FIFTEEN THERAPEUTICS, INC. Management discussion and analysis of the financial situation and results of operations. (Form 10-Q)

FIFTEEN THERAPEUTICS, INC.  Management discussion and analysis of the financial situation and results of operations.  (Form 10-Q)
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with (i) our unaudited condensed
consolidated financial statements and related notes appearing elsewhere in this
Quarterly Report on Form 10-Q and (ii) our audited financial statements and
related notes and management's discussion and analysis of financial condition
and results of operations included in our Annual Report on Form 10-K for the
year ended December 31, 2021 filed with the Securities and Exchange Commission
(the "SEC"), on March 1, 2022. Unless the context requires otherwise, references
in this Quarterly Report on Form 10-Q to the "Company," "Quince," "we," "us" and
"our" refer to Quince Therapeutics, Inc.and "our legacy assets" refer to
atuzaginstat (COR388), COR588, COR852, and COR803, collectively.

Forward-looking statements


This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
statements other than statements of historical facts contained in this quarterly
report, including statements regarding our future results of operations and
financial position, business strategy, prospective products, product approvals,
research and development costs, timing and likelihood of success, plans and
objectives of management for future operations, adequacy of our cash resources
and working capital, impact of COVID-19 pandemic on our research and development
activities and business operations, and future results of anticipated products,
are forward-looking statements. These statements involve known and unknown
risks, uncertainties and other important 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 the forward-looking
statements.

In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "expect," "plan," "anticipate," "could," "intend,"
"target," "project," "contemplates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of these terms or other similar
expressions. The forward-looking statements in this quarterly report are only
predictions. We have based these forward-looking statements largely on our
current expectations and projections about future events and financial trends
that we believe may affect our business, financial condition and results of
operations. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
anticipated in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in this Quarterly
Report in Part II, Item 1A -"Risk Factors," and in our Annual Report on Form
10-K for the year ended December 31, 2021 and elsewhere in this Quarterly Report
on Form 10-Q and in other filings we make with the SEC from time to time. The
events and circumstances reflected in our forward-looking statements may not be
achieved or occur and actual results could differ materially from those
projected in the forward-looking statements. Moreover, we operate in an evolving
environment. New risk factors and uncertainties may emerge from time to time,
and it is not possible for management to predict all risk factors and
uncertainties. These forward-looking statements speak only as of the date
hereof. Except as required by applicable law, we do not plan to publicly update
or revise any forward-looking statements contained herein, whether as a result
of any new information, future events, changed circumstances or otherwise.

Overview


We are a preclinical stage biopharmaceutical company focused on advancing
innovative precision therapeutics for debilitating and rare diseases. The
company discovered a broad bone-targeting drug platform designed to precisely
deliver small molecules, peptides, or large molecules directly to the site of
bone fracture and disease to promote more rapid healing with fewer off-target
safety concerns compared to non-targeted therapeutics. Our discovery pipeline is
positioned for rapid expansion across multiple skeletal therapeutic indications
to address underserved therapeutic areas with major, unmet medical needs,
including osteogenesis imperfecta, fractures, spinal fusion, and other severe
bone diseases. Additionally, our pipeline includes small molecule therapeutics
available for out-licensing that target the infectious pathogen P. gingivalis'
role in degenerative disease progression, including for indications such as
Alzheimer's disease, periodontal disease, and oral potentially malignant
disorders, among others.

Business Acquisition


On May 19, 2022, we acquired all of the equity voting interests and completed
the acquisition of Novosteo, Inc. ("Novosteo"), a Delaware corporation, pursuant
to that certain Agreement and Plan of Merger and Reorganization dated as of May
9, 2022, by and among the Company, Quince Merger Sub I, Inc., a Delaware
corporation and a wholly owned subsidiary of the Company, Quince Merger Sub II,
LLC, a Delaware limited liability company and a wholly owned subsidiary of
Company, Novosteo, and Fortis Advisors LLC, a Delaware limited liability
company, solely in its capacity as the securityholders' representative. To
effect this transaction a combination of transactions was executed with the
intention of being treated as integrated steps in a single transaction resulting
in Novosteo being a wholly owned subsidiary of the Company.


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Pursuant to the terms of the Merger Agreement, at the closing of the Acquisition
(the "Effective Time"), each share of capital stock of Novosteo that was issued
and outstanding immediately prior to the Effective Time was automatically
cancelled and converted into the right to receive 0.0911 shares of common stock,
par value $0.001 per share. We issued 5,520,000 shares of common stock
representing approximately 15.5% of outstanding stock on the completion of the
Acquisition. We also assumed 507,108 options to purchase shares of our common
stock upon conversion of the outstanding Novosteo options with awards retaining
the same vesting and other terms and conditions as in effect immediately prior
to consummation of the Acquisition.

In conjunction with the Acquisition, we appointed Novosteo executives Dirk Thye,
M.D. as Chief Executive Officer, Dr. Karen Smith, M.D., Ph.D. as Chief Medical
Officer and Brendan Hannah as Chief Business Officer. We also appointed Dr. Thye
and Phillip S. Low, Ph.D. to our Board of Directors as Class II and Class I
directors, respectively.

From our inception, we have been focused on novel therapeutic approaches to
improve the lives of patients diagnosed with Alzheimer's and other degenerative
diseases. Our company was initially founded on the seminal discovery of the
presence of Porphyromonas gingivalis, or P. gingivalis, and its secreted toxic
virulence factor proteases, called gingipains, in the relevant brain areas of
both Alzheimer's and Parkinson's disease patients. The acquisition of Novosteo,
and the addition of new executive management has allowed us to strategically
shift focus and prioritize the internal development of our innovative
bone-targeting drug platform and lead compound NOV004 for development for rare
skeletal diseases, bone fractures, and injury. We plan to advance the gingipain
and 3CLpro inhibitor programs through a proactive out-licensing effort.

