TransCode Therapeutics

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________

FORM 10-Q

____________________________________________


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

For the quarterly period ended June 30, 2021


☐	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 001-40363

__________________________________________

TRANSCODE THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in Its Charter)

__________________________________________

Delaware

(State or Other Jurisdiction of

Incorporation or Organization)

81-1065054

(I.R.S. Employer

Identification No.)

6 Liberty Square, #2382

Boston, Massachusetts

(Address of Principal Executive Offices)

02109

(Zip Code)

(857) 837-3099

(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 per share	RNAZ	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 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

At August 20, 2021, the registrant had 12,904,574 shares of Common Stock, $0.0001 par value per share, outstanding.

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TRANSCODE THERAPEUTICS, INC.

QUARTERLY REPORT ON FORM 10-Q

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		PAGE NUMBER
PART I. FINANCIAL INFORMATION		7
ITEM 1. FINANCIAL STATEMENTS (Unaudited)		7
BALANCE SHEETS AS OF JUNE 30, 2021, (UNAUDITED) AND DECEMBER 31, 2020		7
STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020 (UNAUDITED)		8
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020 (UNAUDITED)		9
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020 (UNAUDITED)		10
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)		11
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		41
ITEM 4. CONTROLS AND PROCEDURES		42
PART II. OTHER INFORMATION		42
ITEM 1. LEGAL PROCEEDINGS		42
ITEM 1A. RISK FACTORS		42
ITEM 6. EXHIBITS		96
SIGNATURES		97

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Summary of Material Risks

Our business is subject to numerous material and other risks and uncertainties that you should be aware of in evaluating our business. These risks are described more fully elsewhere in this Quarterly Report on From 10-Q and include, but are not limited to, the following:

●

We have incurred significant losses since inception, and we expect to incur losses over the next several years and may not be able to achieve or sustain revenues or profitability in the future.

●

We will need to raise substantial additional funding. If we are unable to raise capital when needed, we would be forced to delay, scale back or discontinue some of our product candidate development programs or commercialization efforts.

●

The amount of our future losses is uncertain, and our quarterly operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts, each of which may cause our stock price to fluctuate or decline.

●

Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

●

Because our product candidates are in an early stage of development, there is a high risk of failure, and we may never succeed in developing marketable products or generating product revenues.

●

Our business is highly dependent on the success of TTX-MC138, our lead candidate which is at the early stages of development. All of our product candidates may require significant additional preclinical and clinical development before we may be able to seek regulatory approval for and launch a product commercially.

●

We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of TTX-MC138 or any of our other product candidates in development.

●

Changes in methods of product candidate manufacturing or formulation may result in additional costs or delay.

●

We may not be successful in our efforts to identify or discover additional product candidates in the future.

●

If product liability lawsuits are brought against us, we may incur substantial financial or other liabilities and may be required to limit commercialization of our product candidates.

●

If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

●

Our product candidates may cause undesirable side effects or death or have other properties that could halt their clinical development, prevent their regulatory approval, limit their commercial potential or result in significant negative consequences.

●

Sales of our products may involve a lengthy sales cycle.

●

A variety of factors, including inadequate funding for the FDA, the SEC and other government agencies could hinder their ability to hire and retain key leadership and other personnel, prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal business functions on which the operation of our business may rely, which could negatively impact our business.

●

Even if we receive regulatory approval of TTX-MC138 or any of our other product candidates, we will be subject to ongoing regulatory requirements and continued regulatory review, which may result in significant additional expense. We may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our product candidates.

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●

Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, exclusion from government healthcare programs, contractual damages, reputational harm and diminished profits and future earnings.

●

Obtaining and maintaining regulatory approval for our product candidates in one jurisdiction does not mean that we will be successful in obtaining regulatory approval for that or of any of our other product candidates in other jurisdictions.

●

We currently have no marketing and sales organization and have no experience as a company in commercializing products, and we may have to invest significant resources to develop these capabilities. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell any products for which we obtain regulatory approval, we may not be able to generate product revenue.

●

Coverage and reimbursement may be limited or unavailable in certain market segments for our product candidates, if approved, which could make it difficult for us to sell any product candidates profitably.

●

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

●

If, in the future, we are unable to establish sales and marketing and patient support capabilities or enter into agreements with third parties to sell and market our current or future product candidates, we may not be successful in commercializing our current or future product candidates if and when they are approved, and we may not be able to generate any revenue.

●

We expect to rely on third-party manufacturing and supply vendors, and our supply of research and development, preclinical and clinical development materials may become limited or interrupted or may not be of satisfactory quantity or quality.

●

We rely on third parties to conduct certain aspects of our preclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or comply with regulatory requirements, we may not be able to obtain regulatory approval of or commercialize any potential product candidates.

●

Parties conducting some or all of our product manufacturing may not perform satisfactorily.

●

We are highly dependent on others to provide services for certain core aspects of our business.

●

If our third-party manufacturers use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.

●

We may not be successful in establishing and maintaining strategic partnerships, which could adversely affect our ability to develop and commercialize products.

●

The global pandemic of the novel coronavirus disease, COVID-19, has, and may continue to, adversely impact our business, including our preclinical studies and clinical trials.

●

We will need to grow the size of our organization, and we may experience difficulties in managing this growth.

●

Compliance with governmental regulations regarding the treatment of animals used in research could increase our operating costs, which would adversely affect the commercialization of our products.

●

Our ability to use our net operating loss carryforwards and certain tax credit carryforwards may be subject to limitation.

●

Our success depends in part on our ability to protect our intellectual property. It is difficult and costly to protect our proprietary rights and technology, and we may not be able to ensure their protection.

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●

The patents covering our lead candidate, TTX-MC138, are currently issued only in the U.S. and there are no foreign applications pending for this invention at this time. We have limited foreign intellectual property rights and may not be able to protect our intellectual property rights throughout the world.

●

Our executive officers, directors, principal stockholders and their affiliates exercise significant influence over our company, which will limit your ability to influence corporate matters and could delay or prevent a change in corporate control.

●

We do not intend to pay dividends on our common stock, so any returns will be limited to the value of our stock.

●

We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business.

