SEC Filing — TCR2 Therapeutics

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2019

o 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

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, Massachusetts 02142

(Address of Principal Executive Offices)

(617) 949-5200

(Registrant’s telephone number, including area code)

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 x No o

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 x No o

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 o		Accelerated filer o
Non-accelerated filer x		Smaller reporting company x
Emerging growth company x

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. o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

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

As of May 6, 2019, there were 23,940,025 shares of the registrant’s Common Stock, $0.0001 par value per share, outstanding.

TCR² Therapeutics Inc.

Table of Contents



PART I		5
Item 1.	Financial Statements	5
	Unaudited Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	5
	Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018	6
	Unaudited Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018	7
	Unaudited Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) as of March 31, 2019 and 2018	8
	Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018	9
	Notes to the Unaudited Consolidated Financial Statements	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	99
Item 3.	Defaults Upon Senior Securities	99
Item 4.	Mine Safety Disclosures	99
Item 5.	Other Information	100
Item 6.	Exhibits	101
	Signatures	101

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)



	March 31, 2019			December 31, 2018
Assets
Current assets
Cash and cash equivalents	$	46,405		$	47,674
Investments	115,251			75,493
Prepaid expenses and other current assets	3,929			2,326
Total current assets	165,585			125,493

Property and equipment, net	1,936			1,638
Investments, non-current	30,048			—
Restricted cash	290			290
Deferred offering costs	—			2,012
Total assets	$	197,859		$	129,433

Liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)
Accounts payable	$	2,830		$	2,663
Accrued expenses and other current liabilities	2,527			2,802
Total current liabilities	5,357			5,465

Other liabilities	455			434
Total liabilities	5,812			5,899

Commitments and contingencies (Note 6)

Redeemable convertible preferred stock
Series A preferred stock, $0.0001 par value; no shares and 45,000,000 authorized at March 31, 2019 and December 31, 2018; no shares and 44,500,001 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively.	—			72,980
Series B preferred stock, $0.0001 par value; no shares and 62,500,000 authorized at March 31, 2019 and December 31, 2018, respectively; no shares and 62,500,000 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively.	—			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 March 31, 2019 and December 31, 2018, respectively.	—			—
Common stock, $0.0001 par value; 150,000,000 and 20,988,730 shares authorized at March 31, 2019 and December 31, 2018, respectively; 23,940,025 and 914,602 shares issued at March 31, 2019 and December 31, 2018, respectively; 23,792,193 and 726,994 shares outstanding at March 31, 2019 and December 31, 2018, respectively.	2			—
Additional paid-in capital	336,939			—
Accumulated other comprehensive income (loss)	1			(106		)
Accumulated deficit	(144,895		)	(85,590		)
Total stockholders’ equity (deficit)	192,047			(85,696		)
Total liabilities, redeemable preferred stock and stockholders’ equity (deficit)	$	197,859		$	129,433

See accompanying notes to unaudited consolidated financial statements

TCR² THERAPEUTICS INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except share and per share data)



	Three Months Ended March 31,
	2019			2018
Operating expenses
Research and development	$	7,889		$	2,893
General and administrative	2,886			1,220
Total operating expenses	10,775			4,113
Loss from operations	(10,775		)	(4,113		)

Interest income, net	872			127
Net loss	(9,903		)	(3,986		)

Accretion of redeemable convertible preferred stock to redemption value	(49,900		)	(10,833		)
Net loss attributable to common stockholders	$	(59,803	)	$	(14,819	)

Per share information
Net loss per share attributable to common stockholders, basic and diluted	$	(4.85	)	$	(28.90	)

Weighted average shares outstanding, basic and diluted	12,328,805			512,685

See accompanying notes to unaudited consolidated financial statements

TCR² THERAPEUTICS INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(amounts in thousands)



	Three Months Ended March 31,
	2019			2018
Net loss	$	(9,903	)	$	(3,986	)
Unrealized (loss) gain on investments	107			(17		)
Comprehensive loss	$	(9,796	)	$	(4,003	)