Effective August 1, 2022We changed our company name to Quince Therapeutics, Inc. and our ticker symbol to “QNCX”.

Changes in company management and board members


On May 20, 2022, we announced the departure of Caryn McDowell, our Chief Legal
and Administrative Officer and Corporate Secretary, effective as of July 8, 2022
(the "CLO Departure Date"). In connection with the departure of Ms. McDowell, we
entered into a transition agreement (the "CLO Separation Agreement") with Ms.
McDowell on May 19, 2022, providing for (i) a release of claims against us; (ii)
cash severance payments of $339,000, which equals to nine months of Ms.
McDowell's 2022 base salary, to be paid in a lump sum; and (iii) certain health
care continuation benefits. The CLO Separation Agreement also provides for an
accelerated vesting of the restricted stock award issued to Ms. McDowell on
March 3, 2022 and an extension of the post-termination exercise period for all
vested stock options or other equity awards held by Ms. McDowell through the
twelve-month period following the CLO Departure Date, provided that the
specified severance preconditions are met. In addition, in the event we
consummate a change in control within three months after the CLO Departure Date,
subject to satisfaction of specified conditions, Ms. McDowell would also be
entitled to additional cash severance and COBRA coverage, payment of target
annual bonus and accelerated vesting with respect to her equity awards.

On June 8, 2022, Christopher Lowe, the Chief Financial Officer, Chief Operating
Officer and a member of the Board of Directors, resigned as a member of the
Board, effective immediately. Mr. Lowe has also resigned from his roles as the
Chief Financial Officer and Chief Operating Officer, effective as of June 10,
2022 (the "CFO Departure Date"). In connection with the departure of Mr. Lowe,
we entered into a separation agreement (the "CFO Separation Agreement") with Mr.
Lowe on June 10, 2022, providing for (i) a release of claims against us; (ii)
cash severance payments of $354,750, which equals to nine months of Mr. Lowe's
2022 base salary, to be paid in accordance with our normal payroll practices;
and (iii) certain health care continuation benefits. The CFO Separation
Agreement also provides for an accelerated vesting of the restricted stock award
issued to Mr. Lowe on March 3, 2022 and an extension of the post-termination
exercise period for all vested stock options or other equity awards held by Mr.
Lowe through the twelve-month period following the CFO Departure Date, provided
that the specified severance preconditions are met. In addition, in the event we
consummate a change in control within three months after the CFO Departure Date,
subject to satisfaction of specified conditions, Mr. Lowe would also be entitled
to additional cash severance and COBRA coverage, payment of target annual bonus
and accelerated vesting with respect to his equity awards.

On June 9, 2022, we designated Ted Monohon, Chief Accounting Officer and Vice
President of Finance, as the principal financial officer, to fill the vacancy
resulting from Mr. Lowe's resignation. Mr. Monohon will serve as the principal
financial officer in addition to his role as a principal accounting officer.

On June 9, 2022, upon recommendation of the Nominating and Corporate Governance
Committee of the Board, the Board appointed June Bray to serve as a Class III
director, effective immediately, to fill the vacant directorship, until her
successor is elected and qualified, or sooner in the event of her death,
resignation or removal. Ms. Bray joins the class of directors whose term expires
at our 2025 annual stockholders' meeting.

On July 22, 2022, we announced the departure of Leslie Holsinger, Ph.D., the
Executive Vice President of Research and Development, effective as of July 31,
2022 (the "EVP of Research Departure Date"). The Separation Agreement provides
for (i) a

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release of claims against the Company, (ii) cash severance payments of $339,000,
which equals to nine months of Dr. Holsinger's 2022 base salary, to be paid in a
lump sum; and (iii) certain health care continuation benefits. The Separation
Agreement also provides for an extension of the post-termination exercise period
for all vested stock options or other equity awards held by each of Dr.
Holsinger through the twelve-month period following the VP of Research Departure
Date, in each case provided that the specified severance preconditions are met.
In addition, in the event the Company consummates a change in control of control
within three months after the EVP of Research Departure Date, subject to
satisfaction of specified conditions, Dr. Holsinger would also be entitled to
additional cash severance and COBRA coverage, payment of target annual bonus,
and accelerated vesting with respect to her equity awards. The Company and Dr.
Holsinger anticipate entering into a consulting agreement to facilitate the
transition of activities until the end of the year.


On September 28, 2022, Marwan Sabbagh, M.D., a member of the Board of Directors
of Quince Therapeutics, Inc. tendered his resignation from the Board, effective
as of September 30, 2022. In connection with the departure of Dr. Sabbagh from
the Company, the Board granted Dr. Sabbagh accelerated vesting of a portion of
the stock options issued to Dr. Sabbagh on March 14, 2022, corresponding to his
service with the Company, and an extension of the post-termination exercise
period for the vested stock options held by Dr. Sabbagh through the twelve-month
period following the effective date of his resignation. Dr. Sabbagh's
resignation from the Board was not a result of any disagreement with the
Company, its Board or management.