●

We may not be able to satisfy listing requirements of the Nasdaq Capital Market or maintain a listing of our common stock on the Nasdaq Capital Market.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor provisions. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

our estimates and expectations regarding our capital requirements, cash and expense levels, liquidity sources and our need for additional financing;

the design, conduct and outcome of our planned preclinical activities to support a IND for our planned Phase 0 trial of TTX-MC138, our lead product candidate focused on metastatic cancer treatment, and our ability to initiate and complete this trial;

the design, conduct and outcome of our planned preclinical activities to support a IND for our planned Phase 0 trial of TTX-MC138 and our ability to initiate and complete this trial;

our ability to expand our drug candidate portfolio through internal research and development or the acquisition or in-licensing of intellectual property assets;

the impact of the global outbreak of the COVID-19 coronavirus, including the spread of new strains of the virus, on the above-described activities, including but not limited to our ability to enroll a sufficient number of patients to advance the above-described clinical trials;

the results and timing of the above-described preclinical and clinical trial activities;

the therapeutic benefits, effectiveness and safety of our product candidates;

our ability to receive regulatory approval for our product candidates in the United States, Europe and other geographies;

the expected regulatory approval pathway for our product candidates, and our ability to obtain, on satisfactory terms or at all, the financing required to support operations, development, clinical trials, and commercialization of products;

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our reliance on third parties for the planning, conduct and monitoring of clinical trials and for the manufacture of clinical drug supplies and drug product;

potential changes in regulatory requirements, and delays or negative outcomes from the regulatory approval process;

our estimates of the size and characteristics of the markets that may be addressed by our product candidates;

the market acceptance of our product candidates that are approved for marketing in the United States or other countries;

our ability to successfully commercialize our product candidates;

the safety and efficacy of therapeutics marketed by our competitors that are targeted to indications which our product candidates have been developed to treat;

the impact of natural disasters, global pandemics (including the outbreak of a novel strain of the COVID-19 coronavirus and subsequent spread of new strains of the virus), labor disputes, lack of raw material supply, issues with facilities and equipment or other forms of disruption to business operations at our manufacturing facilities;

our ability to utilize our proprietary technological approach to develop and commercialize our product candidates;

potential collaborators to license and commercialize any product candidates for which we receive regulatory approval in the future outside of the United States;

our heavy dependence on licensed intellectual property, including our ability to source and maintain licenses from third-party owners;

our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

our ability to attract, retain and motivate key personnel;

our ability to generate revenue and become profitable; and

other risks and uncertainties, including those listed under the caption Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q.

The risks set forth above are not exhaustive. Other sections of this Quarterly Report on Form 10-Q may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all risk factors, nor can we assess the impact of all risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events and with respect to our business and future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC.

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This Quarterly Report on Form 10-Q may include data that we obtained from industry publications and third-party research, surveys and studies. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. This Quarterly Report on Form 10-Q also may include data based on our own internal estimates and research, including estimates regarding the impact of the COVID-19 pandemic (or related pandemic caused by coronavirus variants) on our financial statements and business operations. Our internal estimates have not been verified by any independent source and, while we believe any data obtained from industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data. Such third-party data, as well as our internal estimates and research, are subject to a high degree of uncertainty and risk due to a variety of factors, including those described in Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. These and other factors could cause our results to differ materially from those expressed in this Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q may contain trademarks, service marks and trade names of third parties which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this Quarterly Report on Form 10-Q is not intended to, and does not imply a relationship with, or endorsement or sponsorship by us. Solely for convenience, the trademarks, service marks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ®, TM or SM symbols, but the omission of such references is not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable owner of these trademarks, service marks and trade names.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

TRANSCODE THERAPEUTICS, INC.

BALANCE SHEETS


	June 30,		December 31,
	2021		2020
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	79,567	$	828,016
Prepaid expenses and other current assets		460,652		3,199
Total current assets		540,219		831,215
Fixed assets, net of accumulated depreciation		91,594		—
Deferred offering costs		890,452		224,153
Total assets	$	1,522,265	$	1,055,368
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses	$	1,216,501	$	369,177
Deferred grant income		251,810		—
Escrow for warrant exercise		29,267		—
Due to related parties		35,525		35,685
Total current liabilities		1,533,103		404,862
Convertible promissory notes, net of debt issuance costs and debt discount		2,125,813		2,086,675
Accrued interest – convertible promissory notes		247,285		191,687
Derivative liabilities		2,618,000		1,751,000
Warrant liability		34,145		29,376
Total liabilities		6,558,346		4,463,600
Stockholders’ equity (deficit):
Preferred stock – $0.0001 par value; 10,000,000 and -0‑ shares authorized at June 30, 2021, and December 31, 2020, respectively; -0‑ shares issued or outstanding at June 30, 2021, and December 31, 2020		—		—
Common stock – $0.0001 par value, 290,000,000 shares authorized at June 30, 2021, and December 31, 2020; 4,636,216 shares issued and outstanding at June 30, 2021, and December 31, 2020		464		464
Additional paid-in capital		149,125		65,949
Subscription receivable		(9,354)		(12,763)
Accumulated deficit		(5,176,316)		(3,461,882)
Total stockholders’ equity (deficit)		(5,036,081)		(3,408,232)
Total liabilities and stockholders’ equity (deficit)	$	1,522,265	$	1,055,368

See accompanying notes to financial statements.

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TRANSCODE THERAPEUTICS, INC.

STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Operating expenses:
Research and development	$	211,752	$	75,000	$	475,511	$	78,700
General and administrative		143,776		16,605		329,482		29,414
Total operating expenses		355,528		91,605		804,993		108,114
Operating loss		(355,528)		(91,605)		(804,993)		(108,114)
Other income (expense):
Grant income		57,051		—		57,051		—
Change in fair value of derivative liabilities		3,069,000		—		(867,000)		—
Change in fair value of warrant liability		42,346		—		(4,769)		—
Interest expense		(41,966)		(35,650)		(94,736)		(60,430)
Interest income		1		57		13		86
Total other income (expense), net		3,126,432		(35,593)		(909,441)		(60,344)
Income (loss) before income taxes		2,770,904		(127,198)		(1,714,434)		(168,458)
Income tax expense (benefit)		—		—		—		—
Net income (loss)	$	2,770,904	$	(127,198)	$	(1,714,434)	$	(168,458)
Basic earnings (loss) per share
Net income (loss)	$	2,770,904	$	(127,198)	$	(1,714,434)	$	(168,458)
Weighted-average common shares outstanding		4,636,216		4,636,216		4,636,216		4,636,216
Net earnings (loss) per share	$	0.60	$	(0.03)	$	(0.37)	$	(0.04)

Diluted earnings (loss) per share
Net income (loss) as adjusted	$	2,770,904	$	(127,198)	$	(1,714,434)	$	(168,458)
Weighted-average common shares outstanding	$	5,400,184	$	4,636,216	$	4,636,216	$	4,636,216
Net earnings (loss) per share	$	0.51	$	(0.03)	$	(0.37)	$	(0.04)

See accompanying notes to financial statements.

