Werewolf Therapeutics, Inc. 10-Q

Item 1. Financial Statements Werewolf Therapeutics, Inc. Condensed Consolidated Balance Sheets (unaudited) (amounts in thousands, except par value amounts) March 31, 2021 December 31, 2020 Assets Current assets: Cash and cash equivalents $ 84,602 $ 92,570 Prepaid expenses and other current assets 263 344 Total current assets 84,865 92,914 Property and equipment, net 694 651 Restricted cash 298 207 Operating lease right of use asset 2,305 2,471 Deferred financing costs 1,274 155 Total assets $ 89,436 $ 96,398 Liabilities, Redeemable Convertible Preferred Stock, and Stockholders’ Deficit: Current liabilities: Accounts payable $ 1,800 $ 1,021 Accrued expenses 2,890 3,586 Operating lease liability, current 699 677 Other current liabilities 20 — Total current liabilities 5,409 5,284 Operating lease liability, net of current portion 1,683 1,864 Other liabilities — 31 Total liabilities 7,092 7,179 Commitments and contingencies Redeemable convertible preferred stock: Series A redeemable convertible preferred stock, par value $ 0.0001 per share, 80,247 shares authorized, issued and outstanding at March 31, 2021 and December 31, 2020; liquidation preference of $ 118,765 and $ 69,012 at March 31, 2021 and December 31, 2020, respectively 118,765 69,012 Series B redeemable convertible preferred stock, par value $ 0.0001 per share, 78,222 shares authorized, issued and outstanding at March 31, 2021 and December 31, 2020; liquidation preference of $ 117,333 and $ 72,070 at March 31, 2021 and December 31, 2020, respectively 117,333 72,070 Stockholders’ deficit: Common stock, $ 0.0001 par value, 196,000 shares and 193,500 shares authorized as of March 31, 2021 and December 31, 2020, respectively; 1,760 and 1,746 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively 2 2 Additional paid-in capital — — Accumulated deficit ( 153,756 ) ( 51,865 ) Total stockholders’ deficit ( 153,754 ) ( 51,863 ) Total liabilities, redeemable convertible preferred stock, and stockholders’ deficit $ 89,436 $ 96,398 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents 1z Werewolf Therapeutics, Inc. Condensed Consolidated Statements of Operations (unaudited) (amounts in thousands, except per share amounts) Three Months Ended March 31, 2021 2020 Operating expenses: Research and development $ 4,817 $ 2,763 General and administrative 2,635 1,131 Total operating expenses 7,452 3,894 Operating loss ( 7,452 ) ( 3,894 ) Other income: Interest income, net 33 67 Other expense, net ( 16 ) — Total other income 17 67 Net loss ( 7,435 ) ( 3,827 ) Accretion of redeemable convertible preferred stock to redemption value ( 95,016 ) — Net loss attributable to common stockholders $ ( 102,451 ) $ ( 3,827 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 83.36 ) $ ( 4.58 ) Weighted-average common shares outstanding, basic and diluted 1,229 836 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents Werewolf Therapeutics, Inc. Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit (unaudited) (amounts in thousands) Series A Redeemable Convertible Preferred Stock Series B Redeemable Convertible Preferred Stock Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Deficit Shares Amount Shares Amount Shares Amount Balance at December 31, 2019 48,675 $ 34,703 — $ — 1,737 $ 2 $ 102 $ ( 24,408 ) $ ( 24,304 ) Stock-based compensation expense — — — — — — 57 — 57 Net loss — — — — — — — ( 3,827 ) ( 3,827 ) Balance at March 31, 2020 48,675 $ 34,703 — $ — 1,737 $ 2 $ 159 $ ( 28,235 ) $ ( 28,074 ) Series A Redeemable Convertible Preferred Stock Series B Redeemable Convertible Preferred Stock Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Deficit Shares Amount Shares Amount Shares Amount Balance at December 31, 2020 80,247 $ 69,012 78,222 $ 72,070 1,746 $ 2 $ — $ ( 51,865 ) $ ( 51,863 ) Stock-based compensation expense — — — — — — 539 — 539 Exercise of common stock options — — — — 14 — 21 — 21 Accretion of redeemable convertible preferred stock to redemption value — 49,753 — 45,263 — — ( 560 ) ( 94,456 ) ( 95,016 ) Net loss — — — — — — — ( 7,435 ) ( 7,435 ) Balance at March 31, 2021 80,247 $ 118,765 78,222 $ 117,333 1,760 $ 2 $ — $ ( 153,756 ) $ ( 153,754 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents Werewolf Therapeutics, Inc. Condensed Consolidated Statements of Cash Flows (unaudited) (amounts in thousands) Three Months Ended March 31, 2021 2020 Operating activities: Net loss $ ( 7,435 ) $ ( 3,827 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 539 57 Depreciation 39 23 Non-cash lease expense 166 152 Changes in operating assets and liabilities: Prepaid expenses and other assets 81 23 Accounts payable 724 302 Accrued expenses ( 1,331 ) ( 47 ) Right of