Drug Candidate Portfolio

NOV004


NOV004 is a systemically administered bone anabolic peptide engineered to target
and concentrate at bone fracture sites. By improving fracture site accumulation
and retention, NOV004 stimulates a robust healing response in preclinical
studies. Notable preclinical observations include:

In a fracture induction study in healthy mice, at 3 weeks post femur fracture,
NOV004 treated mice could withstand greater than 1.5 times the force in a
four-point bend test compared to both the vehicle controls and the non-targeted
bone anabolic peptide at the same point in time.

Similar improvements in fracture repair have been seen in mouse bone fracture models with comorbidities such as osteoporosis, diabetes, or osteogenesis imperfecta, a rare genetic bone disease that manifests in skeletal deformities and high fracture rates.

Other improvements in fracture repair were observed by tracking animal's
voluntary movements. As early as 12 days post fracture, mice treated with NOV004
moved significantly faster, as measured by cm/s travelled, than either the mice
treated with vehicle or ibuprofen (8.1 cm/s vs 6.0 cm/s and 5.5cm/s
respectively). In addition, by day 28, both distances traveled (cm) and time
spent (seconds) were also significantly higher in NOV004 treated mice compared
to vehicle or ibuprofen controls.

Fifteen plans to move towards an IND filing for NOV004 in the first half of 2023.


Atuzaginstat (COR388)

Atuzaginstat (COR388) is a novel, orally-administered, small molecule, bacterial
protease inhibitor targeting gingipains produced by the periodontal pathogen
Porphyromonas gingivalis (P gingivalis). This pathogen has been associated with
several diseases in humans including Alzheimer's disease, periodontal disease
and certain head and neck cancers. We are seeking a partner to explore the
therapeutic effect of atuzaginstat (COR388) on the below indications.

Alzheimer disease


On October 26, 2021, we announced top-line results from our global Phase 2/3
clinical trial of atuzaginstat (COR388), called the GAIN (GingipAIN Inhibitor
for Treatment of Alzheimer's Disease) trial, in mild to moderate Alzheimer's
patients. The 643-participant study did not meet statistical significance on its
co-primary cognitive and functional endpoints as measured by ADAS-Cog11 and
ADCS- ADL at end of the treatment period in the overall cohort.

On January 25, 2022, we received a letter from the Food and Drug Administration
("FDA") Division of Neurology 1 placing a full clinical hold on the IND
application for atuzaginstat (COR388). We believe atuzaginstat (COR388) holds
therapeutic potential in non-CNS indications, including oncology and
periodontitis, however, we intend to only continue development of atuzaginstat
through external out-licensing or partnership opportunities. Other divisions of
the FDA may impose a clinical hold on

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atuzaginstat (COR388). This clinical hold may reduce our ability to out license
this product candidate to third parties which could have a materially adverse
impact on our business.

Periodontal Disease

P. gingivalis has been identified as a key pathogen in the development of
periodontal disease. Periodontal disease is a common age-related disease
affecting nearly 50% of the population over 50 years of age, or 65 million
people, in the United States. The disease presents with symptoms including
chronic inflammation, degeneration of gum tissue and tooth loss. Periodontal
disease is associated with increased risk of cardiovascular disease, diabetes
and certain cancers. The disease is often chronic and recurring due to
persistent bacterial infection and antibiotic resistance. Current standard of
care for the treatment of periodontal disease commonly involves scaling and root
planning to remove bacterial plaque and tartar, in addition to local delivery of
antibiotics in some cases. Atuzaginstat (COR388) reduced periodontal disease and
associated bone loss in multiple animal models of periodontal disease. Target
engagement and efficacy data for atuzaginstat (COR388) in aged dogs was
published in January 2020 in the journal Pharmacology Research and Perspectives.

We believe the inhibition of gingipains from P. gingivalis, and the disruption
of biofilms directly in the oral cavity, may provide a therapeutic benefit to
patients. We intend to only continue development of atuzaginstat (COR388)
through external out-licensing or partnership opportunities.

Oncology


We examined atuzaginstat (COR388), to prevent the development of oral/head and
neck squamous cell carcinoma (O/HNSCC). Most cases of O/HNSCC are preceded by
high-risk oral potentially malignant diseases (OPMD), including oral
pre-malignant dysplasia, proliferative verrucous leukoplakia (PVL), and
carcinoma-in-situ.

We held a pre-IND meeting with FDA in August of 2021 and believe atuzaginstat
(COR388) can be advanced in certain oncology indications. We expect to advance
this asset only if we are successful in out-licensing or partnering the asset.

COR588


COR588 is a second-generation brain penetrant lysine gingipain inhibitor which
has completed IND-enabling studies. We began a Phase 1 SAD/MAD trial of COR588
in a cohort of healthy participants in Australia in August 2021. In March 2022,
we announced results from the SAD portion of the Phase 1 trial and in July 2022
we announced results from the MAD portion of the Phase 1 trial. Preliminary
results indicate COR588 was well-tolerated across all cohorts in the dose range
from 25 mg to 200 mg with no serious adverse events. No clinically significant
findings were observed on other safety measures, including vital signs,
laboratory findings, telemetry, or ECGs. We expect to advance this program only
if we are successful in out-licensing or partnering the asset.

COR 803

COR803 for coronavirus is a new patent-pending small molecule 3CL pro inhibitor discovered and developed by us based on our experience in cysteine ​​protease inhibition.

Coronavirus


We selected COR803 as a lead compound for treatment of coronavirus infections,
including COVID-19 disease, caused by SARS-CoV-2 infection. 3CLpro,or Mpro, is a
validated antiviral drug target shown to be essential in viral replication of
SARS-CoV-2. We believe COR803 has potential advantages over other COVID-19
therapeutics and 3CLpro inhibitors in development including high potency as
assessed using human lung cell viral replication assays; and high selectivity
for 3CLpro versus other cellular proteases.