See accompanying notes to unaudited consolidated financial statements

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		Additional Paid-In Capital
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	—		—			—			—			—
Exercise of stock options and warrants	—	—		—	—		123,270	—		104			—			—			104
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	)



	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		Additional Paid-In Capital
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

See accompanying notes to unaudited consolidated financial statements

TCR² THERAPEUTICS INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)



	Three Months Ended March 31,
	2019			2018
Operating activities:
Net loss	$	(9,903	)	$	(3,986	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization	135			76
Stock-based compensation expense	1,141			283
Accretion on investments	(131		)	(18		)
Changes in operating assets and liabilities:
Interest receivable on investments	(157		)	(51		)
Prepaid expenses and other current assets	(1,207		)	583
Accounts payable	(401		)	221
Accrued expenses and other liabilities	(310		)	(120		)
Cash used in operating activities	(10,833		)	(3,012		)

Investing activities:
Purchase of investments	(86,626		)	(13,369		)
Proceeds from maturity of investments	16,819			—
Purchases of equipment	(188		)	(368		)
Cash used in investing activities	(69,995		)	(13,737		)

Financing activities:
Proceeds from the sale of Series B preferred stock	—			120,000
Proceeds from initial public offering, net of issuance costs	80,213			—
Proceeds from the exercise of stock options	—			219
Deferred offering costs	(654		)	(3		)
Payment of issuance costs	—			(150		)
Cash provided by financing activities	79,559			120,066

Net change in cash, cash equivalents, and restricted cash	(1,269		)	103,317
Cash, cash equivalents, and restricted cash at beginning of year	47,964			20,101
Cash, cash equivalents, and restricted cash at end of period	$	46,695		$	123,418

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			10,833
Deferred offering costs included in accounts payable	392			—
Property and equipment additions in accounts payable	245			253
Reclassification of early exercise liability upon vesting of options	13			13

See accompanying notes to unaudited consolidated financial statements

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 $77,168, after deducting underwriting discounts and commissions and other offering expenses payable by the Company of $9,082. 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 March 31, 2019 of $191,704 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.

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 institution is financially sound, and accordingly, minimal credit risk exists with respect to the financial institution.

As of March 31, 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 March 31, 2019 and December 31, 2018, the Company’s financial instruments consist of money market funds, commercial paper, agency and corporate bonds and are included in investments. The

TCR² Therapeutics Inc.

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, excluding share and per share items)

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 March 31, 2019 and December 31, 2018, cash equivalents consisted of U.S treasuries, corporate bonds and government-backed money market funds.

Investments

As of March 31, 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

The Company has classified redeemable convertible preferred stock 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 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.

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. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of its common stock and updated assumption inputs in the Black-Scholes option-pricing model for options or the then current fair value of its common stock for restricted stock. Exercised but unvested stock-based awards are subject to repurchase 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.

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

TCR² Therapeutics Inc.

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, excluding share and per share items)

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 March 31, 2019 and 2018, as they would be antidilutive:



	Three Months Ended March 31,
	2019	2018
Series A redeemable convertible preferred stock	—	7,184,588
Series B redeemable convertible preferred stock	—	9,687,106
Stock options	2,072,650	1,077,519
Unvested shares of restricted stock	25,639	114,924
Common stock warrants	203,676	203,678
Total	2,301,965	18,267,815

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.

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 three months ended March 31, 2019 and 2018.



	March 31,
	2019		2018
Cash and cash equivalents	$	46,405	$	123,128
Restricted cash	290		290
Cash, cash equivalents, and restricted cash shown in the statements of cash flows	$	46,695	$	123,418

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 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. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements and related disclosures.

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.

TCR² Therapeutics Inc.

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, excluding share and per share items)

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.

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.

4. Investments and Fair Value Measurements

As of March 31, 2019, investments were comprised of the following:



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Investments		Investments, non-current
Corporate bonds	$	122,158	$	36	$	(44	)	$	122,150	$	92,102	$	30,048
Agency bonds	9,984		8		—			9,992		9,992		—
Commercial paper	10,912		1		—			10,913		10,913		—
Asset-backed securities	2,244		—		—			2,244		2,244		—
	$	145,298	$	45	$	(44	)	$	145,299	$	115,251	$	30,048

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	$	—

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:



	March 31, 2019
	Amortized Cost		Fair Value
Due within one year	$	115,242	$	115,251
Due after one year through five years	30,056		30,048
	$	145,298	$	145,299



	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

TCR² Therapeutics Inc.

