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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number: 001-38890

Quince Therapeutics, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

90-1024039

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

601 Gateway Boulevard, Suite 1250.

South San Francisco, California

94080

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (415) 910-5717

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

QNCX

 

Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of August 3, 2022, the registrant had 36,104,130 shares of common stock, $0.001 par value per share, outstanding.

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

2

 

Condensed Consolidated Statements of Stockholders’ Equity

3

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.

Controls and Procedures

39

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

40

Item 1A.

Risk Factors

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

86

Item 3.

Defaults Upon Senior Securities

86

Item 4.

Mine Safety Disclosures

86

Item 5.

Other Information

86

Item 6.

Exhibits

87

Signatures

89

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Quince Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

June 30, 2022

 

 

December 31, 2021 (1)

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

46,928

 

 

$

69,724

 

Short term investments

 

 

47,736

 

 

 

37,078

 

Prepaid expenses and other current assets

 

 

4,706

 

 

 

4,871

 

Total current assets

 

 

99,370

 

 

 

111,673

 

Property and equipment, net

 

 

364

 

 

 

263

 

Operating lease right-of-use assets, net

 

 

328

 

 

 

1,165

 

Long term investments

 

 

11,029

 

 

 

19,933

 

Goodwill

 

 

825

 

 

 

 

Intangible asset

 

 

5,900

 

 

 

 

Other assets

 

 

47

 

 

 

194

 

Total assets

 

$

117,863

 

 

$

133,228

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

1,867

 

 

$

4,911

 

Accrued expenses and other current liabilities

 

 

4,083

 

 

 

9,311

 

Total current liabilities

 

 

5,950

 

 

 

14,222

 

Long-term financing lease liabilities

 

 

38

 

 

 

 

Long-term operating lease liabilities

 

 

95

 

 

 

420

 

Deferred tax liabilities

 

 

248

 

 

 

 

Total liabilities

 

 

6,331

 

 

 

14,642

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000,000 authorized, no shares issued and
   outstanding as of June 30, 2022 and December 31, 2021

 

 

 

 

 

 

Common stock, $0.001 par value, 100,000,000 shares authorized,
   
35,977,688 and 30,074,412 issued and outstanding as of June 30, 2022 and
   December 31, 2021, respectively

 

 

36

 

 

 

30

 

Additional paid in capital

 

 

386,766

 

 

 

355,234

 

Accumulated other comprehensive loss

 

 

(466

)

 

 

(79

)

Accumulated deficit

 

 

(274,804

)

 

 

(236,599

)

Total stockholders’ equity

 

 

111,532

 

 

 

118,586

 

Total liabilities and stockholders’ equity

 

$

117,863

 

 

$

133,228

 

 

 

 

 

 

 

 

 

(1) The balance sheet as of December 31, 2021 is derived from the audited financial statements as of that date

 

See accompanying notes.

1


 

Quince Therapeutics, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

7,199

 

 

$

14,719

 

 

$

19,960

 

 

$

31,543

 

General and administrative

 

 

9,059

 

 

 

7,064

 

 

 

18,116

 

 

 

13,553

 

Total operating expenses

 

 

16,258

 

 

 

21,783

 

 

 

38,076

 

 

 

45,096

 

Loss from operations

 

 

(16,258

)

 

 

(21,783

)

 

 

(38,076

)

 

 

(45,096

)

Interest income

 

 

145

 

 

 

160

 

 

 

217

 

 

 

387

 

Other expense, net

 

 

(735

)

 

 

(131

)

 

 

(630

)

 

 

(131

)

Net loss before income tax benefit

 

 

(16,848

)

 

 

(21,754

)

 

 

(38,489

)

 

 

(44,840

)

Income tax benefit

 

 

284

 

 

 

 

 

 

284

 

 

 

 

Net loss

 

 

(16,564

)

 

 

(21,754

)

 

 

(38,205

)

 

 

(44,840

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

250

 

 

 

 

 

 

137

 

 

 

 

Unrealized loss on available for sales securities

 

 

(210

)

 

 

(72

)

 

 

(524

)

 

 

(196

)

Total comprehensive loss

 

$

(16,524

)

 

$

(21,826

)

 

$

(38,592

)

 

$

(45,036

)

Net loss per share - basic and diluted

 

$

(0.51

)

 

$

(0.74

)

 

$

(1.22

)

 

$

(1.52

)

Weighted average shares of common stock outstanding - basic and diluted

 

 

32,467,000

 

 

 

29,587,352

 

 

 

31,307,166

 

 

 

29,571,226

 

 

See accompanying notes.