In june 2022We announce the key findings of our latest COR803 mouse study:

A decrease in virus titer in lung tissue after four days of treatment compared to vehicle control;

Comparable efficacy in animals dosed orally twice daily versus dosed once daily; Y

Decreased lung weight in COR803-treated versus vehicle-treated animals, indicating an amelioration of pathology.

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The target of COR803 is highly conserved across coronavirus strains observed to
date and, therefore, has the potential to address both current and future
coronavirus infection. We believe COR803 has potential advantages over other
COVID-19 therapeutics and 3CLpro inhibitors in development, including:

A chemical reaction that leads to the irreversible covalent attachment of the viral enzyme 3CLpro;

High potency: 12 nM antiviral EC90 in human lung cell viral replication assays;

Broad-spectrum activity against multiple coronaviruses;

Selective for 3CLpro over other cellular proteases, including Cathepsin L; Y

Ability to reach meaningful systemic exposure in preclinical models utilizing
oral, intranasal or subcutaneous administration, allowing for potential clinical
use in multiple settings, such as outpatient and inpatient.

We are currently exploring partnership and licensing opportunities to support the future development of COR803.

Platform and Pipe


NOV004 was discovered using our broad drug-targeting platform designed to
precisely deliver small molecules, peptides, or large molecules directly to the
site of bone fracture and disease to promote more rapid healing with fewer
off-target safety concerns compared to non-targeted therapeutics. Our discovery
pipeline is positioned for rapid expansion across multiple skeletal therapeutic
indications to address underserved therapeutic areas with major, unmet medical
needs, including osteogenesis imperfecta, fractures, spinal fusion, and other
severe bone diseases. We plan to expand our discovery efforts utilizing our
drug-targeting platform and will advance candidates with internal funding and
through external partnerships.

Business update on COVID-19


The COVID-19 pandemic has presented a substantial public health and economic
challenge around the world and is affecting the world economy and financial
markets. The full extent to which the COVID-19 pandemic will directly or
indirectly impact our business, results of operations and financial condition
will depend on future developments that are highly uncertain and cannot be
accurately predicted, including new information that may emerge concerning
COVID-19, the actions taken to contain it or treat its impact and the economic
impact on local, regional, national and international markets.

At this time the impact of the COVID-19 pandemic has not resulted in changes to
our previously stated analysis timelines and milestones. We are continuing to
assess the potential impact of the COVID-19 pandemic on our business and
operations, including our expenses, preclinical operations and clinical trials.
All employees have returned to their pre-pandemic work locations and activities.
We continue to assess the risks which take into account applicable public health
authority and local government guidelines and are designed to ensure community
and employee safety. The Company has not experienced significant hinderances to
its operations or material negative financial impacts as compared to prior
periods.

The effects of the COVID-19 pandemic continue to rapidly evolve and we may have
to resume a more restrictive remote work model or close again certain of our
offices, whether as a result of spikes or surges in COVID-19 infection or
hospitalization rates or public authority mandates. Also, as long as the
pandemic continues, our employees may be exposed to health risks. We are not
currently experiencing any significant supply chain disruptions due to COVID-19.
We have diversified our vendor relationships geographically for both starting
materials and manufacturing. However, in the future, the ongoing COVID-19
pandemic, may result in the inability of some of our suppliers to deliver drug
supplies on a timely basis. We will continue to monitor the COVID-19 situation
and its impact on the ability to continue the development of, and seek
regulatory approvals for, our product candidates.

For additional information on the various risks posed by the COVID-19 pandemic, please read 1A. Risk Factors included in this Quarterly Report on Form 10-Q.

Financial Summary


Since commencing material operations in 2014, we have devoted substantially all
of our efforts and financial resources to building our research and development
capabilities, establishing our corporate infrastructure and most recently,
executing our Phase 1a, Phase 1b and Phase 2/3 clinical trials of atuzaginstat
(COR388) and our Phase 1 SAD/MAD clinical trial of COR588.

To date, we have not generated any revenue and we have never been profitable. We
have incurred net losses since the commencement of our operations. As of
September 30, 2022, we had an accumulated deficit of $282.7 million. We incurred
a net loss of $7.9 million and $46.1 million in the three and nine months ended
September 30, 2022. We do not expect to generate product

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revenue unless and until we obtain marketing approval for and commercialize a
drug candidate, and we cannot assure you that we will ever generate significant
revenue or profits.

To date, we have financed our operations primarily through the issuance and sale
of convertible promissory notes and redeemable convertible preferred stock and
common stock. From inception through September 30, 2022, we received net
proceeds of approximately $303.7 million from the issuance of redeemable
convertible preferred stock, convertible promissory notes and common stock.

On December 23, 2021, we entered into an Open Market Sales Agreement, with
Jefferies LLC, or sales agreement, whereby we may sell up to $150.0 million in
aggregate proceeds of common stock from time to time, through Jefferies as our
sales agent. During the three and nine months ended September 30, 2022, we sold
zero and 51,769 shares of common stock, respectively, under the sales agreement
and received net proceeds of $0 and $0.6 million, respectively.

As of September 30, 2022 and December 31, 2021, we had cash, cash equivalents
and short-term investments of $94.3 million and $106.8 million, respectively.
The balances exclude long-term investments of $5.0 million and $19.9 million as
of those same periods. Our cash equivalents, short-term and long-term
investments are held in money market funds, certificate of deposits, repurchase
agreements, investments in corporate debt securities, municipal debt obligations
and government agency obligations.