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, excluding share and per share items)

As of March 31, 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)
Assets
Cash equivalents⁽¹⁾	$	7,959	$	7,959	$	3,715	$	4,244	$	—
Corporate bonds	122,158		122,150		—		122,150		—
Agency bonds	9,984		9,992		—		9,992		—
Commercial paper	10,912		10,913		—		10,913		—
Asset-backed securities	2,244		2,244		—		2,244		—
	$	153,257	$	153,258	$	3,715	$	149,543	$	—

During the three months ended March 31, 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)
Assets
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 three months ended March 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.

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:



	March 31, 2019			December 31, 2018
Laboratory equipment	2,398			2,118
Computer hardware and equipment	105			105
Furniture and fixtures	326			326
Leasehold improvements	84			34
Construction in-process	104			—
	3,017			2,583
Less: Accumulated depreciation and amortization	(1,081		)	(945		)
	$	1,936		$	1,638

Depreciation expense was $135 and $76 for the three months ended March 31, 2019 and 2018, respectively.

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of:



	March 31, 2019		December 31, 2018
Employee compensation and related benefits	$	625	$	1,676
Professional fees	576		342
Contract manufacturing organization fees	315		173
Contract research organization fees	265		232
University partnerships	257		162
Other	489		217
	$	2,527	$	2,802

7. Commitments and Contingencies

Leases

The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not yet paid. Landlord allowances for tenant improvements are deferred and recognized as a reduction to rent expense on a straight-line basis and over the remaining lease term.

In March 2018, the Company entered into a lease for office and laboratory facilities that expires in July 2025. Under the terms of the lease, the Company placed $290 letter of credit into a restricted cash account as security for the facility.

In December 2018, the Company signed a collaboration agreement (the Collaboration Agreement) with Cell Therapy Catapult Limited (Catapult) to establish the Company's manufacturing process in Catapult’s GMP manufacturing facility in the United Kingdom. The initial term of the Collaboration Agreement is three years which began March 1, 2019. The Company can terminate the Collaboration Agreement earlier with twelve months’ notice and continued payment for contributions during the twelve-month termination period.

The Collaboration Agreement provides for Catapult to provide identified space, called a module, and other specified services. The Company has concluded that the Collaboration Agreement contains an embedded lease as the Company has the right to operate the module in a manner it determines. The Company also

TCR² Therapeutics Inc.

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, excluding share and per share items)

concluded that it is not the deemed owner during modification of the module nor does the agreement represent a capital lease under ASC 840, “Leases”. As a result, the Collaboration Agreement will be accounted for as an operating lease. The Company determined the amounts to be representative of rent to be £300,000 per year based on the relative selling prices of the services being provided. This amount will be amortized annually on a straight-line basis as rent expense over the term of the embedded lease, commencing March 1, 2019.

The following table presents future minimum rent payments under non-cancellable operating leases with initial terms in excess of one year at March 31, 2019:



	Minimum Rent Payments
Remainder of 2019	$	2,017
2020	2,745
2021	2,457
2022	2,009
2023	2,002
Thereafter	3,116
Total minimum payments required	$	14,346

Rent expense was $631 and $375 for the three months ended March 31, 2019 and 2018, respectively.

Litigation

The Company is not currently party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to such legal proceedings.

Royalty transfer agreement

In connection with the sale of Series A redeemable convertible preferred stock (see Note 7), certain investors are entitled to receive, in the aggregate, a royalty from the Company equal to one percent of (i) all global net sales of any Company products and (ii) any license income on intellectual property that was in existence at the time of the Series A preferred stock financing. The Company has elected to account for this liability at fair value with changes recognized in earnings. Given the early stage nature of the underlying technology and inherent risks associated with obtaining regulatory approval and achieving commercialization, the Company ascribed no value to the royalty agreement at inception and at March 31, 2019 and December 31, 2018. The Company currently does not have any net sales or license income and as a result has paid no royalties under this obligation for the three months ended March 31, 2019 or 2018 nor has the Company accrued any liability as of March 31, 2019 or December 31, 2018.

