

 
$
139,767


 
 
December 31, 2018
 
 
Amortized Cost
 
Fair Value
Due within one year
 
$
75,599

 
$
75,493

Due after one year through five years
 

 

 
 
$
75,599

 
$
75,493



The Company believes that the decline in value of its debt securities is temporary and primarily related to the change in market interest rates since purchase. The Company believes it is more likely than not that it will be able to hold these securities to maturity. Therefore, the Company anticipates full recovery of its debt securities’ amortized cost basis at maturity.

The Company follows FASB’s accounting guidance on fair value measurements for financial assets and liabilities measured on a recurring basis. Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. Where available, fair value is based on observable market prices, or parameters derived from such prices. Where observable prices or inputs are not available, valuation models are applied. This hierarchy requires the use of observable market data when available and to minimize the use of unobservable inputs when determining fair value. These valuation techniques involve some level of management estimation and judgment. The degree of management estimation and judgment is dependent on the price transparency for the instruments, or market, and the instruments’ complexity.

The guidance requires fair value measurements to be classified and disclosed in one of the following three categories:

Level 1—Quoted prices (unadjusted in active markets for identical assets or liabilities)
Level 2—Inputs other than quoted prices in active markets that are observable either directly or indirectly
Level 3—Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions



18


TCR2 Therapeutics Inc.
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands, excluding share and per share items)


As of June 30, 2019, the Company has classified assets measured at fair value on a recurring basis as follows:
 
 
 
 
 
Fair Value Measurement Based On
 
Amortized Cost
 
Fair Value
 
Quoted Prices in Active Markets (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Cash equivalents (1)
$
39,685

 
$
39,685

 
$
39,685

 
$

 
$

Corporate bonds
123,410

 
123,611

 

 
123,611

 

Agency bonds
6,450

 
6,460

 

 
6,460

 

Commercial paper
7,447

 
7,448

 

 
7,448

 

Asset-backed securities
2,248

 
2,248

 

 
2,248

 

 
$
179,240

 
$
179,452

 
$
39,685

 
$
139,767

 
$


During the six months ended June 30, 2019, there were no transfers among the Level 1, Level 2 and Level 3 categories.

As of December 31, 2018, the Company has classified assets measured at fair value on a recurring basis as follows:
 
 
 
 
 
Fair Value Measurement Based On
 
Amortized Cost
 
Fair Value
 
Quoted Prices in Active Markets (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Cash equivalents (1)
$
45,974

 
$
45,974

 
$
45,108

 
$
866

 
$

Corporate bonds
58,029

 
57,936

 

 
57,936

 

Agency bonds
9,966

 
9,957

 

 
9,957

 

Commercial paper
7,214

 
7,210

 

 
7,210

 

Asset-backed securities
390

 
390

 

 
390

 

 
$
121,573

 
$
121,467

 
$
45,108

 
$
76,359

 
$


During the twelve months ended December 31, 2018, there were no transfers among the Level 1, Level 2 and Level 3 categories.

(1) 
Includes cash sweep accounts, U.S. Treasury money market mutual fund, bank certificates of deposit, U.S. Treasury bills and corporate bonds that have a maturity of three months or less from the original acquisition date.



19


TCR2 Therapeutics Inc.
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands, excluding share and per share items)


5. Property and Equipment

Property and equipment, net, consisted of:
 
June 30,
2019
 
December 31,
2018
Laboratory equipment
$
3,198

 
$
2,118

Computer hardware and equipment
105

 
105

Furniture and fixtures
326

 
326

Leasehold improvements
84

 
34

Laboratory equipment not placed in service
704

 

 
4,417

 
2,583

Less: Accumulated depreciation and amortization
(1,245
)
 
(945
)
 
$
3,172

 
$
1,638