use assets and operating lease liability ( 159 ) ( 71 ) Other liabilities 50 ( 11 ) Net cash used in operating activities ( 7,326 ) ( 3,399 ) Investing activities: Purchases of property and equipment ( 13 ) ( 449 ) Net cash used in investing activities ( 13 ) ( 449 ) Financing activities: Deferred financing costs ( 559 ) — Stock option exercise 21 — Net cash used in financing activities ( 538 ) — Net decrease in cash and cash equivalents ( 7,877 ) ( 3,848 ) Cash, cash equivalents and restricted cash—beginning of period 92,777 18,104 Cash, cash equivalents and restricted cash—end of period $ 84,900 $ 14,256 Non-cash investing and financing activities: Non-cash accretion of Series A and Series B redeemable convertible preferred stock $ 95,016 $ — Issuance costs in accounts payable and accrued expenses $ 560 $ — Purchases of property and equipment in accounts payable and accrued expenses $ 130 $ 66 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Table of Contents Werewolf Therapeutics, Inc. Notes to Condensed Consolidated Financial Statements (unaudited) 1. Description of Business, Organization, and Liquidity Werewolf Therapeutics, Inc. (“Werewolf” or the “Company”) was incorporated in the state of Delaware in October 2017. The Company is an innovative biopharmaceutical company pioneering the development of therapeutics engineered to stimulate the body’s immune system for the treatment of cancer. The Company’s headquarters are located in Cambridge, Massachusetts. Since inception, the Company has devoted substantially all of its time and efforts to performing research and development activities, raising capital and recruiting management and technical staff to support these operations. The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry including, but not limited to, technical risks associated with the successful research, development and manufacturing of product candidates, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Current and future programs will require significant research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales. On May 4, 2021, the Company closed its initial public offering (“IPO”) of 7,500,000 shares of the Company’s common stock at a public offering price of $ 16.00 per share. The gross proceeds from the IPO were $ 120.0 million and the net proceeds were approximately $ 108.9 million, after deducting underwriting discounts and commissions and other offering expenses payable by the Company. Upon completion of the Company’s IPO, all of the Company’s then outstanding preferred stock as of March 31, 2021 was automatically converted into an aggregate of 18,279,712 shares of common stock. The Company had cash and cash equivalents of $ 84.6 million at March 31, 2021. The Company expects that its cash and cash equivalents, including the net proceeds from its IPO, will enable it to fund its operating expenses and capital expenditure requirements for at least twelve months from June 10, 2021, the filing date of this Quarterly Report on Form 10-Q. However, additional funding will be necessary beyond this point to fund future preclinical and clinical activities. The Company expects to finance its future cash needs through a combination of equity or debt financings, collaboration agreements, strategic alliances and licensing arrangements. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying condensed consolidated financial statements as of March 31, 2021, and for the three months ended March 31, 2021 and 2020, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and generally accepted accounting principles in the United States of America (“GAAP”) as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”) for condensed consolidated financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these condensed consolidated financial statements reflect all normal recurring adjustments which are necessary for a fair presentation of the Company’s financial position and results of its operations, as of and for the periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s final prospectus for its IPO dated April 29, 2021 and filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Prospectus”). The information presented in the condensed consolidated financial statements and related notes as of March 31, 2021, and for the three months ended March 31, 2021 and 2020, is unaudited. The December 31, 2020 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including notes, required by GAAP for complete financial statements. Interim results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021, or any future period. The accompanying condensed consolidated financial statements include the accounts of Werewolf Therapeutics, Inc. and its wholly-owned subsidiary, Werewolf Therapeutics Mass Securities, Inc. All intercompany transactions and balances have been eliminated in consolidation. Summary of Significant Accounting Policies The significant accounting policies and estimates used in the preparation of the condensed consolidated financial statements are described in the Company’s audited financial statements for the year ended December 31, 2020, and the notes thereto, which are included in the Prospectus. There have been no material changes in the Company’s significant accounting policies during the three months ended March 31, 2021. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates which include, but are not limited to, the fair values of common stock and redeemable convertible preferred stock, the fair value of the warrant liabilities, and the fair value of the preferred stock tranche rights. Actual results could differ from those estimates. 8 Table of Contents Recent Accounting Pronouncements In October 2020, the FASB issued ASU 2020-10, Codification Improvements , which updates various codification topics by clarifying or improving disclosure requirements to align with the SEC’s regulations. The Company adopted ASU 2020-10 as of the reporting period beginning January 1, 2021 and the adoption did not have material impact on the Company’s condensed consolidated balance sheets, condensed consolidated statements of operations or related disclosures. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments . This guidance amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The Company has adopted the new guidance effective January 1, 2021 and the adoption did not have any material impact on the Company’s condensed consolidated balance sheets, condensed consolidated statements of operations or related disclosures. 3. Financial Instruments and Fair Value Measurements Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is determined based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. As a basis for considering such assumptions, GAAP establishes a three-tier value hierarchy, which prioritizes the inputs used to develop the assumptions and for measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company measures the fair value of money market funds based on quoted prices in active markets for identical securities. The carrying amounts reflected in the condensed consolidated balance sheets for cash, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values, due to their short-term nature. Assets measured at fair value on a recurring basis as of March 31, 2021 were as follows (in thousands): Quoted Price in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Money market funds $ 84,602 $ — $ — $ 84,602 Total assets $ 84,602 $ — $ — $ 84,602 Assets measured at fair value on a recurring basis as of December 31, 2020 were as follows (in thousands): Quoted Price in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Money market funds $ 92,570 $ — $ — $ 92,570 Total assets $ 92,570 $ — $ — $ 92,570 There were no changes in valuation techniques during the three months ended March 31, 2021. There were no liabilities measured at fair value on a recurring basis as of March 31, 2021 or December 31, 2020. Preferred Stock Tranche Liability — During 2019, the Company issued 48,675,140 shares of Series A redeemable convertible preferred stock (“Series A Preferred Stock”) which contained the preferred stock tranche liability. The fair value of the preferred stock tranche liability was $ 7.8 million upon issuance and was remeasured to $ 7.3 million as of December 31, 2019. The preferred stock tranche liability was settled in June 2020 upon the closing of the second tranche of the Series A Preferred Stock. There was no change in the fair value of the preferred stock tranche liability for the three months ended March 31, 2020. 4. Restricted Cash The Company maintained non-current restricted cash of $ 0.3 million and $ 0.2 million at March 31, 2021 and December 31, 2020, respectively. This amount is comprised solely of letters of credit required pursuant to the Company’s leased office spaces. 