8. Common Stock and Redeemable Convertible Preferred Stock

Common stock

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Subject to the rights of holders of redeemable convertible preferred stock, common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any. No dividends had been declared through March 31, 2019.

TCR² Therapeutics Inc.

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, excluding share and per share items)

Redeemable convertible preferred stock

Upon completion of the IPO during February 2019, all redeemable convertible preferred stock was converted to common stock.

Prior to the IPO, the Company elected to accrete the carrying value of the Series A and B preferred stock to redemption value at the end of each reporting period as if the end of the reporting period were the redemption date, increases to the carrying value of redeemable convertible preferred stock are charged to additional paid-in capital or, in the absence of additional paid-in capital, charged to accumulated deficit.

Series A redeemable convertible preferred stock

Prior to the IPO, there were 44,500,001 Series A preferred shares issued and outstanding. Included in the Series A preferred stock purchase agreement, the investor is required to purchase additional shares upon the achievement of certain Company milestones. The Company evaluated the future commitment obligations at original issuance and determined they were not freestanding instruments as they were not legally detachable. The future commitment obligations were also evaluated as embedded derivatives and determined they did not meet the definition of a derivative instrument for which bifurcation would be required.

Upon completion of the IPO in February 2019, all Series A preferred stock was converted to 7,184,588 shares of common stock.

Conversion

Prior to the IPO, each share of Series A preferred stock was convertible, at the option of the holder, into shares of common stock. Prior to the common stock reverse stock split in February 2019, the shares were convertible on a one-to-one basis. Post-split the Series A stock were convertible at 1-to-0.1615 basis. The Series A conversion rights were subject to adjustment for certain dilutive events. The conversion price could have been adjusted to prevent dilution of the Series A preferred stock.

The preferred stock was also mandatorily convertible upon the closing of an initial public offering resulting in gross proceeds to the Company exceeding $50,000 or by a written election by the majority of the Series A stockholders.

Redemption

Prior to the IPO, at the election of a majority of the Series A stockholders, the Series A preferred stock was redeemable at any time on or after October 16, 2020. The Series A preferred stock may be redeemed at a price equal to the greater of (a) the original issuance price, plus any cumulative dividends accrued but unpaid thereon, whether or not declared, or (b) the fair market value as of the date of the redemption.

Dividends

Prior to the IPO, the holders of shares of Series A preferred stock were entitled to receive cumulative dividends of 6% from the date of issuance. Accumulated dividends were payable only when and if declared by the Board of Directors, in preference to dividends paid to holders of common stock. The dividend preference for Series A preferred stock is $0.06 per share, as adjusted for recapitalizations. No dividends have been declared through March 31, 2019.

TCR² Therapeutics Inc.

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, excluding share and per share items)

Liquidation

Prior to the IPO, in the event of a liquidation, dissolution or winding up of the Company, either voluntary or involuntary, or in the event of a deemed liquidation event, which included a sale of the Company as defined in the Company’s certificate of incorporation, holders of Series A preferred stock were entitled to receive, subject to the preference of the Series B holders but in preference to common stockholders, an amount equal to their original investment amount plus any declared and unpaid dividends. If upon the occurrence of such event, the assets and funds available for distribution were insufficient to pay such holders the full amount to which they are entitled, then the entire assets and funds legally available for distribution would have been distributed ratably among the holders of the Series A preferred stock in proportion to the full amounts to which they would otherwise be entitled.

After payment of the liquidation preference on shares of Series A preferred stock had been made, any remaining assets would have been distributed ratably to common, Series B stockholders and Series A stockholders, on an as-converted basis.

Series B redeemable convertible preferred stock

Prior to the IPO, there were 62,500,000 Series B preferred shares issued and outstanding. The Series B preferred stock is classified outside of stockholders’ equity (deficit) as the preferred holders may, at their option, elect to have their shares redeemed upon written notice by a majority of the preferred shareholders and at any time after February 2023.