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TRANSCODE THERAPEUTICS, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)


										Total
				Additional						Stockholders’
	Common Stock			Paid-In		Subscription		Accumulated		Equity
	Shares	Amount		Capital		Receivable		Deficit		(Deficit)
Six months ended June 30, 2020
Balance, December 31, 2019	4,636,216	$	464	$	20,014	$	(12,272)	$	(1,117,989)	$	(1,109,783)
Interest on subscription receivable	—		—		123		(123)		—		—
Share-based compensation	—		—		698		—		—		698
Net loss	—		—		—		—		(41,260)		(41,260)
Balance, March 31, 2020	4,636,216		464		20,835		(12,395)		(1,159,249)		(1,150,345)
Interest on subscription receivable	—		—		245		(245)		—		—
Share-based compensation	—		—		699		—		—		699
Net loss	—		—		—		—		(127,198)		(127,198)
Balance, June 30, 2020	4,636,216	$	464	$	21,779	$	(12,640)	$	(1,286,447)	$	(1,276,844)

Six months ended June 30, 2021
Balance, December 31, 2020	4,636,216	$	464	$	65,949	$	(12,763)	$	(3,461,882)	$	(3,408,232)
Interest on subscription receivable	—		—		128		(128)		—		—
Share-based compensation	—		—		48,431		—		—		48,431
Net loss	—		—		—		—		(4,485,338)		(4,485,338)
Balance, March 31, 2021	4,636,216		464		114,508		(12,891)		(7,947,220)		(7,845,139)
Interest on subscription receivable	—		—		103		(103)		—		—
Proceeds from subscription receivable	—		—		—		3,640		—		3,640
Share-based compensation	—		—		34,514		—		—		34,514
Net income	—		—		—		—		2,770,904		2,770,904
Balance, June 30, 2021	4,636,216	$	464	$	149,125	$	(9,354)	$	(5,176,316)	$	(5,036,081)

See accompanying notes to financial statements.

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TRANSCODE THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended
	June 30,
	2021		2020
Cash flows from operating activities:
Net loss	$	(1,714,434)	$	(168,458)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation		5,947		—
Share-based compensation expense		82,945		1,397
Change in fair market value of derivative liabilities		867,000		—
Non-cash interest expense		39,138		6,358
Change in fair market value of warrant liability		4,769		—
Changes in assets and liabilities:
Prepaid expenses and other current assets		(457,453)		(3,200)
Accounts payable and accrued expenses		266,528		3,188
Deferred grant income		251,810		—
Accrued interest on convertible promissory notes		55,598		54,071
Net cash used in operating activities		(598,152)		(106,644)
Cash flows from investing activities:
Purchase of fixed assets		(97,541)		—
Net cash from (used in) investing activities		(97,541)		—
Cash flows from financing activities:
Proceeds from convertible promissory notes		—		1,190,000
Proceeds from subscription receivable		3,640		—
Proceeds from escrow payment for warrant exercise		29,267		—
Payments of deferred offering costs		(85,663)		—
Net cash provided by (used in) financing activities		(52,756)		1,190,000
Net change in cash and cash equivalents		(748,449)		1,083,356
Cash and cash equivalents, beginning of period		828,016		204,471
Cash and cash equivalents, end of period	$	79,567	$	1,287,827
Supplemental disclosure of cash flow
Cash paid during the year for:
Interest	$	—	$	—
Income taxes	$	—	$	—
Supplemental disclosure of non-cash investing and financing activities:
Accrued interest on subscriptions receivable	$	231	$	368
Debt discounts associated with derivative liabilities of convertible promissory notes	$	37,471	$	304,000
Deferred offering costs included in accounts payable and accrued expenses	$	580,636	$	—

See accompanying notes to financial statements.

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TransCode Therapeutics, Inc.

Notes to Financial Statements

(Unaudited)

(1) Nature of Business and Liquidity

TransCode Therapeutics, Inc. (the “Company” or “TransCode”) was incorporated on January 11, 2016, under the laws of the State of Delaware. TransCode is a biopharmaceutical company focused on developing and commercializing innovative drugs for treating metastatic disease. TransCode is preparing for its first clinical study. The Company’s lead therapeutic candidate, TTX-MC138, is an oligonucleotide conjugated to an iron oxide nanoparticle designed to be administered by infusion to inhibit the ability of metastatic tumor cells to survive. The goal of the therapy, if approved, is to achieve lifelong regression and long-term patient survival.

Since its founding, the Company has been engaged in organizational activities, including raising capital, and research and development activities. The Company has generated only minor revenues and has not yet achieved profitable operations, nor has it ever generated positive cash flows from operations. There is no assurance that profitable operations, if achieved, could be sustained on a continuing basis. The Company is subject to those risks associated with any early-stage biopharmaceutical company that requires substantial expenditures for research and development. There can be no assurance that the Company’s research and development projects will be successful, that products developed will obtain necessary regulatory approvals, or that any approved product will be commercially viable. In addition, the Company operates in an environment of rapid technological change and is largely dependent on the services of its employees and consultants. Further, the Company’s future operations are dependent on the success of the Company’s efforts to raise additional capital.

To date, the Company has incurred substantial losses and negative cash flows from operations. It expects to continue to incur operating losses for the foreseeable future until such time, if ever, that the Company can generate significant revenue from product candidates currently in development. At June 30, 2021, the Company had an accumulated deficit of $5,176,316, total outstanding debt of $2,240,000 (before deduction of debt issuance costs and debt discounts), and total accrued interest expense of $247,285. At June 30, 2021, the Company had $79,567 in cash and cash equivalents. Through June 30, 2021, the Company’s primary source of capital was from the issuance of convertible promissory notes.

On July 13, 2021, the Company completed the initial public offering (“IPO”) of its common stock at an initial offering price of $4.00 per share. The Company’s common stock commenced trading on the Nasdaq Capital Market on July 9, 2021, under the ticker symbol “RNAZ”. The Company issued 7,187,500 shares of common stock in connection with the IPO, including exercise of the underwriter’s over-allotment option. The gross proceeds from the IPO, including proceeds from the exercise of the underwriters’ option to purchase additional shares, were $28.75 million. The net proceeds from the IPO were approximately $25.4 million after deducting underwriting discounts, commissions and estimated offering expenses payable by the Company, including offering costs paid in 2020 and offering costs accrued and unpaid as of June 30, 2021. In connection with the IPO, the Company also granted the underwriters warrants to purchase up to 312,500 shares of Company common stock at an exercise price of $5.00 per share (125% of the initial public offering price). Upon the closing of the IPO, outstanding convertible promissory notes converted into 1,068,135 shares of Company common stock.

As of the date of these financial statements, management believes that the net proceeds from the IPO, funding from an SBIR Grant awarded to the Company in April 2021, and its current cash and cash equivalents are sufficient to fund operations and capital requirements for at least the next 12 months. The Company expects to need to raise additional capital to complete clinical development of, and to commercialize, its product candidates. There is no assurance that such financing will be available when needed or on acceptable terms.