We believe that our existing cash, cash equivalents and investments will be sufficient to fund our planned operations in the second half of 2025. We have based this estimate on assumptions that may turn out to be incorrect, and we may use our available capital resources sooner than we expect.


We expect to incur substantial expenditures in the foreseeable future as we
develop our pipeline and advance our drug candidates through preclinical and
clinical development, the regulatory approval process and, if approved,
commercial launch activities. Specifically, in the near term we expect to incur
substantial expenses relating to our ongoing and planned clinical trials, the
development and validation of our manufacturing processes, and other development
activities.

We will need substantial additional funding to support our continuing operations
and pursue our development strategy. Until such time as we can generate
significant revenue from sales of an approved drug, if ever, we expect to
finance our operations through the sale of equity, debt financings or other
capital sources. Adequate funding may not be available to us on acceptable
terms, or at all. If we fail to raise capital or enter into such agreements as,
and when, needed, we may have to significantly delay, scale back or discontinue
the development and commercialization of our drug candidates or delay our
efforts to expand our product pipeline.

Critical accounting policies and significant judgments and estimates


Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles
("GAAP"). The preparation of these consolidated financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported expenses incurred during
the reporting periods. Our estimates are based on our historical experience and
on various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.

We believe that the assumptions and estimates associated with accrued research
and development expenditures, stock-based compensation, and assumptions
regarding intangible asset valuation resulting from the Acquisition have the
most significant impact on our condensed consolidated financial statements.
Therefore, we consider these to be our critical accounting policies and
estimates.

The following critical accounting policies are described under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies, Significant Judgements and Use
Estimates" in our 2021 Annual Report on Form 10-K and the notes to the unaudited
condensed consolidated financial statements included in Item 1, "Unaudited
Financial Statements," of this Quarterly Report on Form 10-Q. We believe that of
our critical accounting policies, the

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The following accounting policies are the most critical to fully understanding and evaluating our financial condition and results of operations:

Research and development expenses;

Stock-Based Compensation Expenses;

•
Business Combinations; and

•
Income Taxes

Below is a description of our Business Combination accounting policy for the
nine months ended September 30, 2022, which is our only change in our critical
accounting policies from those as disclosed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Critical Accounting
Policies, Significant Judgments and Use of Estimates" in our Annual Report.

business combination


The Company accounts for business combinations using the acquisition method
pursuant to the Financial Accounting Standards Board (the "FASB") Accounting
Standards Codification ("ASC") Topic 805. This method requires, among other
things, that results of operations of acquired companies are included in the
Company's financial results beginning on the respective acquisition dates, and
that identifiable assets acquired and liabilities assumed are recognized at fair
value as of the acquisition date. Intangible assets acquired in a business
combination are recorded at fair value using a discounted cash flow model. The
discounted cash flow model requires assumptions about the timing and amount of
future net cash flows, the cost of capital and terminal values from the
perspective of a market participant. Any excess of the fair value of
consideration transferred (the "Purchase Price") over the fair values of the net
assets acquired is recognized as goodwill. The fair value of identifiable assets
acquired and liabilities assumed in certain cases may be subject to revision
based on the final determination of fair value during a period of time not to
exceed 12 months from the acquisition date. Legal costs, due diligence costs,
business valuation costs and all other acquisition-related costs are expensed
when incurred.

Components of Results of Operations

operating expenses

Research and development expenses


Our research and development expenses consist of expenses incurred in connection
with the research and development of our research programs. These expenses
include payroll and personnel expenses, including stock-based compensation, for
our research and product development employees, laboratory supplies, product
licenses, consulting costs, contract research, regulatory, quality assurance,
preclinical and clinical expenses, allocated rent, facilities costs and
depreciation. We expense both internal and external research and development
costs as they are incurred. Non-refundable advance payments and deposits for
services that will be used or rendered for future research and development
activities are recorded as prepaid expenses and recognized as an expense as the
related services are performed.

To date, our research and development expenditures have supported the advancement of atuzaginstat (COR388) and COR588 and, to a lesser extent, our other drug candidates in preclinical development. We expect that, at least for the foreseeable future, a large majority of our research and development spending will support the clinical and regulatory development of NOV004.


We expect our research and development expenses to increase during the next few
years from current levels as we seek to complete existing and initiate
additional clinical trials, pursue regulatory approval of NOV004 and advance
other drug candidates into clinical development. Over the next few years, we
expect our preclinical, clinical and contract manufacturing expenses to increase
relative to our current levels. Predicting the timing or the final cost to
complete our clinical program or validation of our manufacturing and supply
processes is difficult and delays may occur because of many factors.

The length, costs, and timing of our clinical trial and the development of our product candidates will depend on a variety of factors including, but not limited to, the following:


•
per patient trial costs;

•
biomarker analysis costs;

the cost and timing of drug manufacturing for the trials;

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the number of patients participating in the trials;

the number of sites included in the trials;

the countries in which the trials are carried out;

the time required to enroll eligible patients;

patient detection, randomization, dropout, or discontinuation rates;

possible additional safety monitoring or other studies requested by regulatory agencies; Y

the efficacy and safety profile of the candidate products.


In addition, the probability of success for each product candidate will depend
on numerous factors, including safety, efficacy, competition, manufacturing
capability and commercial viability. We will determine which programs to pursue
and how much to fund each program in response to the scientific and clinical
success of each product candidate, as well as an assessment of each product
candidate's commercial potential.

