QUINCE THERAPEUTICS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions, that are based on the beliefs of our management. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the "Risk Factors" section of this Annual Report on Form 10-K
Overview
We are a preclinical stage biopharmaceutical company focused on advancing innovative precision therapeutics for debilitating and rare diseases.
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 predecessor company,
Business Acquisition
On
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
In conjunction with the Acquisition, we appointed Novosteo executives
Effective
Sale of legacy portfolio
On
Upon the consummation of the Transaction, we received shares of common stock of
Purchaser ("Common Stock") equal to seven and a half percent (7.5%) of the
currently issued and outstanding Common Stock. The issuance is governed by a
Stock Issuance Agreement entered into by us and Purchaser on
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Pursuant to the terms of the Purchase Agreement, we are eligible to receive
milestone payments up to
We and the Purchaser have made certain covenants in the Purchase Agreement with
respect to the transfer of the assets, including requisite filings to be made
with regulatory authorities, and the milestone, royalty and sublicense payments
and have agreed to indemnify each other for any breaches of such party's
covenants, assumed liabilities (in the case of Purchaser) and retained
liabilities, subject to certain customary survival periods and mitigation
requirements. In addition, Purchaser granted to us an exclusive option until
We do not expect a material gain or loss on the sale of this portfolio after deal expenses to be recognized in the first quarter of 2023.
Out-licensing of NOV004
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 predecessor company,
On
We 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.
Corporate Restructuring
We approved the cost reduction program (the "Plan") to align operations with the
changes in corporate strategy. Under the Plan, we are reducing headcount by
approximately 47% through a reduction in its workforce. The reduction in force
began in
In connection with the Plan, we estimate that we will incur expenses of
approximately
Financial Overview
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
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1a, Phase 1b and Phase 2/3 clinical trials of atuzaginstat (COR388), our Phase I SAD/MAD clinical trial of COR588 and to a lesser extent readying NOV004 for Phase 1 clinical trials.
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
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
On
As of
Based on our current business plans including an analysis of our contractual
obligations and commitments as of
In response to the reprioritization of our pipeline on
We will need substantial additional funding to support our continuing operations and pursue our development strategy once we successfully in-license and acquire a clinical-stage asset targeting debilitating and rare diseases. 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 any drug candidates or delay our efforts to expand our product pipeline.
Critical Accounting Policies, Significant Judgments and Use of Estimates
For a description of our significant accounting policies, see Note 2 to our consolidated financial statements.
The preparation of our consolidated financial statements in conformity with
Of our policies, the following are considered critical to an understanding of our consolidated financial statements as they require the application of subjective and complex judgment, involving critical accounting estimates and assumptions impacting our consolidated financial statements.
The critical accounting estimates relate to the following:
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•
Research and Development Expenses
•
Stock-based Compensation Expenses
• Income Taxes • Business Combination •Goodwill •
Indentifiable Intangible Assets
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses consist primarily of clinical trial and contract manufacturing expenses related to development of our drug candidates. Also included are personnel costs for our research and product development employees, non-personnel costs such as professional fees payable to third parties for preclinical studies and research services, laboratory supplies and equipment maintenance, product licenses, and other consulting costs.
We estimate preclinical and clinical study and research expenses based on the services performed, pursuant to arrangements with contract research organizations, or CROs that conduct and manage preclinical and clinical studies and research services on our behalf. Research and development contracts vary significantly in length, and may be for a fixed amount, based on milestones or deliverables, a variable amount based on actual costs incurred, capped at a certain limit, or for a combination of these elements. The financial terms of these agreements vary from contract to contract and may result in uneven expenses and payment flows. We estimate these expenses based on regular reviews with internal management personnel and external service providers as to the progress or stage of completion of services and the contracted fees to be paid for such services. Based upon the combined inputs of internal and external resources, if the actual timing of the performance of services or the level of effort varies from the original estimates, we will adjust the accrual accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period. Our accrual is dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations and other third-party vendors. Payments associated with licensing agreements to acquire exclusive licenses to develop, use, manufacture and commercialize products that have not reached technological feasibility and do not have alternate commercial use are expensed as incurred. Payments made to third parties under these arrangements in advance of the performance of the related services by the third parties are recorded as prepaid expenses until the services are rendered.
To date, there have been no material differences from our accrued estimated expenses to the actual clinical trial expenses; and our methodology and assumptions used in developing these estimates have not changed materially during the periods presented. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates, which could materially affect our results of operations. Adjustments to our accruals are recorded as changes in estimates become evident. Furthermore, based on amounts invoiced to us by our service providers, we may also record payments made to those providers as prepaid expenses that will be recognized as expense in future periods as services are rendered. Due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our research and development activities.
Stock-Based Compensation Expense
We measure and record compensation expense using the applicable accounting guidance for share-based payments related to stock options and performance-based awards granted to our directors and employees. The fair value of stock options is determined by using the Black-Scholes option-pricing model. The fair value of performance stock option awards is estimated at the date of grant, using the Monte Carlo Simulation model. The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. In valuing our stock options and market-based stock awards, significant judgment is required in determining the expected volatility of our common stock and the expected life that individuals will hold their stock options prior to exercising. Expected volatility for stock options is based on the historical volatility of our own stock and the stock of companies within our defined peer group. Further, our expected volatility may change in the future, which could substantially change the grant-date fair value of future awards and, ultimately, the expense we record.