To the extent the Company raises additional funds by issuing equity securities, its stockholders may experience significant dilution. Any debt financing, if available, may include potentially dilutive features and restrictive covenants that impact the Company’s ability to conduct business. If the Company is unable to raise additional capital when required or on acceptable terms, the Company may have to significantly scale back planned operations or relinquish or otherwise dispose of rights to technologies on unfavorable terms.

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TransCode Therapeutics, Inc.

Notes to Financial Statements

(Unaudited)

(2) Summary of Significant Accounting Policies

(a) Basis of Presentation

The interim financial statements included herein are unaudited. These financial statements have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Update (ASU) of the Financial Accounting Standards Board (FASB). In the opinion of management, these statements include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the financial position of TransCode Therapeutics, Inc. at June 30, 2020, and its results of operations and its cash flows for the three and six months ended June 30, 2021 and 2020. The interim results of operations are not necessarily indicative of the results to be expected for a full year. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2020, and notes thereto contained in the Company’s prospectus dated July 8, 2021, filed with the SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such rules and regulations relating to interim financial statements.

(b) Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Due to the uncertainty of factors surrounding the estimates or judgments used in the preparation of the financial statements, actual results may materially vary from these estimates.

Significant items subject to such estimates and assumptions include the valuation of share-based compensation, derivative liabilities, and warrant liability. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. Accounting estimates used in the preparation of these financial statements change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes.

Basic net earnings (loss) per share is determined by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net earnings (loss) per share includes the effect, if any, from the potential conversion, vesting or exercise of securities (Contingent Securities) such as convertible promissory notes and stock options, which would result in the issuance of incremental shares of common stock. The computation of diluted net earnings (loss) per shares does not include the conversion or exercise of Contingent Securities that would have an antidilutive effect. The basic and dilutive computations of net earnings (loss) per share for the Company for the three months ended June 30, 2021, differ because the effect of the Contingent Securities was dilutive, while for the three months ended June 30, 2020, and the six months ended June 30, 2021 and 2020, are the same because the effects of including the Company’s Contingent Securities would be antidilutive.

(d) Cash and Cash Equivalents

The Company classifies deposits in banks, money market funds and cash invested temporarily in various instruments with original maturities of three months or less as cash and cash equivalents. At times, the Company’s cash balances in U.S. banks may exceed the levels of insured amounts under the Federal Deposit Insurance Corporation (FDIC). The Company’s cash balances at June 30, 2021 and December 31, 2020, were $79,567 and $828,016, respectively.

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TransCode Therapeutics, Inc.

Notes to Financial Statements

(Unaudited)

(e) Fair Value of Financial Instruments

The Company’s financial instruments at June 30, 2021, and December 31, 2020, included cash and cash equivalents, accounts payable, accrued expenses, convertible notes, derivative liabilities related to the convertible notes and the warrant liability. Cash and cash equivalents and the derivative liabilities are reported at fair value. The recorded carrying amount of accounts payable and accrued expenses reflect their fair value due to their short-term nature. The carrying value of the interest-bearing convertible notes approximates fair value based upon the borrowing rates currently available to the Company for loans with similar terms and maturities.

(f) Research and Development

Research and development costs are expensed as incurred and primarily comprise expenses to discover, research and develop therapeutic candidates. These expenses may include personnel costs, share-based compensation expense, materials and supplies, allocated facility-related and depreciation expenses, third-party license fees, and costs under arrangements with third party vendors, such as contract research organizations (“CROs”), contract manufacturing organizations (“CMOs”), and consultants. Non-refundable prepayments for goods or services that will be used or rendered for future research and development activities are recorded as prepaid expenses. Such amounts are recognized as expenses as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered. At June 30, 2021, and December 31, 2020, the Company’s outstanding payables to CROs or CMOs were $149,145 and $31,346, respectively.

The Company has entered into various research and development-related contracts with companies both inside and outside of the United States. The related costs are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ materially from the Company’s estimates.

Patent Costs

All legal fees and expenses and costs related to patent-related filings with governmental authorities incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses.

(g) Grant Income

Funds from grants are recognized as grant income in the statements of operations as and when earned for the specific research and development projects for which the grants are designated. Grant payments received are recorded as deferred grant income on the Company’s balance sheets until the related income has been earned. Grant income earned in excess of grant payments received is recorded as grant receivable on the Company’s balance sheets.

(h) Share-Based Compensation

Share based compensation, if any, for employees and non-employees is measured at the grant date based on the fair value of the award. The Company recognizes compensation expense, if any, for awards to employees and directors over the requisite service period, which is generally the vesting period of the respective award, and for awards to nonemployees over the period during which services are rendered by such nonemployees until completed. Generally, the Company issues awards with only service-based vesting conditions and records the expense for these awards using the straight-line method. The Company classifies share-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. Forfeitures are accounted for as they occur.

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TransCode Therapeutics, Inc.

Notes to Financial Statements

(Unaudited)

Because prior to the IPO, there was no public market for the Company’s common stock, the estimated fair value of the common stock has been determined by the Company’s board of directors (the “Board”) as of the date of each award, with input from management, considering, when available, third-party valuations of the Company’s common stock as well as the Board’s assessment of additional objective and subjective factors that it believed were relevant and which may have changed between the date of the most recent third-party valuation and the date of the grant. The assumptions used in calculating the fair value of share-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different.

Certain stock appraisal methodologies utilize, among other variables, the volatility of the stock price. As an historically private company, the Company has lacked company-specific historical and implied volatility information for its stock. Therefore, it has estimated its expected stock price volatility based on the historical volatility of publicly traded peer companies and expects to continue to do so until such time, if ever, as it has adequate historical data regarding the volatility of its own traded stock price. The expected life of options awarded was estimated using the simplified method because the Company has limited historical information on which to base reasonable expectations about future exercise patterns and post-vesting employment. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends on its common stock and does not expect to pay cash dividends in the foreseeable future.

(i) Income Taxes

The Company provides for income taxes using the asset and liability approach. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As of June 30, 2021 and December 31, 2020, the Company had a full valuation allowance against deferred tax assets.

The Company is subject to the provisions of ASC 740-10-25, Income Taxes (ASC 740). ASC 740 prescribes a more likely-than-not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

There are currently no open Federal or State tax audits. The Company has not recorded any liability for uncertain tax positions at June 30, 2021, or December 31, 2020.

(j) Concentrations of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash. The Company generally maintains balances in various accounts at one or more U.S. banks in amounts that may exceed federally insured limits. The Company has not experienced any losses related to its cash and does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking balances.

(k) Derivative Liabilities

The Company does not use derivative instruments to hedge exposures to interest rate, market, or foreign currency risks. The Company evaluates all of its financial instruments, including convertible promissory notes, to determine if such instruments contain features that meet the definition of embedded derivatives.