Upon completion of the IPO in February 2019, all Series B preferred stock was converted to 10,090,711 shares of common stock.

Conversion

Prior to the IPO, each share of Series B preferred stock was convertible, at the option of the holder, into shares of common stock. Prior to the common stock reverse stock split in February 2019, the shares were convertible on a one-to-one basis. Post-split the Series B stock were convertible at 1-to-0.1615 basis. The Series B conversion rights were subject to adjustment for certain dilutive events. The conversion price could have been adjusted to prevent dilution of the Series B preferred stock.

The Series B preferred stock was also mandatorily convertible upon the closing of an initial public offering resulting in gross proceeds to the Company exceeding $50,000 or by a written election by the majority of the Series B stockholders.

Redemption

Prior to the IPO, at the election of a majority of the Series B stockholders, the Series B preferred stock was redeemable at any time on or after February 2023. The Series B preferred stock could have been redeemable at a price equal to the greater of (a) the original issuance price, plus any cumulative dividends accrued but unpaid thereon, whether or not declared, or (b) the fair market value as of the date of the redemption.

Dividends

Prior to the IPO, the holders of shares of Series B preferred stock were entitled to receive cumulative dividends of 6% from the date of issuance. Accumulated dividends were payable only when and if declared by the Board of Directors, in preference to dividends paid to holders of Series B preferred stock and common stock. The dividend preference for Series B preferred stock was $0.12 per share, as adjusted for recapitalizations. No dividends were declared through March 31, 2019.

TCR² Therapeutics Inc.

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, excluding share and per share items)

Liquidation

Prior to the IPO, in the event of a liquidation, dissolution or winding up of the Company, either voluntary or involuntary, or in the event of a deemed liquidation event, which includes a sale of the Company as defined in the Company’s articles of incorporation, holders of Series B preferred stock were entitled to receive, in preference to the holders of Series A preferred stock or Common Stock, an amount equal to their original investment amount plus any declared and unpaid dividends. If upon the occurrence of such event, the assets and funds available for distribution were insufficient to pay such holders the full amount to which they are entitled, then the entire assets and funds legally available for distribution would have been distributed ratably among the holders of the Series B preferred stock in proportion to the full amounts to which they would otherwise be entitled.

After payment of the liquidation preference on shares of Series B preferred stock has been made, any remaining assets would have been distributed ratably to Series A stockholders in an amount equal to their original investment amount plus any accrued dividends, whether or not declared, together with any other dividends declared but unpaid thereon. After payment of the liquidation preference on shares of Series A preferred stock had been made, any remaining assets would have been distributed ratably to common, Series B stockholders and Series A stockholders, on an as-converted basis.

9. Stock-based Compensation

In February 2019, the Company’s Board of Directors and stockholders approved the 2018 Stock Option and Incentive Plan (the 2018 Plan), which replaced the 2015 Plan. The shares under the 2015 Plan which were not issued, were rolled into the 2018 Plan. The 2018 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock units, stock appreciation rights and other stock-based awards. The Company’s officers, employees, directors and other key persons (including consultants) are eligible to receive awards under the 2018 Plan. The maximum number of authorized shares to be issued under the Plan is 3,000,000 shares of common stock. The number of shares of common stock reserved for issuance under the 2018 Plan shall be cumulatively increased on January 1, 2020 and each January 1 thereafter by 4% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year or a lesser number of shares determined by the Company's Board of Directors. The amount, terms of grants, and exercisability provisions are determined and set by the Compensation Committee of the Company’s Board of Directors. The term of the options may be up to 10 years, and options are exercisable in cash or as otherwise determined by the Board of Directors.

As of March 31, 2019, there were 3,045,491 shares of common stock available for future issuance. Generally, options and restricted stock awards vest over a four-year period.

The Company recorded stock-based compensation expense in the following expense categories of its accompanying unaudited consolidated statements of operations for the three months ended March 31, 2019 and 2018:



	Three Months Ended March 31,
	2019		2018
Research and development	$	298	$	56
General and administrative	843		227
	$	1,141	$	283

TCR² Therapeutics Inc.

