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 endedDecember 31, 2021 filed with theSecurities and Exchange Commission (the "SEC"), onMarch 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 toQuince 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 endedDecember 31, 2021 and elsewhere in this Quarterly Report on Form 10-Q and in other filings we make with theSEC 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
OnMay 19, 2022 , we acquired all of the equity voting interests and completed the acquisition ofNovosteo, Inc. ("Novosteo"), aDelaware corporation, pursuant to that certain Agreement and Plan of Merger and Reorganization dated as ofMay 9, 2022 , by and among the Company,Quince Merger Sub I, Inc. , aDelaware corporation and a wholly owned subsidiary of the Company,Quince Merger Sub II, LLC , aDelaware limited liability company and a wholly owned subsidiary of Company, Novosteo, andFortis Advisors LLC , aDelaware 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. 24 -------------------------------------------------------------------------------- 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 executivesDirk Thye , M.D. as Chief Executive Officer, Dr.Karen Smith , M.D., Ph.D. as Chief Medical Officer andBrendan Hannah as Chief Business Officer. We also appointedDr. Thye andPhillip 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
Changes in company management and board members
OnMay 20, 2022 , we announced the departure ofCaryn McDowell , our Chief Legal and Administrative Officer and Corporate Secretary, effective as ofJuly 8, 2022 (the "CLO Departure Date"). In connection with the departure ofMs. McDowell , we entered into a transition agreement (the "CLO Separation Agreement") withMs. McDowell onMay 19, 2022 , providing for (i) a release of claims against us; (ii) cash severance payments of$339,000 , which equals to nine months ofMs. 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 toMs. McDowell onMarch 3, 2022 and an extension of the post-termination exercise period for all vested stock options or other equity awards held byMs. 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. OnJune 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 ofJune 10, 2022 (the "CFO Departure Date"). In connection with the departure ofMr. Lowe , we entered into a separation agreement (the "CFO Separation Agreement") withMr. Lowe onJune 10, 2022 , providing for (i) a release of claims against us; (ii) cash severance payments of$354,750 , which equals to nine months ofMr. 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 toMr. Lowe onMarch 3, 2022 and an extension of the post-termination exercise period for all vested stock options or other equity awards held byMr. 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. OnJune 9, 2022 , we designatedTed Monohon , Chief Accounting Officer and Vice President of Finance, as the principal financial officer, to fill the vacancy resulting fromMr. Lowe's resignation.Mr. Monohon will serve as the principal financial officer in addition to his role as a principal accounting officer. OnJune 9, 2022 , upon recommendation of theNominating and Corporate Governance Committee of the Board, the Board appointedJune 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. OnJuly 22, 2022 , we announced the departure ofLeslie Holsinger , Ph.D., the Executive Vice President of Research and Development, effective as ofJuly 31, 2022 (the "EVP of Research Departure Date"). The Separation Agreement provides for (i) a 25 -------------------------------------------------------------------------------- release of claims against the Company, (ii) cash severance payments of$339,000 , which equals to nine months ofDr. 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 ofDr. 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 andDr. Holsinger anticipate entering into a consulting agreement to facilitate the transition of activities until the end of the year. OnSeptember 28, 2022 ,Marwan Sabbagh , M.D., a member of the Board of Directors ofQuince Therapeutics, Inc. tendered his resignation from the Board, effective as ofSeptember 30, 2022 . In connection with the departure ofDr. Sabbagh from the Company, the Board grantedDr. Sabbagh accelerated vesting of a portion of the stock options issued toDr. Sabbagh onMarch 14, 2022 , corresponding to his service with the Company, and an extension of the post-termination exercise period for the vested stock options held byDr. 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
OnOctober 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. OnJanuary 25, 2022 , we received a letter from theFood 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 26 -------------------------------------------------------------------------------- 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, inthe 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 inJanuary 2020 in the journalPharmacology 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 inAustralia inAugust 2021 . InMarch 2022 , we announced results from the SAD portion of the Phase 1 trial and inJuly 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
•
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.
27 -------------------------------------------------------------------------------- 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 ofSeptember 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 endedSeptember 30, 2022 . We do not expect to generate product 28 -------------------------------------------------------------------------------- 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 throughSeptember 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. OnDecember 23, 2021 , we entered into an Open Market Sales Agreement, withJefferies 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 endedSeptember 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 ofSeptember 30, 2022 andDecember 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 withU.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 29 --------------------------------------------------------------------------------
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 endedSeptember 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 theFinancial 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;
30 --------------------------------------------------------------------------------
•
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
Below are our operating results for the three months ended
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 ) %
31
--------------------------------------------------------------------------------
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
Research and development expenses were
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 endedSeptember 30, 2022 , the costs for NOV004 increased by$0.8 million after the acquisition ofNovosteo, Inc. onMay 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
Facilities and other research and development expenses decreased$0.7 million for the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 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 endedSeptember 30, 2022 from$7.6 million for the three months endedSeptember 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 ofNovosteo, Inc. inMay 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 32 -------------------------------------------------------------------------------- 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 endedSeptember 30, 2022 .
Interest income
Interest income increased by$0.2 million for the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 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
Comparison of the nine months ended
Below are our results of operations for the nine months ended
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
Research and development expenses were
33 -------------------------------------------------------------------------------- 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 inAustralia . 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 endedSeptember 30, 2022 , the costs for NOV004 increased by$1.1 million after theNovosteo, Inc. acquisition onMay 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2022 from$21.2 million for the nine months endedSeptember 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.
We conducted an impairment analysis of our goodwill that resulted from the purchase ofNovosteo, Inc. inMay 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 endedSeptember 30, 2022 .
Interest income
Interest income was$0.5 million for the nine months endedSeptember 30, 2022 compared to$0.5 million for the nine months endedSeptember 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 endedSeptember 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 theSan Diego lease impairment loss and loss on disposal of fixed assets. 34 --------------------------------------------------------------------------------
Income tax
We record a
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 ofSeptember 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
35 --------------------------------------------------------------------------------
•
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 inthe 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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