Embedded derivatives must be separately measured from the host contract if all the requirements for bifurcation are met. The assessment of the conditions surrounding the bifurcation of embedded derivatives depends on the nature of the host contract. Bifurcated embedded derivatives are recognized at fair value, with changes in fair value recognized in the statement of operations each period. Bifurcated embedded derivatives are classified with the related host contract in the Company’s balance sheets.

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TransCode Therapeutics, Inc.

Notes to Financial Statements

(Unaudited)

In connection with the Company’s convertible promissory notes, the Company has identified certain embedded and freestanding derivatives which are recorded as liabilities on the balance sheets and are remeasured to fair value at each reporting date until the derivative is settled. Changes in the fair value of the derivative liabilities are recognized in the statements of operations.

(l) Deferred Offering Costs

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process capital stock financings as deferred offering costs until such financings are consummated. After consummation of the financing, these costs are recorded in stockholders’ equity (deficit) as a reduction of additional paid-in capital generated as a result of the offering. Should a planned equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the statements of operations. As of June 30, 2021, and December 31, 2020, the Company had recorded deferred offering costs of $890,452 and $224,153, respectively, incurred in connection with the Company’s IPO and reported as long-term assets on the accompanying balance sheets.

(m) Emerging Growth Company Status

The Company is an “emerging growth company” (“EGC”) as defined in the Jumpstart Our Business Startups Act (“JOBS Act”) and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not EGCs. The Company may take advantage of these exemptions until it is no longer an EGC under Section 107 of the JOBS Act and has elected to use the extended transition period for complying with new or revised accounting standards. As a result of this election, the Company’s financial statements may not be comparable to companies that comply with public company Financial Accounting Standards Board (“FASB”) standards’ effective dates. The Company may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of a public offering or such earlier time that it is no longer an EGC.

(n) Recent Accounting Pronouncements

In August 2020, the FASB issued ASU No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40). ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. The ASU is effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating ASU 2020-06 and assessing the impact of its adoption on its financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating ASU 2019-12 but does not believe the adoption of this standard will have a significant impact on its financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting (“Topic 842”). The FASB has issued several updates to the standard which: (i) clarify how to apply certain aspects of the new standard; (ii) provide an additional transition method for adoption of the new standard; (iii) provide a practical expedient for certain lessor accounting; and (iv) amend certain narrow aspects of the guidance. Topic 842 requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve- month term, these arrangements must be recognized as assets and liabilities on the balance sheet of the lessee. Under Topic 842, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/ interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of Topic 842 is calculated using the applicable incremental borrowing rate at the date of adoption. While Topic 842 is effective for the Company, the Company has no long-term leases requiring consideration under Topic 842.

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TransCode Therapeutics, Inc.

Notes to Financial Statements

(Unaudited)

(o) Reverse Stock Split

On March 22, 2021, the board of directors and shareholders of the Company approved a reverse stock split of the Company’s common stock at a ratio of one share for every 1.6486484 shares previously held. All common stock share and per share data and conversion or exercise price data for applicable common stock equivalents included in these financial statements have been retroactively adjusted to reflect the reverse stock split.

(3) Fair Value Measurements

ASC 820, Fair Value Measurements, provides guidance on the development and disclosure of fair value measurements. The Company follows this guidance for fair value measurements, which defines fair value, establishes a framework for measuring fair value under U.S. GAAP, and expands disclosures about fair value measurements. The guidance requires fair value measurements be classified and disclosed in one of the following three categories:

●

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.

●

Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

●

Level 3: Unobservable inputs which are supported by little or no market activity and values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2021, and December 31, 2020. The carrying amount of cash and accounts payable approximated fair value as they are short term in nature. The guidance in ASC 815, Derivatives and Hedging, requires that we mark the value of our common stock warrant liability to market and recognize the change in valuation in our statements of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant. The fair value of the common stock warrants we issued were estimated based on a Black-Scholes model as of June 30, 2021, and December 31, 2020. The estimated fair value of the warrant liability and the derivative liability (“embedded put features”) included in the convertible promissory notes represent Level 3 measurements. The following table details the fair value measurement within the fair value hierarchy of the Company’s financial instruments, which includes the Level 3 liabilities:


	Fair value measurements as of
	December 31, 2020, using:
	Level 1		Level 2		Level 3		Total
Liabilities
Derivative liabilities	$	—	$	—	$	1,751,000	$	1,751,000
Warrant liability		—		—		29,376		29,376
	$	—	$	—	$	1,780,376	$	1,780,376


	Fair value measurements as of
	June 30, 2021, using:
	Level 1		Level 2		Level 3		Total
Liabilities
Derivative liabilities	$	—	$	—	$	2,618,000	$	2,618,000
Warrant liability		—		—		34,145		34,145
	$	—	$	—	$	2,652,145	$	2,652,145

During the three and six months ended June 30, 2021 and 2020, there were no transfers between Level 1, Level 2 and Level 3.

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TransCode Therapeutics, Inc.

Notes to Financial Statements

(Unaudited)

A summary of the changes in the fair value of Level 3 financial instruments for the six months ended June 30, 2021 is as follows:


	Level 3
Balance, December 31, 2020	$	1,780,376
Changes in fair value of derivative liability		867,000
Changes in fair value of warrant liability		4,769
Balance, June 30, 2021	$	2,652,145

For further discussion of the derivative liabilities, see Note 7. For further discussion of the warrant liability, see Note 9.

(4) Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following:


	June 30,		December 31,
	2021		2020
Professional fees	$	840,455	$	193,281
Consulting fees		76,507		80,012
Research and development billings		238,185		51,806
State filing and other fees		1,397		1,778
Accrued license payments		59,957		42,300
	$	1,216,501	$	369,177

See Note 6 for further information regarding the accrued license payments.

(5) Deferred Grant Income

In April 2021, the Company received a Fast-Track Small Business Innovation Research, or SBIR, Award from the National Cancer Institute of the National Institutes of Health (the “NIH”). The Award is expected to provide $2,392,845 over three years to fund a two-phased research partnership between the Company and Massachusetts General Hospital. In May 2021, the Company received the first year funding of $308,861. Grant income is recognized as work related to the Grant is completed. The Company recognized $57,051 of Grant Income for the three and six months ended June 30, 2021, and recorded the remaining $251,810 as Deferred Grant Income.

(6) Commitments and Contingencies

(a) Leases

In March 2021, the Company entered into an agreement with Massachusetts Biomedical Initiatives, Inc. (“MBI”) whereby the Company has subleased approximately 2,484 square feet of laboratory space with room for minor administrative functions. The Company may also use shared laboratory equipment at the facility. The monthly rental is $6,210 and the Company pays an additional amount for its allocated share of operating expenses currently assessed at $15 per square foot or $3,105 per month. The agreement is for one year, includes an option to extend the agreement upon the mutual agreement of the parties, and is cancelable anytime upon 90 days’ notice. As of June 30, 2021, the lease commitment through February 28, 2022, amounts to $74,520. In March 2020, the Company entered into an agreement with the Pagliuca Harvard Life Lab whereby the Company rented one laboratory bench and the right to use certain common facilities at the Life Lab. In March 2021, the Company terminated the arrangement with the Life Lab.