9 Table of Contents 5. Accrued Expenses Accrued expenses as of March 31, 2021 and December 31, 2020 were comprised as follows (in thousands): March 31, 2021 December 31, 2020 Manufacturing $ 1,166 $ 1,741 Employee compensation and benefits 381 990 Professional fees 832 654 Contract research 123 107 Other 388 94 Total accrued expenses $ 2,890 $ 3,586 6. Redeemable Convertible Preferred Stock The Company’s Series A and Series B redeemable convertible preferred stock, together referred to as “Preferred Stock,” has been classified as temporary equity on the accompanying condensed consolidated balance sheets in accordance with authoritative guidance for the classification and measurement of redeemable securities as the preferred stock was redeemable upon the occurrence of a deemed liquidation event. Upon completion of the Company’s IPO, all of the Company’s then outstanding preferred stock as of March 31, 2021 was automatically converted into an aggregate of 18.3 million shares of common stock. Series A Preferred Stock As of March 31, 2021, 80,246,565 shares of Series A Preferred Stock were issued and outstanding. These shares were issued at various closing dates between 2019 and 2020 for a purchase price of $ 0.70 per share. The shares were issued in exchange for cash proceeds of $ 44.0 million, net of issuance costs of $ 0.2 million and the exchange of approximately $ 12.0 million in outstanding convertible notes, including accrued interest. Tranche Rights Issued with Series A Preferred Stock Included in the terms of the Series A Preferred Stock purchase agreement (the “Series A Stock Purchase Agreement”) were certain tranche rights (the “Tranche Rights”). The Tranche Rights obligated the Series A Preferred Stock investors to purchase, and the Company to sell, an additional 31,571,425 shares of Series A Preferred Stock for a purchase price of $ 0.70 per share (the “Second Closing”) on November 1, 2020 or based on the election of each investor prior to the Second Closing. On May 12, 2020, the Series A Stock Purchase Agreement was amended such that the Second Closing would occur on June 1, 2020 or on an earlier date at the election of each investor. The Company concluded that the Tranche Rights met the definition of a freestanding financial instrument, as the Tranche Rights were legally detachable and separately exercisable from the Series A Preferred Stock. Therefore, the Company allocated the net proceeds between the Tranche Rights and the Series A Preferred Stock. The trigger for the Second Closing was based on the passage of time or the election of the holders of Series A Preferred Stock. Based on the contractual terms, and the fact that the issuance was based on an event that was not within the control of the Company (i.e., written consent or passage of time), the Tranche Rights imposed an obligation on the Company to issue shares. Since the Series A Preferred Stock was contingently redeemable, the Tranche Rights were classified as a liability under ASC 480, Distinguishing Liabilities from Equity , and were initially recorded at fair value. The Tranche Rights were measured at fair value at each reporting period. Since the Tranche Rights were subject to fair value accounting, the Company allocated the proceeds to the Tranche Rights based on the fair value at the date of issuance with the remaining proceeds being allocated to the Series A Preferred Stock. The estimated fair value of the Tranche Rights was determined using a probability-weighted present value model that considered the probability of closing a tranche, the estimated future value of Series A redeemable convertible preferred stock at each closing and the investment required at each closing. Future values were converted to present value using a discount rate appropriate for probability-adjusted cash flows. The Tranche Rights were initially recorded as a liability of $ 7.8 million. The Company remeasured the liability on each subsequent balance sheet date and prior to settlement and issuance of shares in connection with the Second Closing, which occurred on June 1, 2020. Series B Preferred Stock As of March 31, 2021, 78,222,173 shares of Series B redeemable convertible preferred stock (“Series B Preferred Stock”) were authorized, issued and outstanding. These shares were issued for a purchase price of $ 0.92 per share. The issuance resulted in cash proceeds of $ 71.8 million, net of issuance costs of $ 0.3 million. Rights, preferences, privileges, and restrictions: The holders of Preferred Stock had the rights, preferences, privileges, and restrictions as set forth below: Dividends: The holders of Preferred Stock were entitled to receive non-cumulative dividends when, as and if declared by the Company’s board of directors at a rate of $ 0.056 per share and $ 0.0737 per share, respectively. The Company could only declare dividends on the common stock if the holders of Preferred Stock simultaneously received dividends at the same rate and same time as the common stock, with the holders of Preferred Stock participating on an as-if converted basis. No dividends were declared or paid as of March 31, 2021. 