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, excluding share and per share items)

Stock options

During the three months ended March 31, 2018, there were no grants of stock options, 12,731 options forfeited, and 122,171 options exercised, respectively.

The following table summarizes the activity related to stock option grants to employees and non-employees for the three months ended March 31, 2019:



	SHARES		WEIGHTED AVERAGE EXERCISE PRICE PER SHARE		WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE (IN YEARS)
Balance at January 1, 2019	2,121,551		$	3.78	9.1
Granted	—		—
Exercised	(3,464	)	0.74
Forfeited	(45,438	)	0.74
Outstanding at March 31, 2019	2,072,649		$	3.43	8.9

Exercisable at March 31, 2019	562,900
Vested and expected to vest at March 31, 2019	2,072,649

As of March 31, 2019, there was $6,839 in unrecognized compensation cost that is expected to be recognized over an estimated weighted-average amortization period of 3.0 years.

Restricted stock

During the three months ended March 31, 2018, the Company granted no restricted stock and there were no forfeitures.

During the three months ended March 31, 2019, the Company granted no restricted stock and there were no forfeitures. As of March 31, 2019, there was $400 in unrecognized compensation cost that is expected to be recognized by December 31, 2019.

Warrants

During the three months ended March 31, 2019 and 2018, the Company granted no warrants and there were no forfeitures.

As of March 31, 2019, there was $1,800 in unrecognized compensation cost that is expected to be recognized over an estimated weighted-average amortization period of 1.7 years.

Employee stock purchase plan (ESPP)

In February 2019, the Company’s Board of Directors adopted and the Company’s stockholders approved the 2018 Employee Stock Purchase Plan (2018 ESPP). The 2018 ESPP enables eligible employees to purchase shares of the Company's common stock at the end of each six-month offering period at a price equal to 85% of the fair market value of the shares on the first business day or the last business day of the offering period, whichever is lower. Eligible employees generally included all employees. Offering periods began on the first trading day September 1 and March 1 of each year and ended on the last trading day in February and August of each year. Share purchases are funded through payroll deductions of up to 15% of an employee’s eligible compensation for each payroll period, or $25 each calendar year.

TCR² Therapeutics Inc.

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, excluding share and per share items)

During the three months ended March 31, 2019 and 2018, there were no shares issued under the 2018 ESPP.

10. Related party transactions

Consulting arrangements

On October 1, 2015, the Company entered into a consulting agreement with Dr. Patrick Baeuerle. Pursuant to the consulting agreement, Dr. Baeuerle agreed to perform such consulting, advisory and related services to and for the Company as may be reasonably requested. In exchange, the Company agreed to pay Dr. Baeuerle a consulting fee of €15 per month. On November 1, 2016, the Company amended the consulting agreement to revise Dr. Baeuerle’s consulting fee to be €3 per month. Dr. Baeuerle is also eligible for an annual bonus equal to 33% of the annual fees paid under the consulting agreement, subject to the discretion of the Company's Board of Directors based on Dr. Baeuerle’s performance and the Company's performance. The term of the agreement is one year, and automatically extends for additional one-year periods unless terminated. During the three months ended March 31, 2019 and 2018, the Company incurred fees and travel related expenses to Dr. Baeuerle in the amount of $18 and $19, respectively, under the consulting agreement. Dr. Baeuerle is a member of the Company's Board of Directors and is a managing director at MPM Capital, the beneficial owner of more than 5% of the Company's voting securities.