(b) License Agreement

In November 2018, the Company licensed the exclusive rights to certain intellectual property to support development of its therapeutic candidates (“License”). The intellectual property licensed by the Company is owned by The General Hospital Corporation, d/b/a Massachusetts General Hospital, (“Licensor”). Payments by the Company under the license agreement included a one-time non-refundable fee of $50,000 paid after execution of the License; reimbursement of Licensor’s patent costs which, at execution of the

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TransCode Therapeutics, Inc.

Notes to Financial Statements

(Unaudited)

License, were approximately $145,000; a minimum annual license fee of $25,000 payable within 60 days of each anniversary of the effective date of the License prior to the first commercial sale of a product or process covered by the License; milestone payments upon attainment of certain milestone events; royalties based on net sales of products covered by the patent-related rights; and a portion of any sublicense income received by the Company. The Company is responsible for the development and commercialization of the licensed assets and for meeting certain milestones set forth in the License.

In accounts payable and accrued expenses at June 30, 2021, and December 31, 2020, the Company had accrued $59,957 and $42,300, respectively, in license payments under the terms of the License. All amounts due under the License have been paid.

The milestone payments the Company shall pay to Licensor shall not exceed $1,550,000 based upon and subject to the attainment of each milestone event indicated below. These payments are generally due within 60 days of achievement of the milestone.


Milestone Event	Amount
Enrollment of first patient in a phase II clinical trial of a therapeutic product or process	$	100,000
Enrollment of first patient in a phase III clinical trial of a therapeutic product or process	$	200,000
First commercial sale of a therapeutic product or process	$	1,000,000
Filing of an application for regulatory approval of a clinical diagnostic product or process	$	100,000
First regulatory approval of a clinical diagnostic product or process	$	150,000

As of June 30, 2021, and December 31, 2020, no milestone events had been achieved.

In addition to milestone payments, royalties shall be paid to Licensor assessed on net sales of licensed products on a country-by-country basis in an amount equal to 3.0% for therapeutic products or processes and 6.0% for clinical diagnostic products and processes. The Company shall pay Licensor 30% of any and all sublicense income.

The Company has the right to terminate the License at any time by giving 90 days advance notice subject to the payment of any amounts due under the License at that time. The License may also be terminated for cause by either party upon the breach of the material obligations of the other party or the bankruptcy or liquidation of the other party. If the Company does not terminate the License, the term of the License shall continue until the latest of (i) the date on which all issued patents and filed patent applications subject to the License have expired or been abandoned; (ii) expiration of the last to expire regulatory exclusivity covering a covered product or process; or (iii) 10 years after the first commercial sale. The License requires the Company to make royalty payments beyond the term of the License at 1.5%.

In November 2020, the Company and Licensor amended the License. Under the amendment, the intellectual property licensed in 2018 was categorized as “Patent Family 1” and a provisional patent filing related to the Company’s nanoparticle technology was added to Patent Family 1. A second patent family (“Patent Family 2”) was created which includes Licensor intellectual property targeting PD-L1.

The minimum annual license fee prior to the first commercial sale of a product or process covered by the License was increased from $25,000 per year to $30,000 per year for Patent Family 1 and a minimum annual license fee of $10,000 per year was added related to Patent Family 2. All other terms of the License including milestone payments, royalties and payment terms related to sublicense income received by the Company remain the same as in the original License.

Option Agreement

The Company signed an Exclusive Option And Internal Evaluation License Agreement (the “Option”) with the Licensor effective February 15, 2021. Under the Option, the Company has (1) the exclusive right to negotiate a license of a certain technology patented by the Licensor and (2) a non-exclusive internal evaluation license to allow the Company to evaluate the technology. The Option had an original term of six months at a cost of $5,000 with a right to extend, upon the mutual agreement of the parties, for an additional six months for a second $5,000 payment. In August 2021, the Licensor agreed to extend the initial term of the Option until November 15, 2021, at no cost to the Company. The Company shall also be responsible for patent costs related to the subject technology incurred by Licensor during the Option period. Patent costs incurred by Licensor prior to the effective date will not be reimbursed under the Option.

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TransCode Therapeutics, Inc.

Notes to Financial Statements

(Unaudited)

The Company may from time to time be subject to claims by others under various legal disputes. The defense of such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the Company’s liquidity, financial condition, and cash flows. At June 30, 2021, and December 31, 2020, the Company did not have any pending legal actions.

(d) Indemnification Agreements

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners, and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and executive officers that require the Company, among other things, to indemnify the parties against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any costs as a result of payments required by such indemnifications. The Company is not aware of any indemnification arrangements that could have a material adverse effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its financial statements as of June 30, 2021, and December 31, 2020.

(e) Risks and Uncertainties

In December 2019, a novel strain of a virus named SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), or coronavirus, which causes COVID-19, surfaced in Wuhan, China, subsequently spreading worldwide, including to eastern Massachusetts where the Company’s primary office and laboratory space is located. The coronavirus pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public health safety measures. The extent to which the coronavirus impacts our operations directly or through parties on whom we depend will also depend on future developments, which are highly uncertain and cannot be predicted with confidence. The outcome of these events could delay the Company’s plans, increase its operating expenses and have a material adverse effect on its financial results.

(7) Convertible Promissory Notes

From May 2018 through May 2020, the Company issued 14 convertible promissory notes (“Notes”) having an aggregate principal amount of $2,240,000. The Notes bear interest at a rate of 6% per annum and were initially set to mature on February 14, 2021. In 2020, the Notes were extended and unless previously converted, principal and accrued but unpaid interest on the Notes is payable on demand any time after December 31, 2022, (“Maturity Date”). As of June 30, 2021 and 2020, total accrued interest on the Notes was $247,285 and $91,578, respectively. Principal and accrued but unpaid interest on the Notes automatically convert, at a discount, into the same equity securities as are sold by the Company in a Qualified Financing (generally an equity financing with gross proceeds of $5 million or more) or upon a change in control of the Company. Subject to a pre-money valuation limit of $15 million, the conversion discount ranges from 20% to 30%. In the event of a liquidation, dissolution or winding up of the Company, the conversion rights shall terminate.

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TransCode Therapeutics, Inc.

