Quince Therapeutics, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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 consolidated 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, 2019 filed with the Securities and Exchange Commission, or the SEC, on March 16, 2020. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to the “Company,” “Cortexyme,” “we,” “us” and “our” refer to Cortexyme, Inc. In preparing the Management’s Discussion and Analysis below, we presume the readers have access to and have read the Management’s Discussion and Analysis in our Prospectus, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K. 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, or 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 report in Part II, Item 1A -“Risk Factors,” and in our Annual Report on Form 10-K for the year ended December 31, 2019 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 clinical-stage biopharmaceutical company pioneering a novel disease-modifying therapeutic approach to treat what we believe to be a key underlying cause of Alzheimer’s and other degenerative diseases. Our approach is based on the seminal discovery of the presence of Porphyromonas gingivalis , or P. gingivalis , and its secreted toxic virulence factor proteases, called gingipains, in the brains of greater than 90% of more than 100 Alzheimer’s patients observed across multiple studies to date. Additionally, we have observed that P. gingivalis infection causes Alzheimer’s pathology in animal models, and these effects have been successfully treated with a gingipain inhibitor in preclinical studies. Our proprietary lead drug candidate, atuzaginstat (COR388), is an orally administered, brain-penetrating small molecule gingipain protease inhibitor. Atuzaginstat was well-tolerated with no concerning safety signals in our Phase 1a and Phase 1b clinical trials conducted to date, which enrolled a total of 67 subjects, including nine patients with mild to moderate Alzheimer’s disease. We initiated a global Phase 2/3 clinical trial of atuzaginstat, called the GAIN ( GingipAIN Inhibitor for Treatment of Alzheimer’s Disease) trial, in mild to moderate Alzheimer’s patients in April 2019 in the United States and in September 2019 in Europe. We plan to conduct the interim analysis by the end of 2020 after approximately 100 patients in each of the GAIN trial’s three arms complete 24 weeks of treatment and expect top-line results by the end of 2021. The GAIN Trial also includes an open-label extension (OLE) in the United States that began dosing patients in April 2020. Upon completing the 48-week placebo-controlled period of the GAIN Trial, participants in the GAIN Trial’s placebo and active arms in the U.S. may be eligible to enroll in the OLE study, where they will receive 40 mg or 80 mg of atuzaginstat twice daily for an additional 48 weeks. The OLE is intended to evaluate long-term safety and efficacy measures of participants in the GAIN Trial. 16 Business Update Regarding COVID-19 The current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, patients, communities and business operations, as well as the U.S. 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. To date, our employees, vendors and clinical trial sites have been able to advance our GAIN clinical trial, continue randomizations and screenings and begin our Open Label Extension for those patients completing the GAIN trial. At this time the impact of the COVID-19 pandemic has not resulted in changes to our previously stated analysis timelines for the GAIN trial. 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. Our office-based employees have been working primarily from home since mid-March 2020, while ensuring essential staffing levels in our operations remain in place, including maintaining key personnel in our lab facility. We ar e not currently experiencing any significant supply chain disruptions and have drug supply for the full GAIN Trial on hand. 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. The Company has taken and continues to take proactive measures to maintain the integrity of its ongoing clinical trial. Despite these efforts, the COVID-19 pandemic could impact clinical trial enrollment and its completion. The Company will continue to monitor the COVID-19 situation and its impact on the ability to continue the development of, and seek regulatory approvals for, the Company’s product candidates. For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A. Risk Factors included in this report. 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, 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, substantially all of our research and development expenses have supported the advancement of atuzaginstat and our other drug candidates are in preclinical development. As a result, we do not allocate our costs to individual drug candidates. We expect that at least for the foreseeable future, a substantial majority of our research and development expense will support the clinical and regulatory development of atuzaginstat . We expect our research and development expenses to increase substantially during the next few years as we seek to complete existing and initiate additional clinical trials, pursue regulatory approval of atuzaginstat and advance other drug candidates into preclinical and clinical development. Over the next few years, we expect our preclinical, clinical and contract manufacturing expenses to increase significantly relative to what we have incurred to date. 