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We expense stock-based compensation for stock options and performance awards over the requisite service period. For awards with only a service condition, we expense stock-based compensation using the straight-line method over the requisite service period for the entire award. For awards with a market condition, we expense over the vesting period regardless of the value that the award recipients ultimately receive.
We estimate the fair value of stock-based compensation utilizing the Black-Scholes and Monte Carlo Simulation option-pricing models, which are impacted by the following variables:
Expected Term-We have opted to use the "simplified method" for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years).
Expected Volatility-Due to our limited operating history and a lack of company specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of our own stock and the stock of companies within our defined peer group. The historical volatility data was computed using the daily closing prices for the selected companies' shares during the equivalent period of the calculated expected term of the stock-based awards.
Risk-Free Interest Rate-The risk-free rate assumption is based on the
Expected Dividend-We have not issued any dividends in our history and do not expect to issue dividends over the life of the options and therefore have estimated the dividend yield to be zero.
Income Taxes
We prepare and file income tax returns based on our interpretation of each jurisdiction's tax laws and regulations. In preparing our consolidated financial statements, we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets.
Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, under the applicable financial accounting standards, we are allowed to consider the scheduled reversal of deferred tax liabilities, projected future taxable income and the effects of tax planning strategies. In the event that actual results differ from our estimates, we adjust our estimates in future periods and we may need to increase or decrease our valuation allowance, when management determines it is more likely than not that some or all of the tax benefits will not be realized. This could materially impact our consolidated financial position and results of operations.
We account for uncertain tax positions using a "more likely than not" threshold for recognizing and resolving uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis and consider various factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in process audit activities and changes in facts or circumstances related to a tax position. We adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Our liabilities for uncertain tax positions can be relieved only if the contingency becomes legally extinguished, through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the "more likely than not" threshold or the liability becomes effectively settled through the examination process. We consider matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews, we have no plans to appeal or litigate any aspect of the tax position and we believe that it is highly unlikely that the taxing authority would examine or re-examine the related tax position. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax expense. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.
Business Combination
We make certain judgments to determine whether transactions should be accounted for as acquisitions of assets or as business combinations. If it is determined that substantially all of the fair value of gross assets acquired in a transaction is concentrated in a single asset (or a group of similar assets), the transaction is treated as an acquisition of assets. We evaluate the inputs, processes, and outputs associated with the acquired set of activities. If the assets in a transaction include an input and a substantive process that
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together significantly contribute to the ability to create outputs, the transaction is treated as an acquisition of a business. We account for business combinations using the acquisition method of accounting, which requires that assets acquired and liabilities assumed generally be recorded at their fair values as of the acquisition date.
The Company accounts for business combinations using the acquisition method
pursuant to the
Indentifiable Intangible Assets
We have acquired an intangible asset through our recent business combination
with
•
estimating the timing of and expected costs to complete the in-process projects;
•
projecting regulatory approvals;
•
estimating future cash flows including revenues and operating profits resulting from completed products and in-process projects; and
•
developing appropriate discount rates and probability rates by project.
We believe the fair value that we assign to the intangible asset acquired are based upon reasonable estimates and assumptions given available facts and circumstances as of the acquisition dates. No assurance can be given, however, that the underlying assumptions used to estimate expected cash flows will transpire as estimated. In addition, we are required to estimate the period of time over which to amortize the intangible assets, which requires significant judgment.
Impairment of Intangible Assets
Finite-lived intangible asset consist primarily of purchased developed
technology and is amortized on a straight-line basis over their estimated useful
lives. Indefinite lived intangible assets are not amortized, Intangible assets
acquired in a business combination or an acquisition that are used in research
and development activities (In-process research and development or IPR&D) shall
be considered indefinite lived until the completion or abandonment of the
associated research and development efforts. IPR&D is not amortized but is
tested for impairment annually or when events or circumstances indicate that the
fair value may be below the carrying value of the asset. If the carrying value
of the assets is not expected to be recovered, the assets are written down to
their estimated fair values. As of
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discounted cash flow analysis to determine if the intangible asset had decreased in value. In order to determine the fair value of the intangible asset, the Company utilized an average of a discounted cash flow analysis and comparable public company analysis. The key assumptions associated with determining the estimated fair value include projected future revenue growth rates, projected cost of revenue, operating expenses, future income tax rates, and after tax free cash flow, and the discount rate. The assumptions used in the discount rate calculation were based on a peer company metrics to determine the weighted average cost of capital. This quantitative analysis resulted in the intangible asset fair value being above its carrying value, resulting in no impairment.
Components of Operating Results
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 expenses have supported the advancement of atuzaginstat (COR388) and COR588 and to a lesser extent the clinical and regulatory development of NOV004. We expect our research and development expenses to decrease significantly from current levels until such time as we in-license a new product candidate. Predicting the timing or the costs to in-license a new drug candidate is difficult because of many factors.