Because our product candidates are still in development and the outcome of these efforts is uncertain, we cannot estimate the actual quantities required to successfully complete the development and commercialization of our product candidate or if or when we can achieve profitability.

General and administrative


General and administrative expenses consist principally of personnel-related
costs, including payroll and stock-based compensation, for personnel in
executive, finance, human resources, business and corporate development, and
other administrative functions, professional fees for legal, consulting,
insurance and accounting services, allocated rent and other facilities costs,
depreciation, and other general operating expenses not otherwise classified as
research and development expenses.

We anticipate that our general and administrative expenses will increase as the size of our business operations grows to support additional research and development activities.

Interest income

Interest and other income, net, consists primarily of interest earned on our short- and long-term investment portfolio.

Results of Operations

Comparison of the three months ended September 30, 2022 at the end of three months September 30, 2021

Below are our operating results for the three months ended
September 30, 2022 and 2021 (in thousands):

                                                Three Months Ended
                                                  September 30,                    Change
                                              2022             2021            $             %
Operating expenses:
   Research and development                 $   2,451       $   14,038     $ (11,587 )       (82.5 ) %
   General and administrative                   4,344            7,639        (3,295 )       (43.1 ) %
   Goodwill impairment charge                     825                -           825         100.0   %
Loss from operations                           (7,620 )        (21,677 )      14,057         (64.8 ) %
Interest income                                   315              128           187         146.1   %
Other expense, net                               (616 )           (157 )        (459 )       292.4   %
Net loss before income tax benefit          $  (7,921 )     $  (21,706 )      13,785         (63.5 ) %
Income tax benefit                                  -                -             -             -   %
Net loss                                    $  (7,921 )     $  (21,706 )   $  13,785         (63.5 ) %




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Research and development expenses (in thousands):


                                            Three Months Ended September 30,               Change
                                                2022                  2021             $             %
Direct research and development
expenses:
  Atuzaginstat (COR388)                    $           107         $     4,502     $  (4,395 )       (97.6 ) %
  COR588                                               841               1,662          (821 )       (49.4 ) %
  NOV004                                               763                   -           763         100.0   %
  Other direct research costs                           82                 557          (475 )       (85.3 ) %
Indirect research and development
expenses:
  Personnel related (including                                              

(5,931) (91.3) %

  stock-based compensation)                            566               

6,497

  Facilities and other research and                                                     (728 )       (88.8 ) %
  development expenses                                  92                 

820

Total research and development expenses $2,451 $14,038 $(11,587) (82.5) %

Research and development expenses were $2.5 million for the three months ended
September 30, 2022compared to $14.0 million for the three months ended
September 30, 2021a decrease of $11.6 million.


The costs for atuzaginstat (COR388) decreased $4.4 million from the prior year
due the GAIN trial concluding in the fourth quarter of 2021. As a result, we
experienced a decrease of $1.8 million in clinical trial costs, a $1.0 million
decrease in drug manufacturing costs, and a decrease in non-clinical studies and
analysis related to the GAIN trial of $0.7 million, and a $0.9 million decrease
in consulting expenses related to atuzaginstat (COR388).

Our Phase 1 SAD/MAD testing in healthy volunteers was completed in the second
quarter of 2022. As a result, the costs for COR588 decreased $0.8 million from
the prior year due to $0.5 million decrease in clinical trial costs and a $0.5
million decrease in drug manufacturing costs, offset by a $0.2 million increase
for non-clinical work supporting COR588.

In the quarter ended September 30, 2022, the costs for NOV004 increased by $0.8
million after the acquisition of Novosteo, Inc. on May 19, 2022, primarily in
drug manufacturing costs. We anticipate expense increases related to NOV004 to
increase from current levels as we advance this asset to a Phase 1 clinical
trial in 2023.

Other direct research costs decreased $0.5 million primarily due to the winddown
of pipeline development of our two arginine gingipain inhibitors, COR788 and
COR822, our 3CLpro inhibitor, COR803, COR852 and other preclinical research.

We do not expect to incur any significant future costs related to atuzaginstat (COR388) or COR588, as we will only advance our legacy neuroscience and antiviral assets through proactive licensing efforts.

We also incurred decreases in $5.9 million in personnel-related expenses due to a $4.4 million decrease in allocated stock-based compensation costs and a decrease in $1.5 million due to decrease in staff year after year.


Facilities and other research and development expenses decreased $0.7 million
for the three months ended September 30, 2022, as compared to the three months
ended September 30, 2021 primarily due to a $0.3 million decrease in regulatory,
quality assurance, and other consulting expenses, a $0.2 million decrease in
allocated rent and facilities expenses and $0.2 million decrease in other
non-clinical research.

General and adminsitrative expenses


General and administrative expenses decreased by $3.3 million to $4.3 million
for the three months ended September 30, 2022 from $7.6 million for the three
months ended September 30, 2021. The decrease in general and administrative
expenses is primarily due to a decrease of $2.9 million in personnel related
expenses due to a $2.5 million decrease in allocated stock-based compensation
expense and $0.4 million in wages and related employee benefits, as well as a
$0.4 million decrease in corporate marketing related expenses as a result of our
previously announced cost reduction program initiated in the first quarter of
2022.