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. We initiated a global Phase 2/3 clinical trial of atuzaginstat, called the GAIN trial, in mild to moderate Alzheimer’s patients in April 2019 in the United States and in September 2019 in Europe. We plan to conduct the interim analysis by the end of 2020 after approximately 100 patients in each of the GAIN trial’s three arms complete 24 weeks of treatment and expect top-line results by the end of 2021. Patients successfully completing the 48-week placebo-controlled period of the GAIN trial are eligible to participate in the open-label extension (OLE) in the United States. We started dosing patients in the OLE starting in April 2020 where they receive 40 mg or 80 mg of atuzaginstat twice daily for an additional 48 weeks. The OLE is intended to evaluate the long-term safety and efficacy measures of participants in the GAIN trial. 17 The duration, costs and timing of our clinical trial and development of our product c andidates will depend on a variety of factors that include, but are not limited to, the following: • per patient trial costs; • biomarker analysis costs; • the cost and timing of drug manufacturing for the trials; • the number of patients that participate in the trials; • the number of sites included in the trials; • the countries in which the trials are conducted; • the length of time required to enroll eligible patients; • the screening, randomization, drop-out or discontinuation rates of patients; • potential additional safety monitoring or other studies requested by regulatory agencies; and • the efficacy and safety profile of the product candidates. Because our product candidate is in clinical development and 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. The COVID-19 pandemic may have an adverse impact on our operations, supply chains, our current or future clinical trials, and increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking. 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 continue to increase as a result of staff expansion and additional occupancy costs, as well as costs associated with being a public company, including higher legal and accounting fees, investor relations costs, higher insurance premiums and other compliance costs associated with being a public company. Interest Income Interest income consists of interest earned on our cash equivalents and investments recognized during the period. Results of Operations Three Months Ended June 30, 2020 and 2019 The following sets forth our results of operations for the three months ended June 30, 2020 (in thousands): Three Months Ended June 30, Change 2020 2019 $ % Operating expenses: Research and development $ 14,086 $ 7,109 $ 6,977 98.1 % General and administrative 4,185 2,466 1,719 69.7 % Loss from operations (18,271 ) (9,575 ) (8,696 ) 90.8 % Interest income 659 513 146 28.5 % Net loss $ (17,612 ) $ (9,062 ) $ (8,550 ) 94.4 % 18 Research and Development Expenses (in thousands) Three Months Ended June 30, Change 2020 2019 $ % Direct research and development expenses: Atuzaginstat (COR388) $ 9,797 $ 5,637 $ 4,160 73.8 % Other direct research costs 822 327 495 151.4 % Indirect research and development expenses: Personnel related (including stock-based compensation) 3,176 927 2,249 242.6 % Facilities and other research and development expenses 291 218 73 33.5 % Total research and development expenses $ 14,086 $ 7,109 $ 6,977 98.1 % Research and development expenses were $14.1 million for the three months ended June 30, 2020, compared to $7.1 million for the three months ended June 30, 2019. The increase of $7.0 million was driven mostly by increasing patient enrollments in the GAIN trial resulting in increases of $2.7 million in clinical trial expenses for our lead product candidate, atuzaginstat which entered into Phase 2/3 clinical trials in 2019, $1.5 million in drug manufacturing costs to support the clinical trial and $0.5 million in non-clinical related costs. Additionally, we experienced a net increase of $2.2 million in personnel related expenses primarily due to an increase in our employee headcount which was comprised of an increase in compensation and benefit costs of $0.5 million and $1.7 million in allocated stock-based compensation costs. General and Administrative Expenses General and administrative expenses increased $1.7 million to $4.2 million for the three months ended June 30, 2020 from $2.5 million for three months ended June 30, 2019 primarily due to an increase in personnel costs due to an increase in our employee headcount which was comprised of an increase in compensation and benefits costs of $0.4 million and $1.3 million in allocated stock-based compensation expense. Interest Income Interest income was $0.7 million for the three months ended June 30, 2020 compared to $0.5 million for the three months ended June 30, 2019. The increase was a result of increased average cash and investment balances from the proceeds of private placement which closed in February 2020 and our initial public offering which closed in May 2019. We anticipate overall yields from our investment portfolio will remain at historic lows in