10 Table of Contents Voting Rights: The holders of Preferred Stock were entitled to voting rights equal to the number of shares of common stock into which the shares of Preferred Stock were convertible. As long as at least 15,000,000 shares of Preferred Stock remained outstanding, the holders of Series A Preferred Stock, exclusively and as a separate class, were entitled to elect four members of the Company’s board of directors, and the holders of Series B Preferred Stock, exclusively and as a separate class, were entitled to elect two members of the Company’s board of directors. If the holders of the Preferred Stock failed to elect a sufficient number of directors to fulfill directorships for which they were entitled to elect directors, then any directorship would have remained vacant until the holders of Preferred Stock elected a person. The holders of common stock, and any other class or series of voting stock (including Preferred Stock) exclusively and voting together as a single class, were entitled to elect the balance of the total number of directors of the Company. Liquidation Rights: In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of Preferred Stock had liquidation preferences, before any distribution or payment would have been made to holders of common stock, in an amount per share equal to the greater of (i) the original issue price of $ 0.70 per share for Series A Preferred Stock and the original issue price of $ 0.92 per share for Series B Preferred Stock, respectively, or (ii) an amount per share that would have been payable had, in the case of the Series A Preferred Stock, all shares of Series A Preferred Stock and, in the case of the Series B Preferred Stock, all shares of Series B Preferred Stock been converted to common stock. If the assets and funds to be distributed among the holders of Preferred Stock were insufficient to permit the payment to such holders, then the entire assets and funds of the Company legally available for distribution would have been distributed ratably among the holders of Preferred Stock in proportion to the preferential amount each such holder was otherwise entitled to receive. Upon completion of the payment of the full liquidation preference of Preferred Stock, the remaining assets of the Company, if any, would have been distributed among the holders of common stock, pro rata based on the number of shares held by each common stockholder. Conversion: Each share of Preferred Stock was convertible into shares of common stock, at the option of the holder, at any time after date of issuance. As of March 31, 2021, each share of Preferred Stock was automatically convertible into the number of shares of common stock determined in accordance with the conversion rate upon the earlier of (i) the closing of a public offering, in which the gross cash proceeds are at least $ 75.0 million and the initial offering price to the public is at least $ 24.01 per share (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations, reorganizations, reclassifications or the like) or (ii) the occurrence of an event, specified by vote or written consent of the holders of 67 % of the Series B Preferred Stock. Redemption: As of March 31, 2021, the Preferred Stock was not redeemable. Upon certain change in control events that are outside of the Company’s control, including liquidation, sale or transfer of control of the Company, the Preferred Stock was contingently redeemable. In addition, the Preferred Stock was redeemable at any time on or after the fifth anniversary of the original issue date. The Preferred Stock was redeemable at a price equal to the greater of (i) the original issue price of $ 0.70 per share for Series A Preferred stock and the original issue price of $ 0.92 per share for Series B Preferred Stock, respectively, or (ii) the fair market value of the Series A Preferred Stock and Series B Preferred Stock, as applicable, as of the redemption request date. As the Preferred Stock approached becoming redeemable due to the passage of time, the Company recorded changes in the redemption value and accreted the Preferred Stock immediately to redemption value as it occurred. Protective Provisions: As long as at least 20,000,000 shares of Preferred Stock were outstanding, as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations, reorganizations, reclassifications or the like, the Company could not, either directly or by amendment, merger, consolidation, reclassification or otherwise, do any of the following without the approval of the holders of a majority of the shares of outstanding Preferred Stock, including at least 67 % of the then-outstanding shares of Series B Preferred Stock: (i) effect the consummation of a liquidation event or any other merger or consolidation, (ii) amend, alter or repeal any provision of the Company’s certificate of incorporation of bylaws in a manner