Notes to Financial Statements

(Unaudited)

Convertible promissory notes at June 30, 2021, comprised the following:


		Principal		Accrued Interest at		Accrued Interest at
Note Identifier	Issue Date	Amount		June 30, 2021		December 31, 2020
Note One	May 2, 2018	$	500,000	$	92,548	$	80,137
Note Two	June 26, 2018	$	50,000	$	8,803	$	7,562
Note Three	March 2, 2019	$	100,000	$	13,249	$	10,767
Note Four	March 5, 2019	$	50,000	$	6,625	$	5,466
Note Five	March 8, 2019	$	50,000	$	6,707	$	5,384
Note Six	March 15, 2019	$	50,000	$	6,567	$	5,326
Note Seven	March 20, 2019	$	50,000	$	6,534	$	5,293
Note Eight	November 7, 2019	$	100,000	$	9,205	$	6,723
Note Nine	November 7, 2019	$	100,000	$	8,942	$	6,460
Note Ten	February 17, 2020	$	1,000,000	$	75,806	$	50,984
Note Eleven	April 3, 2020	$	40,000	$	2,780	$	1,790
Note Twelve	May 8, 2020	$	50,000	$	3,192	$	1,951
Note Thirteen	May 8, 2020	$	50,000	$	3,192	$	1,951
Note Fourteen	May 15, 2020	$	50,000	$	3,135	$	1,893

The unamortized amounts of debt issuance costs and debt discounts at June 30, 2021, and December 31, 2020, are:


	June 30, 2021		December 31, 2020
Principal amount of convertible promissory notes	$	2,240,000	$	2,240,000
Less unamortized debt issuance costs		(6,335)		(8,002)
Less unamortized debt discounts		(107,852)		(145,323)
Convertible promissory notes, net	$	2,125,813	$	2,086,675

Upon closing of a Qualified Financing, the Notes settle by providing the holder with a variable number of shares in the Qualified Financing with an aggregate fair value determined by reference to the debt principal and accrued but unpaid interest. In this scenario, the value that the holder receives at settlement does not vary with the value of the Company’s common stock, so the settlement provision was not a typical conversion option. Rather, the share settlement feature was considered a contingent redemption provision (i.e., a contingent embedded put). The Company evaluated the embedded put features in accordance with ASC 815-15-25. The embedded puts are not clearly and closely related to the debt host instrument and therefore have been separately measured at fair value, with subsequent changes in fair value recognized in the statement of operations.

Management used a scenario-based analysis to estimate the fair value of the embedded put features upon issuance of the Notes. The original values of the embedded put features were recorded as a debt discount to the Notes which discount is amortized over the life of the Notes as non-cash interest expense during the reporting periods.

At June 30, 2021, and December 31, 2020, the fair value of the derivative liability was $2,618,000 and $1,751,000, respectively. The Company recorded a decrease in fair value of the derivative liability of $3,069,000 for the three months ended June 30, 2021, and an increase of $3,936,000 in the three months ended March 31, 2021, resulting in a net decrease of $867,000 for the six months ended June 30, 2021.

During the three and six months ended June 30, 2021, the Company amortized debt issuance costs of $1,000 and $10,538, respectively, to interest expense.

The IPO constituted a Qualified Financing resulting in the conversion of the Notes into 1,068,135 shares of common stock upon the closing of the IPO. Also, at that time, the balance of the derivative liability was extinguished. See Note 14 Subsequent Events.

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TransCode Therapeutics, Inc.

Notes to Financial Statements

(Unaudited)

(8) Stockholders’ Equity

(a) Overview

The Company’s Certificate of Incorporation, originally filed on January 11, 2016, was amended on April 15, 2020, to increase the number of shares of Common Stock authorized and to authorize the issuance of Preferred Stock. The Company’s Certificate of Incorporation was further amended and restated on April 27, 2021. The total number of shares which the Company is authorized to issue is 300,000,000, each with a par value of $0.0001 per share. Of these shares, 290,000,000 shall be Common Stock and 10,000,000 shall be Preferred Stock. Between January 2016 and October 2018, the Company issued 4,636,216 shares of restricted common stock subject to forfeiture until vested. As of June 30, 2021, and December 31, 2020, 4,598,357 shares and 4,489,738 shares, respectively, of restricted common stock had vested. Of the shares sold in 2018, an aggregate of 292,250 shares were issued to two purchasers in exchange for subscriptions receivable bearing interest at 4% per annum and secured by the underlying restricted shares. One subscription receivable in the principal amount of $3,290 and accumulated interest were repaid in April 2021. At June 30, 2021, and December 31, 2020, the principal balances of subscriptions receivable was $8,400 and $11,690, respectively, and accrued interest was $954 and $1,073, respectively. The Preferred Stock is undesignated; no shares of Preferred Stock have been issued.

At June 30, 2021, and December 31, 2020, the Company had reserved 1,080,858 shares and 1,050,694 shares, respectively, of common stock for the conversion of outstanding Convertible Promissory Notes (see Note 7) and the exercise of outstanding warrants to purchase shares of common stock (see Note 9).

The following table lists information about unvested restricted common stock.


Unvested restricted common stock at December 31, 2020		146,483
Shares issued		—
Shares vested		(108,624)
Unvested restricted common stock at June 30, 2021		37,859

(b) Common Stock

Dividends

Subject to the rights of holders of any Preferred Stock, holders of the Common Stock are entitled to receive dividends as may be declared from time to time by the Board. No cash dividends were declared or paid during the three and six months ended June 30, 2021 and 2020, or at any other time through the date of these financial statements.

ii.Liquidation

Subject to the rights of holders of any Preferred Stock as to liquidation, upon the liquidation, dissolution or winding up of the Company, the remaining assets of the Company will be distributed to holders of Common Stock.

iii.

Voting

Holders of Common Stock are entitled to one vote for each share of Common Stock held but shall not be entitled to vote on any amendment to the Certificate of Incorporation that relates solely to the terms of any series of Preferred Stock. There is no cumulative voting.

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TransCode Therapeutics, Inc.

Notes to Financial Statements

(Unaudited)

(9) Warrants

In connection with the May 2, 2018, issuance of the Convertible Promissory Note designated as “Note One” (see Note 7), the Company agreed to pay a cash fee to the finder involved in the sale and to issue to the finder warrants to purchase shares of the Company’s common stock. The number of shares of common stock subject to the warrants is equal to five percent of the number of shares of Common Stock into which Note One converts. The exercise price is the conversion price applicable on conversion of the Note. The number of shares of Common Stock to be issued to the holder of the Note on conversion of the Note is equal to the principal amount of the Note, plus accrued but unpaid interest to the date of conversion, divided by the applicable conversion price. The applicable conversion price is equal to the price paid for the Company’s equity securities in a Qualified Financing (as defined) less a discount. The discount ranges from 20% to 30% depending on the length of time after the investment to complete the Qualified Financing.

Regardless of the applicable conversion price resulting from application of the foregoing process, the applicable conversion price cannot exceed that price per share that equates to a $15 million pre-money valuation. Exercise of the purchase rights represented by the warrant may be made, in whole or in part, at any time or from time to time until May 2, 2028, except that the warrants terminate upon an initial public offering of the Company’s Common Stock or a change in control of the Company. The warrants were exercised the day prior to the IPO resulting in the issuance of 12,763 shares of common stock. See Subsequent Events.