future quarters due to the impact of the COVID-19 pandemic on the financial markets, specifically the credit securities markets. Six Months Ended June 30, 2020 and 2019 The following sets forth our results of operations for the six months ended June 30, 2020 (in thousands): For the Six Months Ended June 30, Change 2020 2019 $ % Operating expenses: Research and development $ 28,467 $ 11,934 $ 16,533 138.5 % General and administrative 7,662 3,716 3,946 106.2 % Loss from operations (36,129 ) (15,650 ) (20,479 ) 130.9 % Interest income 1,341 907 434 47.9 % Net loss $ (34,788 ) $ (14,743 ) $ (20,045 ) 136.0 % 19 Research and Development Expenses (in thousands) Six months ended June 30, Change 2020 2019 $ % Direct research and development expenses: Atuzaginstat (COR388) $ 20,889 $ 9,876 $ 11,013 111.5 % Other direct research costs 1,558 463 1,095 236.5 % Indirect research and development expenses: Personnel related (including stock-based compensation) 5,313 1,195 4,118 344.6 % Facilities and other research and development expenses 707 400 307 76.8 % Total research and development expenses $ 28,467 $ 11,934 $ 16,533 138.5 % Research and development expenses were $28.5 million for the six months ended June 30, 2020, compared to $11.9 million for the six months ended June 30, 2019. The increase of $16.6 million was driven mostly by increasing patient enrollments in the GAIN trial resulting in $7.9 million in clinical trial expenses for our lead product candidate, atuzaginstat which entered into Phase 2/3 clinical trials in 2019, $3.1 million in drug manufacturing costs to support the clinical trial and $1.1 million in non-clinical related costs. We also experienced a net increase of $4.1 million in personnel related expenses due to an increase in our employee headcount which was comprised of an increase in compensation and benefit costs of $1.6 million and $2.5 million in allocated stock-based compensation costs. Additionally, facility and other non-clinical costs increased $0.3 million due primarily to pipeline research. General and Administrative Expenses General and administrative expenses increased approximately $4.0 million to $7.7 million for the six months ended June 30, 2020 from $3.7 million for the six months ended June 30, 2019. The increase in general and administrative expenses was primarily due to an increase of $3.2 million in personnel costs due to an increase in our employee headcount which was comprised of an increase in compensation and benefits costs of $0.9 million and $2.3 million in allocated stock-based compensation expense and increases in $0.8 million in insurance expense associated with becoming a public company. Interest Income Interest income was $1.3 million for the six months ended June 30, 2020 compared to $0.9 million for the six months ended June 30, 2019. The increase was a result of increased average cash and investment balances from the proceeds of private placement which closed in February 2020 and our initial public offering which closed in May 2019. We anticipate overall yields from our investment portfolio will remain at historic lows in future quarters due to the impact of the COVID-19 pandemic on the financial markets, specifically the credit securities markets. 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 June 30, 2020, we had an accumulated deficit of $104.6 million and had cash, cash equivalents and short-term investments of $144.5 million. Although our investment portfolio contains some debt securities that have experienced negative credit downgrades, based on our current cash requirements, we believe that we will continue to be able to hold all securities to their final maturity and not realize material gains or losses in the available for sale portfolios. Based on our existing business plan, we believe that our existing cash, cash equivalents, and short-term investments will be sufficient to fund our anticipated level of operations for a period of at least one year from the date this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission. Capital Resources Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures related to our Phase 2/3 drug candidate, atuzaginstat, research on our proprietary library of small molecules, additional pipeline candidates 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. 20 Our lead product candidate is in the early stages of clinical 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. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stoc kholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to raise capital when needed, we will need to delay, reduce or terminate planned activities to reduce costs. Doing so will likely harm our ability to execute our business plans. We may also be required to sell or license to others rights to our drug candidate in certain territories or indications that we would prefer to develop and commercialize ourselves. We completed an initial public offering; or the IPO in May 2019 by issuing and selling 5,073,800 shares of common stock at a public offering price of $17.00 per share, including 661,800 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares. The aggregate net proceeds received by us from the offering, net of underwriting discounts and commissions and offering expenses, was approximately $77.8 million. Upon the closing of the IPO, all of the outstanding shares of redeemable convertible preferred stock automatically converted into 18,161,027 shares of common stock. Subsequent to the closing of the IPO, there were no shares of redeemable convertible preferred stock outstanding. In February 2020, we completed a private placement by issuing and selling 2,500,000 shares at $50.00 per share. The aggregate net proceeds received by us from the offering net of offering expenses, was approximately $117.6 million. 