On March 2, 2016, the Company entered into a consulting agreement with Dr. Mitchell Finer (the Original Finer Agreement), which was amended and restated on May 9, 2017 to, among other things, add Pattern Recognition Ventures as a party. Pursuant to the amended and restated consulting agreement, Pattern Recognition Ventures agreed to perform scientific consulting, advisory and related services to and for the Company as may be reasonably requested, including making Dr. Finer available to serve as Chairman of the Company's Scientific Advisory Board. Pursuant to the amended and restated consulting agreement, the Company agreed (i) to pay Pattern Recognition Ventures a consulting fee of $19 per quarter for services provided under the agreement, commencing on July 1, 2017. During the three months ended March 31, 2019 and 2018, the Company incurred fees and travel-related expenses to Pattern Recognition Ventures in the amount of $19 and $19, respectively. Dr. Finer has a financial interest in Pattern Recognition Ventures and is its managing member. Dr. Finer is also a member of the Company's Board of Directors and is an executive partner at MPM Capital, the beneficial owner of more than 5% of the Company's voting securities.

On October 1, 2017, the Company entered into a consulting agreement with Globeways Holdings Limited. Dr. Morana Jovan-Embiricos has financial interests in Globeways Holdings Limited and is its founding director. Pursuant to the consulting agreement, Globeways Holdings Limited provides consulting, advisory and related services in exchange for consulting fees of $0.1 per year. During the three months ended March 31, 2019 and 2018, the Company incurred fees and travel-related expenses to Globeways Holdings Limited in the amount of $30 for each period. Dr. Jovan is also a member of the Company's Board of Directors and Globeways Holdings Limited is the appointed manager of certain affiliates of F2 Capital that collectively beneficially own more than 5% of the Company's voting securities.

The majority investor in the Company is MPM Capital (MPM). In September 2015, the Company began receiving consulting and management services pursuant to agreements with three Managing Directors at MPM. For the three months ended March 31, 2019 and 2018, the Company incurred approximately $82 and $102, respectively, for management and advisory services in connection with those agreements. These amounts were recorded in general and administrative expenses in the unaudited consolidated statements of operations.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q (“Quarterly Report”) and our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “Annual Report’) filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2019. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those set forth in Item 1A, “Risk Factors” and elsewhere in our Annual Report and this Quarterly Report.

Overview

We are a clinical-stage immunotherapy company developing the next generation of novel T cell therapies for patients suffering from cancer. Our proprietary TCR Fusion Construct T cells (TRuC-T cells) specifically recognize and kill cancer cells by harnessing the entire T cell receptor (TCR) signaling complex, which we believe is essential for T cell therapies to be effective in patients with solid tumors. We have designed our TRuC-T cells so that tumor cell recognition does not require human leukocyte antigens (HLA), which provides two important additional benefits. First, in contrast to current engineered T cell therapies that use the full TCR (TCR-T cells), our technology is designed so that it can be applied to all patients that express the cancer surface antigen irrespective of HLA subtype, which we believe will allow us to address a significantly larger patient population. Second, HLA is downregulated or lost in many tumors which can prevent their recognition by T cells and lead to diminished response rates and higher relapse rates. We therefore believe our approach will allow us to deliver the first HLA-independent TCR-T cell therapy for patients with solid tumors. We also believe that our product candidates have the potential to improve upon the efficacy and safety of currently approved chimeric antigen receptor T (CAR-T) cell therapies in CD19-positive B-cell hematological malignancies. This belief is based on preclinical studies comparing our product candidates to CAR-T cells that we engineered.

Since our inception in May 2015, we have focused significant efforts and financial resources on developing our TRuC platform, establishing and protecting our intellectual property portfolio, conducting research and development of our product candidates, manufacturing drug product material for use in preclinical studies, staffing our company and raising capital. We do not have any products approved for sale and have not generated any revenue from product sales. To date, we have funded our operations with proceeds from the sale of our preferred and common stock. Through March 31, 2019, we have received gross proceeds of $163.7 million from the sale of our Series A and Series B preferred stock and $86.3 million common stock in our IPO.

Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. As of March 31, 2019, we had an accumulated deficit of $144.9 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly if and as we:


•	conduct additional preclinical studies for our product candidates;


•	initiate and conduct clinical trials for our product candidates;


•	continue to discover and develop additional product candidates;


•	acquire or in-license other product candidates and technologies;


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


•	hire additional clinical and scientific personnel;


•	expand our manufacturing capabilities with third parties and establish manufacturing capabilities in-house;


•	seek regulatory approvals for any product candidates that successfully complete clinical trials; and


•	add operational, financial, and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts, as well as to support our transition to a public reporting company.