that adversely affects the powers, preferences or rights of the Preferred Stock, (iii) create, or authorize the creation of, or obligate the Company to issue any equity security unless such security is junior to the Preferred Stock, (iv) subject to certain exceptions, purchase or redeem, or pay or declare or make any distribution on, any shares of the capital stock, (v) create, or authorize the creation of, or issue, or authorize the issuance of certain debt securities, (vi) change the authorized number of directors of the Company, (vii) increase the number of authorized shares of Preferred Stock, (viii) alter or change the powers, preferences or rights of the Preferred Stock, (ix) create, or hold capital stock in, any subsidiary that is not wholly owned or (x) enter into any transactions between the Company and any Company affiliate. 7. Term Loan In May 2020, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Pacific Western Bank (“PWB”). Under the terms of the Loan Agreement, PWB made available a term loan up to $ 6.0 million (“Term Loan A”). Based on the satisfaction of certain conditions defined in the Loan Agreement, PWB is also obligated to make available an additional term loan in the amount of up to $ 8.0 million (“Term Loan B”, or collectively with Term Loan A, the “Term Loans”). The Company satisfied the conditions to draw Term Loan B in June 2020. Although Term Loan A was made available to the Company at the closing date, the Company elected to forgo making a draw, thereby incurring a delayed draw fee of $ 25,000 with PWB. As of March 31, 2021, the Company had no t drawn down any Term Loans and had no outstanding borrowings under the Loan Agreement. The Term Loans will bear interest on the outstanding daily balance at a floating annual rate equal to greater of: (i) 1.75 % above the prime rate then in effect or (ii) 5.00 %. If the prime rate changes throughout the term, the interest rate will be adjusted effective on the date of the prime 11 Table of Contents rate change. All interest chargeable under the Loan Agreement is computed on a 360-day year for the actual number of days elapsed, with interest payable monthly. The Company is obligated to pay PWB a fee of 5.00 % of the amount drawn under the Term Loans upon the occurrence of the Company achieving certain conditions defined in the Loan Agreement (the “Success Fee”). The Success Fee will survive ten years from the date of payment of the Term Loan in full, such that, if the Loan Agreement is terminated prior to the payment of the Success Fee the Company will remain obligated to pay the Success Fee upon the occurrence of a Success Fee Event. The Company determined that the Success Fee constitutes a freestanding financial instrument and should be accounted for as a liability in connection with ASC 480— Distinguishing Liabilities from Equity. The Company determined that the fair value of the Success Fee was immaterial at both issuance and as of March 31, 2021. Borrowings under the Loan Agreement are secured by the Company’s personal property (exclusive of any intellectual property) and are subject to acceleration in the event of default. In the event of a late payment or default, the Company is obligated to pay a fee equal to 5.0 % of such unpaid amounts. In connection with the Loan Agreement, the Company is required to comply with certain covenants, which among other things, restrict the Company from (i) effectuating a merger or consolidation with or into any other business organization, (ii) paying dividends or making certain other distributions and (iii) making investments in any entities or instruments other than certain investments specified in the Loan Agreement. In addition, the Loan Agreement contains standard affirmative covenants, including with respect to the issuance of audited consolidated financial statements, insurance, and maintenance of good standing and government compliance in the Company’s state of formation. The Company is also required to maintain unrestricted cash balances of at least 2.5 times its monthly cash burn, and has covenanted not to make any capital expenditures in excess of $ 0.4 million in the aggregate in any fiscal year without the prior written consent of PWB. In December 2020, the Loan Agreement was amended to allow the Company to make investments in its subsidiary, Werewolf Therapeutics Mass Securities, Inc., subject to certain conditions described in the Loan Agreement. In February 2021, the Loan Agreement was amended such that the Company may not make any capital expenditures in excess of $ 2.0 million in the aggregate in 2021 and $ 0.5 million in the aggregate in any fiscal year thereafter without the prior written consent of PWB. PWB has the right to accelerate all obligations of the Company in the event of a material adverse effect on (i) the operations, business or financial condition of the Company (ii) the Company’s ability to repay any portion of the Term Loans or perform any of its other obligations under the Loan Agreement and (iii) the Company’s interest in, or the value, perfection or priority of PWB’s security interest in the collateral. As of March 31, 2021, the Company had $ 14.0 million available to draw on the Term Loans and had no outstanding principal. 