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 resulting from the ongoing COVID-19 pandemic. 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 through 2022, including through the completion and the announcement of the top-line results of our Phase 2/3 GAIN trial. 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): Six Months Ended June 30, 2020 2019 Net cash (used in) provided by: Operating activities $ (25,171 ) $ (13,531 ) Investing activities (78,628 ) (44,673 ) Financing activities 118,741 77,896 Net increase in cash and cash equivalents $ 14,942 $ 19,692 Operating Activities Net cash used in operating activities was $25.2 million for the six months ended June 30, 2020. Cash used in operating activities was primarily due to our net loss of $34.8 million for the period, adjusted for $5.9 million of non-cash items, including $5.4 million in stock-based compensation and a net increase in accounts payable, accrued expenses and other current liabilities of $4.6 million offset by increases in our current assets of $0.9 million. Net cash used in operating activities was $13.5 million for the six months ended June 30, 2019 and was primarily due to our net loss for the period of $14.7 million, adjusted for $0.4 million of non-cash items and a net increase in accounts payable, accrued expenses and other current liabilities of $5.6 million offset by an increase in operating assets of 4.8 million related to activities surrounding our GAIN clinical trial. 21 Investing Activities Cash used by investing activities was $78.6 million for the six months ended June 30, 2020, primarily related to the purchase of available for sale investment securities with the proceeds from the private placement transaction which closed in February 2020. Cash used by investing activities was $44.7 million in the six months ended June 30, 2019, primarily related to investment of the IPO proceeds received in May 2019 Financing Activities Cash provided by financing activities was $118.7 million for the six months ended June 30, 2020, which consisted primarily of net proceeds from the private placement transaction and the proceeds from the exercise of stock options. Cash provided by financing activities was $77.9 million in the six months ended June 30, 2019, primarily related to the IPO proceeds received in May 2019. Contractual Obligations and Commitments Commitments There have been no material changes to our contractual obligations and other commitments as of June 30, 2020, as compared to those disclosed in our Annual Report on Form 10-K. 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. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under the rules and regulations of the SEC. JOBS Act As an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley. We will remain an emerging growth company until December 31, 2020. Critical Accounting Policies, Significant Judgments and Use of Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these 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 and stock-based compensation have the most significant impact on our condensed financial statements. Therefore, we consider these to be our critical accounting policies and estimates. 22 The following critical accounting policies are described under the heading “Management’s Discussi on and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies, Significant Judgements and Use Estimates” in our 2019 Annual Report on Form 10-K and the notes to the unaudited condensed 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 following accounting policies are the most critical to fully understanding and evaluating our financial condition and result s of operations: • Research and Development Expenses; • Stock-Based Compensation Expense; and • Income Taxes Recent Accounting Pronouncements Please refer to Note 2 to our unaudited condensed financial statements appearing under Part 1, Item 1 of this report for a discussion of new accounting standards updates that may impact us. Available information Our corporate website address is www.cortexyme.com. We use the investor relations page of our website for purposes of compliance with Regulation FD and as a routine channel for distribution of important information, including news releases, analyst presentations, financial information and corporate governance practices. Our filings with the SEC are posted on our website and available free of charge as soon as reasonably practical after they are electronically filed with, or furnished to, the SEC. The SEC's website, www.sec.gov, contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. The content on any website referred to in this Quarterly Report on Form 10-Q is not incorporated by reference in this Form 10-Q unless expressly noted. Further, the Company’s references to website URLs are intended to be inactive textual references only.