In addition, the probability of success of any in-licensed product candidate will depend on numerous factors, including safety, efficacy, competition, manufacturing capability and commercial viability. We will need to 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 have not been in-licensed the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidate or whether, or when, we may achieve profitability.
General and Administrative Expenses
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 remain consistent until we in-license a new drug candidate. We anticipate an increase of our general and administrative expense after the successful in-licensing of a drug candidate as the size of our business and research and development operations grows to support additional research and development activities.
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Interest Income
Interest income consists primarily of interest earned on our short-term and long-term investments portfolio.
Other Expense, net
Other Expense, net consists primarily of the effects of foreign currency exchange rates.
Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the periods indicated (dollars in thousands):
Year Ended December 31, Change
2022 2021 $ %
Operating expenses:
Research and development $ 25,178 $ 60,795 $ (35,617 ) (58.6 ) %
General and administrative 26,012 29,523 (3,511 ) (11.9 ) %
Goodwill impairment charge 825 - 825 100.0 %
Loss from operations (52,015 ) (90,318 ) (38,303 ) (42.4 ) %
Interest income 1,068 620 448 72.3 %
Other expense, net (997 ) (247 ) (750 ) 303.6 %
Net loss before income tax benefit (51,944 ) (89,945 ) (38,001 ) 42.2 %
Income tax benefit 284 - (284 ) 100.0 %
Net loss $ (51,660 ) $ (89,945 ) $ (38,285 ) (42.6 ) %
Research and Development Expenses
The following table summarizes our research and development expenses: (dollars in thousands)
Year Ended December 31, Change
2022 2021 $ %
Direct research and development
expenses:
Atuzaginstat (COR388) $ 1,400 $ 25,639 (24,239 ) (94.5 ) %
COR588 5,467 4,989 478 9.6 %
NOV004 1,834 - 1,834 100.0 %
Other direct research costs 1,510 3,503 (1,993 ) (56.9 ) %
Indirect research and development
expenses:
Personnel related (including 14,147 24,861 (10,714 ) (43.1 )
stock-based compensation) %
Facilities and other research and 820 1,803 (983 ) (54.5 )
development expenses %
Total research and development
%
Research and development expenses were
The costs for atuzaginstat (COR388) development, used in our GAIN Phase 2/3
clinical trial, decreased
Our Phase 1 SAD/MAD trial was completed in the second quarter of 2022 for our
compound COR588 in healthy participants in
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due to a
As we sold our legacy protease inhibitor portfolio including COR388 and COR588
to
For the year ended
Additionally, other direct research costs decreased
For the year ended
Facilities and other research and development expenses decreased
General and Administrative Expenses
General and administrative expenses decreased by
As a result of the previously mentioned cost reduction program, we anticipate our general and administrative expenses will decrease in 2023 compared to 2022 as we adjust our expenses to support our current in-licensing strategy.
As of
Interest Income
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For the year ended
Other Expense
Other expense increased by
Income tax
We recorded an
Liquidity, Capital Resources and Plan of Operations
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
On
Capital Resources
Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures related to NOV004 and 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.
In
In the near term, our primary uses of cash will be to fund our operations, including business development activities, and administrative 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 out-licensing and in-licensing timelines, which are uncertain.
We may 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. If we are able to in-license or acquire at least one clinical stage asset, 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 of and timing of any potential future trials;
•
the outcome, costs and timing of seeking and obtaining FDA and any other regulatory approvals;
•
the number and characteristics of drug candidates that we pursue;
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•
our need to expand our research and development activities in connection with any assets that we may in-license;
•
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 may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;
•
our need and ability to retain management and hire scientific and clinical personnel;
•
the effect of competing drugs and drug candidates and other market developments;
•
our need to implement additional internal systems and infrastructure, including financial and reporting systems; and
•
the economic and other terms, timing of and success of any collaboration, licensing or other arrangements into which we may enter 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 other 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
Summary Statement of Cash Flows
The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below (in thousands):
Year Ended December 31,
2022 2021
Net cash (used in) provided by:
Operating activities $ (44,038 ) $ (62,932 )
Investing activities 18,002 58,952
Financing activities 707 6,808
Effect of exchange rate changes on cash 184 55
Net (decrease) increase in cash and cash equivalents
Operating Activities
Net cash used in operating activities was
Net cash used in operating activities was
Investing Activities
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Cash provided in investing activities was
Cash used in investing activities was
Financing Activities
Cash provided by financing activities was
Cash provided by financing activities was
Contractual Obligations and Commitments
Material contractual obligations arising in the normal course of business
primarily consist of operating and finance leases, drug manufacturing,
preclinical and clinical contract obligations. See Note 6 to the Consolidated
Financial Statements for amounts outstanding for operating and finance leases on
We enter into contracts in the normal course of business with third party
contract organizations for clinical trials, non-clinical studies and testing,
manufacturing, and other services and products for operating purposes. The
amount and timing of the payments under these contracts varies based upon the
timing of the services. We have recorded accrued expense of approximately
Indemnification
As permitted under
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our business.
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