Goodwill impairment charge

We conducted an impairment analysis of our goodwill that resulted from the
purchase of Novosteo, Inc. in May 2022. That assessment included a qualitative
assessment of deteriorating macro-economic conditions, including inflationary
pressures, rising interest rates, and the continuing decline in our market
capitalization from the date of acquisition. This qualitative assessment

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indicated that our goodwill was potentially impaired. To determine the extent,
if any, by which our goodwill was impaired, we conducted additional quantitative
analyses which resulted in our fair value being significantly below our current
carrying value. As a result of the analyses, we recorded a non-cash goodwill
impairment charge of $0.8 million for the three months ended September 30, 2022.

Interest income


Interest income increased by $0.2 million for the three months ended September
30, 2022, as compared to the three months ended September 30, 2021. The increase
was a result of higher yields on our portfolio as interest rates have increased
during 2022 from historic lows. We anticipate higher investment yields as we
believe short-term interest rates will continue to rise in the near term.

other expense

Other expenses increased by $0.5 million for the three months ended September 30, 2022mainly due to unrealized losses resulting from changes in exchange rates.

Comparison of the nine months ended September 30, 2022 after nine months
September 30, 2021

Below are our results of operations for the nine months ended
September 30, 2022 and 2021 (in thousands):


                                            Nine Months Ended September
                                                        30,                         Change
                                               2022             2021            $             %
Operating expenses:
   Research and development                 $   22,410       $   45,582     $ (23,172 )       (50.8 ) %
   General and administrative                   22,461           21,192         1,269           6.0   %
   Goodwill impairment charge                      825                -           825         100.0   %
Loss from operations                           (45,696 )        (66,774 )      21,078         (31.6 ) %
Interest income                                    532              515            17           3.3   %
Other expense, net                              (1,246 )           (287 )        (959 )       334.1   %
Net loss before income tax benefit          $  (46,410 )     $  (66,546 )   $  20,136         (30.3 ) %
Income tax benefit                                 284                -           284         100.0   %
Net loss                                    $  (46,126 )     $  (66,546 )   $  20,420         (30.7 ) %


Research and development expenses (in thousands):


                                           Nine Months Ended September 30,             Change
                                             2022               2021               $             %
Direct research and development
expenses:
  Atuzaginstat (COR388)                    $   1,368       $        19,607     $ (18,239 )       (93.0 ) %
  COR588                                       4,851                 4,295           556          12.9   %
  NOV004                                       1,082                     -         1,082         100.0   %
  Other direct research costs                  1,489                 2,404          (915 )       (38.1 ) %
Indirect research and development
expenses:
  Personnel related (including                12,903                17,481        (4,578 )       (26.2 ) %
  stock-based compensation)
  Facilities and other research and              717                 1,795        (1,078 )       (60.1 ) %
  development expenses
Total research and development expenses    $  22,410       $        45,582  

$(23,172) (50.8) %

Research and development expenses were $22.4 million for the nine months ended
September 30, 2022compared to $45.6 million for the nine months ended
September 30, 2021a decrease of $23.2 million.

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The costs for atuzaginstat (COR388) development decreased $18.2 million from the
same period in the prior year due to a decrease of $11.0 million in clinical
trial costs, a $3.1 million decrease in drug manufacturing costs, a decrease in
non-clinical studies and analysis related to the GAIN trial samples of $2.3
million, a $1.6 million decrease in consulting expenses as the GAIN Phase 2/3
clinical trial concluded in late 2021, and a decrease in travel expenses related
to COR388 of $0.2 million. Costs incurred in 2022 related primarily to
statistical and biomarker analysis.

Our Phase 1 SAD/MAD trial was completed in the second quarter of 2022 for our
compound COR588 in healthy participants in Australia. The costs for COR588
increased $0.6 million from the same period in the prior year due to a $0.1
million increase in clinical trial costs and $0.9 million for non-clinical
studies and analysis to support COR588, offset by a decrease of $0.4 million in
drug manufacturing costs.

Additionally, other direct research costs decreased $0.9 million primarily due
to the winddown of pipeline development of our two arginine gingipain
inhibitors, COR788 and COR822, our 3CLpro inhibitor, COR803, COR852 and other
preclinical research.

For the nine months ended September 30, 2022, the costs for NOV004 increased by
$1.1 million after the Novosteo, Inc. acquisition on May 19, 2022, primarily as
a result of the increase in drug manufacturing costs as we prepared our compound
for Phase 1 clinical trials. We anticipate expense increases related to NOV004
to increase from current levels as we advance this asset to a Phase 1 clinical
trial in 2023.

For the nine months ended September 30, 2022, we also experienced a net decrease
of $4.6 million in personnel related expenses due to a $4.5 million decrease in
allocated stock-based compensation costs, a decrease of $2.5 million in wages
and related personnel expenses as a result of our decreased headcount, offset by
an increase in severance related expenses of $2.4 million as a result of our
previously announced cost reduction program initiated in the first quarter of
2022.

Facilities and other research and development expenses decreased $1.1 million
from the nine months ended September 30, 2021 due to a $0.5 million decrease in
regulatory and quality assurance consulting costs, $0.4 million decrease in the
purchase of non-clinical supplies, and a $0.2 million decrease in facilities and
rent expense.

General and adminsitrative expenses


General and administrative expenses increased approximately $1.3 million to
$22.5 million for the nine months ended September 30, 2022 from $21.2 million
for the nine months ended September 30, 2021. The increase in general and
administrative expenses was primarily due to increased severances expenses of
$1.6 million offset by a $1.9 million decrease in allocated stock-based
compensation expense related to our previously announced cost reduction program
initiated in the first quarter of 2022. We also incurred a $2.7 million increase
in legal, audit and other professional expenses related to the acquisition of
Novosteo offset by a decrease of $0.4 million in marketing and investor
relations expense and a $0.7 million decrease in consulting, corporate insurance
expenses and other administrative expense due to our cost reductions efforts
announced in the first quarter of 2022.