8. Common Stock Common stockholders are entitled to dividends if and when declared by the Company’s board of directors subject to the rights of the preferred stockholders. As of March 31, 2021, no dividends on common stock had been declared by the Company. The Company had reserved shares of common stock for issuance as follows (in thousands): As of March 31, As of December 31, 2021 2020 Redeemable convertible preferred stock outstanding 18,280 18,280 Options issued and outstanding 2,401 2,059 Warrants issued and outstanding 59 59 Total 20,740 20,398 9. Stock-based Compensation In 2017, the Company adopted the 2017 Stock Incentive Plan (the “Plan”), as amended and restated, under which it could grant incentive stock options (“ISOs”), non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights and other stock-based awards to eligible employees, officers, directors and consultants. The terms of stock options and restricted stock awards, including vesting requirements, are determined by the board of directors, subject to the provisions of the Plan. As of March 31, 2021, the maximum number of shares of common stock authorized to be issued under the Plan was 3,728,307 shares, of which 28,893 shares were available for future issuance under the Plan. Stock-Based Compensation Expense Total stock-based compensation expense recognized in the condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020 was as follows (in thousands): Three Months Ended March 31, 2021 2020 Research and development $ 140 $ 35 General and administrative 399 22 Total stock-based compensation $ 539 $ 57 12 Table of Contents Restricted Stock Activity Restricted stock issued under the Plan allow the Company, at its discretion, to repurchase unvested shares at the initial purchase price if the employees or non-employees terminate their service relationship with the Company. The shares are recorded in stockholders’ deficit as they vest. The following table summarizes restricted stock award activity during the three months ended March 31, 2021 (in thousands, except per share amounts): Shares/Units Weighted-Average Grant Date Fair Value Per Share Unvested at December 31, 2020 562 $ 1.54 Granted — $ — Vested ( 64 ) $ 1.53 Forfeited — $ — Unvested at March 31, 2021 498 $ 1.54 As of March 31, 2021, there was unrecognized stock-based compensation expense related to unvested restricted stock awards of $ 0.8 million, which the Company expects to recognize over a weighted-average period of approximately 2.0 years. The aggregate fair value of restricted stock awards that vested during the three months ended March 31, 2021 and 2020, based upon the fair values of the stock underlying the restricted stock awards on the day of vesting, was $ 0.3 million and $ 0.1 million, respectively. Stock Option Activity The fair value of stock options granted during the three months ended March 31, 2021 and 2020 was calculated on the date of grant using the following weighted-average assumptions: Three Months Ended March 31, 2021 2020 Risk-free interest rate 0.8 % 0.9 % Expected term (in years) 6.0 6.0 Dividend yield — % — % Expected volatility 79.8 % 86.3 % Using the Black-Scholes option pricing model, the weighted-average grant date fair value of stock options granted during the three months ended March 31, 2021 and 2020 was $ 4.23 and $ 1.12 per share, respectively. The following table summarizes stock option activity during the three months ended March 31, 2021 (in thousands, except per share amounts): Options Outstanding Number of Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life (in years) Outstanding at December 31, 2020 2,059 $ 3.79 9.76 Granted 356 $ 6.22 Exercised ( 13 ) $ 1.56 Cancelled — $ — Outstanding, March 31, 2021 2,402 $ 4.16 9.58 Exercisable at March 31, 2021 54 $ 3.25 9.14 The aggregate intrinsic fair value of stock options exercised during the three months ended March 31, 2021 was $ 0.1 million. There were no stock options exercised during the three months ended March 31, 2020. As of March 31, 2021, there was unrecognized stock-based compensation expense related to unvested stock options of $ 6.2 million, which the Company expects to recognize over a weighted-average period of approximately 3.6 years. 