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates and do not enter into a commercialization partnership, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing and distribution. Additionally, we expect to incur significant expenses if we acquire and establish our own commercial manufacturing facility, which will be a costly and time-consuming process, and in our operations as a public company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances, and marketing, distribution or licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates.

Components of Our Results of Operations

Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts and the development of our product candidates, which include:


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


•	expenses incurred in connection with the preclinical and clinical development of our product candidates, including under agreements with third parties, such as consultants, contractors and contract research organizations (CROs);


•	the cost of acquiring and manufacturing preclinical and clinical trial materials, including under agreements with third parties, such as consultants, contractors and contract manufacturing organizations (CMOs);


•	consultant fees and expenses associated with outsourced professional scientific development services;


•	facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance; and


•	payments made under third-party licensing agreements.

We expense research and development costs as incurred. Any nonrefundable advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed.

We typically use our employee, consultant and infrastructure resources across our development programs. We track certain outsourced development costs by product candidate, but we do not allocate personnel costs or other internal costs to specific product candidates.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will increase substantially in connection with our planned preclinical and clinical development and manufacturing activities in the near term and in the future. At this time, we cannot reasonably estimate or know the nature, timing, and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates. The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:


•	the timing and progress of our preclinical studies and clinical trials, which may be significantly slower or cost more than we currently anticipate and will depend substantially upon the performance of third-party contractors;


•	the number and scope of preclinical and clinical programs we decide to pursue;


•	the progress of the development efforts of parties with whom we may enter into collaboration arrangements;


•	our ability to maintain our current research and development programs and to establish new ones;


•	our ability to establish licensing or collaboration arrangements;


•	our ability to complete investigational new drug application (IND)-enabling studies and successfully submit IND or comparable applications;


•	whether we are required by the U.S. Food and Drug Administration (FDA) or similar foreign regulatory authorities to conduct additional clinical trials or other studies beyond those planned to support the approval and commercialization of our product candidates or any future product candidates;


•	the timely receipt of necessary marketing approvals from the FDA and similar foreign regulatory authorities;


•	our ability and the ability of third parties with whom we contract to manufacture adequate clinical and commercial supplies of our product candidates or any future product candidates, remain in good standing with regulatory agencies and develop, validate and maintain commercially viable manufacturing processes that are compliant with current good manufacturing practices (cGMP);


•	our ability to demonstrate to the satisfaction of the FDA and similar foreign regulatory authorities the safety, potency, purity and acceptable risk to benefit profile of our product candidates or any future product candidates;


•	the prevalence, duration and severity of potential side effects or other safety issues experienced with our product candidates or future product candidates, if any;


•	our ability to establish and enforce intellectual property rights in and to our product candidates or any future product candidates;


•	our ability to successfully develop a commercial strategy and thereafter commercialize our product candidates or any future product candidates in the United States and internationally, if licensed for marketing, reimbursement, sale and distribution in such countries and territories, whether alone or in collaboration with others;


•	the willingness of physicians, operators of clinics and patients to utilize or adopt any of our product candidates or future product candidates to treat solid and hematologic cancers;


•	patient demand for our product candidates and any future product candidates, if licensed;


•	competition with other products; and


•	continued acceptable safety profile of our therapies following approval.

A change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that

product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, finance and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, patent, consulting, investor and public relations, accounting and audit services. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance, and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.

Interest Income, net

Other income, net consists of interest earned on our cash equivalents and investment balances, net of investment charges

Consolidated Statements of Operations

Comparison of the Three Months Ended March 31, 2019 and 2018

The following table summarizes our results of operations for the three months ended March 31, 2019 and 2018 (in thousands):



	Three Months Ended March 31,
	2019			2018			Change
	(in thousands)
Operating expenses
Research and development	$	7,889		$	2,893		$	4,996
General and administrative	2,886			1,220			1,666
Total operating expenses	(10,775		)	(4,113		)	(6,662		)
Loss from operations	(10,775		)	(4,113		)	(6,662		)