Goodwill impairment charge


We conducted an impairment analysis of our goodwill that resulted from the
purchase of Novosteo, Inc. in May 2022. That assessment included a qualitative
assessment of deteriorating macro-economic conditions, including inflationary
pressures, rising interest rates, and the continuing decline in our market
capitalization. This assessment indicated that our goodwill was potentially
impaired. To determine the extent, if any, by which our goodwill was impaired,
we conducted additional quantitative analysis which resulted in our fair value
being significantly below carrying value. As a result of the analyses, we
recorded a non-cash goodwill impairment charge of $0.8 million for the nine
months ended September 30, 2022.

Interest income


Interest income was $0.5 million for the nine months ended September 30, 2022
compared to $0.5 million for the nine months ended September 30, 2021. Increased
yields on our investment portfolio were offset by decreased average balances
resulting in no change for the periods presented.

other expense


Other expense increased by $1.0 million for the nine months ended September 30,
2022, primarily due to unrealized losses resulting from changes in foreign
exchange rates of $0.8 million, as well as a $0.2 million increase related to
the San Diego lease impairment loss and loss on disposal of fixed assets.

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Income tax

We record a $0.3 million income tax benefit for the nine months ended
September 30, 2022 as a result of the acquisition of Novosteo, Inc. in May 2022.

Liquidity, Capital Resources and Operations Plan


We have incurred cumulative net losses and negative cash flows from operations
since our inception and anticipate we will continue to incur net losses for the
foreseeable future. As of September 30, 2022, we had an accumulated deficit of
$282.7 million. and we had cash, cash equivalents and investments of $99.3
million.

Based on our existing business plan, we believe that our existing cash, cash
equivalents and investments will be sufficient to fund our anticipated level of
operations into the second half of 2025.

capital resources


Our primary use of cash is to fund operating expenses, which consist primarily
of research and development expenditures related to NOV004, atuzaginstat
(COR388), COR588, and other research efforts, and to a lesser extent, general
and administrative expenditures. Cash used to fund operating expenses is
impacted by the timing of when we pay these expenses, as reflected in the change
in our outstanding accounts payable and accrued expenses.

Our product candidate is in preclinical development and the outcome of these
efforts is uncertain. Accordingly, we cannot estimate the actual amounts
necessary to successfully complete the development and commercialization of our
product candidates or whether, or when, we may achieve profitability. We intend
to out-license atuzaginstat (COR388), COR588, COR852 and COR803 to third parties
as we prioritize the internal development of our innovative bone-targeting drug
platform and lead compound NOV004 for development.

In the near term, our primary uses of cash will be to fund our operations,
including research and development, preclinical studies, drug manufacturing,
other pre-IND activities, and personnel related expenses. Our uses of cash
beyond the next 12 months will depend on many factors, including the general
economic environment in which we operate and our ability to progress on our drug
development timelines, which are uncertain but include Phase 1 study for NOV004
and development of other pipeline compounds.

We will continue to require additional capital to develop our drug candidates
and fund operations for the foreseeable future. We may seek to raise capital
through private or public equity or debt financings, collaborative or other
arrangements with other companies, or through other sources of financing.
Adequate additional funding may not be available to us on acceptable terms or at
all. Our failure to raise capital as and when needed could have a negative
impact on our financial condition and our ability to pursue our business
strategies. We anticipate that we will need to raise substantial additional
capital, the requirements of which will depend on many factors, including:

the progress, costs, trial design, results and timing of our Phase 1 clinical trial SAD/MAD NOV004

the outcome, costs, and timing of seeking and obtaining FDA, EMA, and other regulatory approvals;

the number and characteristics of drug candidates we are looking for;

our ability to manufacture sufficient quantities of our drug candidates;

our need to expand our research and development activities;

the costs associated with securing and establishing marketing and manufacturing capabilities;

the costs of acquiring, licensing or investing in businesses, drug candidates and technologies;

our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we are required to make, or may receive, in connection with licensing, filing, prosecution, defense and enforcement of any patent or other intellectual property rights;

our need and ability to retain management and hire scientific and clinical staff;

the effect of competing drugs and drug candidates and other market developments;

our need to implement additional internal systems and infrastructure, including financial and information systems; Y

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the financial and other terms, timing, and success of any collaborations, licenses, or other agreements we may enter into in the future.


If we raise additional funds by issuing equity securities, our stockholders will
experience dilution. Any future debt financing into which we enter may impose
upon us additional covenants that restrict our operations, including limitations
on our ability to incur liens or additional debt, pay dividends, repurchase our
common stock, make certain investments and engage in certain merger,
consolidation or asset sale transactions. Any debt financing or additional
equity that we raise may contain terms that are not favorable to us or our
stockholders. If we are unable to raise additional funds when needed, we may be
required to delay, reduce, or terminate some or all of our development programs
and clinical trials. We may also be required to sell or license to others rights
to our drug candidates in certain territories or indications that we would
prefer to develop and commercialize ourselves.

Our ability to raise additional capital may be adversely impacted by potential
worsening global economic conditions and the recent disruptions to, and
volatility in, the credit and financial markets in the United States and
worldwide. However, based on our current business plans, we believe that our
existing cash, cash equivalents and investments will be sufficient to fund our
planned operations into the second half of 2025.

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