10. Related Parties For the three months ended March 31, 2020, the Company recorded $ 8,000 of general and administrative expense in the accompanying condensed consolidated statements of operations related to the MPM Capital management services. The Company did no t incur any expense with MPM Capital for the three months ended March 31, 2021. 13 Table of Contents In December 2019, the Company entered into a consulting agreement with Briggs Morrison, M.D., a member of the Company’s board of directors, for the provision of consulting, advisory and related services. Pursuant to the consulting agreement, in December 2019, the Company issued Dr. Morrison a stock option for 46,570 shares of our common stock at an aggregate grant date fair value of $ 50,000 , and agreed to reimburse certain of Dr. Morrison’s expenses in connection with the performance of services under the agreement. The stock option has an exercise price of $ 1.56 per share and is scheduled to vest with respect to 2.0833 % of the shares underlying the stock option in equal monthly installments over four years following November 2019, subject to continuous service. The Company recognized $ 3,000 of expense related to this award in the research and development line in the condensed consolidated statements of operations for both the three months ended March 31, 2021 and 2020. 11. Net Loss Attributable to Common Stockholders per Share For purposes of the diluted net loss attributable to common stockholders per share calculation, redeemable convertible preferred stock, outstanding stock options, unvested restricted stock awards and warrants to purchase common stock are considered to be potentially dilutive securities, however the following weighted-average amounts were excluded from the calculation of diluted net loss attributable to common stockholders per share because their effect would be anti-dilutive (in thousands): As of March 31, 2021 2020 Redeemable convertible preferred stock (as converted) 18,280 5,615 Outstanding stock options 2,401 193 Unvested restricted common stock 498 886 Warrants to purchase common stock 59 59 Total 21,238 6,753 12. Subsequent Events Reverse Stock Split In connection with preparing for its initial public offering, the Company’s board of directors and stockholders approved an amendment to the Company’s certificate of incorporation, which became effective on April 23, 2021. The amendment, among other things, effected a 1-for-8.6691 reverse stock split of the Company’s common stock and a proportional adjustment to the conversion price for each series of preferred stock and to the exercise prices and number of shares of common stock underlying the outstanding stock options, and modified the requirements for the automatic conversion of all outstanding shares of preferred stock. All share and per share amounts in the condensed consolidated financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to the reverse stock split. Amendments to Articles of Incorporation In connection with the completion of the IPO, the board of directors and stockholders approved the amended and restated certificate of incorporation to, among other things, provide for 200,000,000 authorized shares of common stock with a par value of $ 0.0001 per share and 5,000,000 authorized shares of preferred stock with a par value of $ 0.0001 per share. Stock Plans The Company's board of directors adopted and the Company's stockholders approved the 2021 stock incentive plan ("2021 Plan"), which became effective immediately prior to the effectiveness of the Company's IPO. The 2021 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units, stock appreciation rights and other stock-based awards. The Company's employees, officers, directors and consultants and advisors are eligible to receive awards under the 2021 Plan. The Company's board of directors adopted and the Company's stockholders approved the 2021 employee stock purchase plan, which became effective upon the closing of the Company's IPO. Lease In June 2021, the Company entered into an office lease agreement (the “Lease”) for approximately 25,778 square feet of laboratory and office space in Watertown, Massachusetts, which will serve as the Company’s headquarters. The lease term is targeted to commence in March 2022 and has an approximate eight year term. Total estimated base rent payments over the term of the lease are approximately $ 17.9 million. The Company will also pay its proportional share of operating expenses and tax obligations. The Company provided the landlord with a security deposit in the form of a letter of credit in the amount of $ 1.0 million upon signing. 14 Table of Contents