Pursuant to ASC 718, the obligation to issue the Warrants will be a liability until issuance as they are an award that embodies an unconditional obligation to issue an undeterminable number of shares for a fixed monetary amount known at inception. Upon issuance, the liability would be reclassified to equity.

The obligation to issue Warrants has been recorded at fair value on inception date and remeasured at each reporting period until issuance. The compensation cost recognized for a liability-classified award equals the amount for which the award is settled. Therefore, the Company measured the obligation to issue warrants at fair value on May 2, 2018, and remeasures fair value at each reporting period until issuance of the Warrants.

A summary regarding the fair value of the warrant liability is as follows:


	Warrant Liability
Fair value at December 31, 2020	$	29,376
Change in fair value		4,769
Fair value at June 30, 2021	$	34,145

The fair value of the Company’s warrant liability was calculated using the Black-Scholes model and the following assumptions:


	As of			As of
	June 30,			December 31,
	2021			2020
Fair value per share of Company’s common stock	$	3.94		$	3.91
Dividend yield		0.0	%		0.0	%
Expected volatility		88.0	%		84.0	%
Risk free interest rate		0.6	%		0.3	%
Expected life (years)		3.44			4.67
Fair value of warrants	$	34,145		$	29,376

(10) Share-Based Compensation

Since inception, the Company has sold shares of restricted stock to co-founders, directors, managers, and advisors generally at prices believed to be fair market value at the time of the sale. Shares of restricted stock were reserved at the time of issue. To the extent that the sale price was less than the estimated fair market value at the grant date, a charge is recorded for the periods in which such shares vest. The vesting period for restricted stock is generally two to three years.

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TransCode Therapeutics, Inc.

Notes to Financial Statements

(Unaudited)

In April 2020, the Board approved the TransCode Therapeutics, Inc. 2020 Stock Option and Incentive Plan (the “Plan”) providing for the issuance of options or other awards to purchase up to 3,032,787 shares of the Company’s Common Stock. The Plan provides for grants of equity in the form of stock awards, stock options and other instruments to employees, members of the Board, officers and consultants of and advisors to the Company. The Plan is administered by the Board or, at the discretion of the Board, by a committee of the Board. The amount and terms of grants are determined by the Board. The terms of options granted under the Plan generally are for ten (10) years after date of grant and are exercisable in cash or as otherwise determined by the Board. The vesting period for equity-based awards is determined at the discretion of the Board and is generally two to four years. If grants of stock options under the Plan terminate, expire, or are surrendered or cancelled, the shares subject to such grants will again be available under the Plan. In 2020, the Board awarded options to purchase 1,756,279 shares of Common Stock under the Plan, all of which were outstanding at June 30, 2021. In January 2021, the Board awarded options to purchase 36,393 shares of Common Stock under the Plan, all of which were outstanding at June 30, 2021.

The exercise price for incentive stock options is determined at the discretion of the Board but for grants to any person possessing less than 10% of the total combined voting power of all classes of stock may not have an exercise price less than 100% of the fair market value of the Common Stock on the grant date (110% for grants to any person possessing more than 10% of the total combined voting power of all classes of stock). The option term for incentive stock option awards may not be greater than ten years from the date of the grant (five years for grants to any person possessing more than 10% of the total combined voting power of all classes of stock).

At June 30, 2021, options to purchase 1,240,115 shares were available for future grants and there were 763,968 options that were vested and exercisable. Information about options to purchase Common Stock of the Company under the Plan is as follows:


		Weighted
		average		Weighted
		exercise		average
	Number of	price		contractual
	shares	per share		term (years)
Outstanding at December 31, 2019	—		—	—
Granted	1,756,279	$	0.25	5.9
Exercised	—		—	—
Forfeited	—		—	—
Outstanding at December 31, 2020	1,756,279	$	0.25	5.9
Granted	36,393	$	3.91	9.8
Exercised	—		—	—
Forfeited	—		—	—
Outstanding at June 30, 2021	1,792,672	$	0.32	6.2

The intrinsic value of the outstanding options as of June 30, 2021, was $6,430,882.

Option valuation

The assumptions that the Company used to determine the grant-date fair value of options granted in the three and six months ended June 30, 2021, were as follows:


	Three and six months ended
	June 30, 2021
Risk-free interest rate		0.59	%
Expected term (in years)		6.0
Expected volatility		97.20	%
Expected dividend yield		—	%
Fair value per share of underlying stock	$	3.91

The weighted average grant date fair value of the options granted in 2021 was $3.01 per share.

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TransCode Therapeutics, Inc.

Notes to Financial Statements

(Unaudited)

The Company recorded share-based compensation expense of $34,514 and $82,945 during the three months and six months ended June 30, 2021, respectively. Share-based compensation in the three months ended June 30, 2021, comprised $33,816 related to stock options and $698 related to restricted stock. Share-based compensation in the six months ended June 30, 2021, comprised $81,548 related to stock options and $1,397 related to restricted stock. The remaining compensation costs to be recognized on the stock options is $312,534 over 2.4 years.

(11) Net Loss Per Share

The Company reported a net profit for the three months ended June 30, 2021, and a net loss for the three months ended June 30, 2020. For the six months ended June 30, 2021 and 2020, the Company reported net losses. Basic and diluted net loss per share attributable to common stockholders are the same for all periods in which the Company reported losses because shares issuable on conversion of all convertible promissory notes, upon exercise of all warrants, and upon exercise of vested stock options have been excluded from the computation of diluted weighted-average shares outstanding because their inclusion would have an antidilutive impact. In the three months ended June 30, 2021, only shares issuable on the exercise of vested stock options have been included in the computation of diluted weighted-average shares outstanding because the effect of doing so was dilutive. Since the contingency allowing for the conversion of the convertible promissory notes and exercise of the warrants has not been met, shares issuable on the conversion of the promissory notes and exercise of warrants have been excluded from the computation of diluted weighted-average shares outstanding.

The following table sets forth the computation of basic and diluted net earnings (loss) per share:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Basic earnings (loss) per share
Numerator
Net income (loss)	$	2,770,904	$	(127,198)	$	(1,714,434)	$	(168,458)
Denominator
Weighted-average common shares outstanding		4,636,216		4,636,216		4,636,216		4,636,216
Net earnings (loss) per share	$	0.60	$	(0.03)	$	(0.37)	$	(0.04)

Diluted earnings (loss) per share
Numerator
Net income (loss)	$	2,770,904	$	(127,198)	$	(1,714,434)	$	(168,458)
Denominator
Weighted-average common shares outstanding		5,400,184		4,636,216		4,636,216