2


 

Quince Therapeutics, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share and per share amounts)

 

For the three months ended June 30, 2022 and 2021

 

 

 

Common Stock

 

 

Additional
Paid in

 

 

Accumulated Other
Comprehensive

 

 

Accumulated

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income / (Loss)

 

 

Deficit

 

 

Equity

 

Balance March 31, 2022

 

 

30,149,570

 

 

$

30

 

 

$

365,096

 

 

$

(506

)

 

$

(258,240

)

 

$

106,380

 

Issuance of common stock on exercise of stock options and vesting of restricted stock units

 

 

308,118

 

 

 

 

 

 

121

 

 

 

 

 

 

 

 

 

121

 

Stock based compensation

 

 

 

 

 

 

 

 

5,051

 

 

 

 

 

 

 

 

 

5,051

 

Share issuance in connection with acquisition of Novosteo, Inc.

 

 

5,520,000

 

 

 

6

 

 

 

16,498

 

 

 

 

 

 

 

 

 

16,504

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

250

 

 

 

 

 

 

250

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(210

)

 

 

 

 

 

(210

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(16,564

)

 

 

(16,564

)

Balance June 30, 2022

 

 

35,977,688

 

 

$

36

 

 

$

386,766

 

 

$

(466

)

 

$

(274,804

)

 

$

111,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance March 31, 2021

 

 

29,575,944

 

 

$

29

 

 

$

326,006

 

 

$

189

 

 

$

(169,740

)

 

$

156,484

 

Exercise of stock options

 

 

79,842

 

 

 

1

 

 

 

671

 

 

 

 

 

 

 

 

 

672

 

Stock based compensation

 

 

 

 

 

 

 

 

6,750

 

 

 

 

 

 

 

 

 

6,750

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(72

)

 

 

 

 

 

(72

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(21,754

)

 

 

(21,754

)

Balance June 30, 2021

 

 

29,655,786

 

 

$

30

 

 

$

333,427

 

 

$

117

 

 

$

(191,494

)

 

$

142,080

 

 

See accompanying notes.

 

3


 

Quince Therapeutics, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share and per share amounts)

 

For the six months ended June 30, 2022 and 2021

 

 

 

Common Stock

 

 

Additional
Paid in

 

 

Other
Comprehensive

 

 

Accumulated

 

 

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income / (Loss)

 

 

Deficit

 

 

Equity

 

Balance January 1, 2022

 

 

30,074,412

 

 

$

30

 

 

$

355,234

 

 

$

(79

)

 

$

(236,599

)

 

$

118,586

 

Issuance of common stock in connection with open market sales agreement, net of issuance costs of $19

 

 

51,769

 

 

 

 

 

 

608

 

 

 

 

 

 

 

 

 

608

 

Issuance of common stock on exercise of stock options and vesting of restricted stock units

 

 

331,507

 

 

 

 

 

 

134

 

 

 

 

 

 

 

 

 

134

 

Stock based compensation

 

 

 

 

 

 

 

 

14,292

 

 

 

 

 

 

 

 

 

14,292

 

Share issuance in connection with acquisition of Novosteo, Inc.

 

 

5,520,000

 

 

 

6

 

 

 

16,498

 

 

 

 

 

 

 

 

 

16,504

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

137

 

 

 

 

 

 

137

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(524

)

 

 

 

 

 

(524

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38,205

)

 

 

(38,205

)

Balance June 30, 2022

 

 

35,977,688

 

 

$

36

 

 

$

386,766

 

 

$

(466

)

 

$

(274,804

)

 

$

111,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2021

 

 

29,543,222

 

 

$

29

 

 

$

318,574

 

 

$

313

 

 

$

(146,654

)

 

$

172,262

 

Exercise of stock options

 

 

112,564

 

 

 

1

 

 

 

1,112

 

 

 

 

 

 

 

 

 

1,113

 

Stock based compensation

 

 

 

 

 

 

 

 

13,741

 

 

 

 

 

 

 

 

 

13,741

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(196

)

 

 

 

 

 

(196

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(44,840

)

 

 

(44,840

)

Balance June 30, 2021

 

$

29,655,786

 

 

$

30

 

 

$

333,427

 

 

$

117

 

 

$

(191,494

)

 

$

142,080

 

 

See accompanying notes.

4


 

Quince Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For The Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities

 

 

 

 

 

 

Net Loss

 

$

(38,205

)

 

$

(44,840

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Non-cash rent expense

 

 

 

 

 

188

 

Stock based compensation

 

 

14,292

 

 

 

13,741

 

Depreciation and amortization

 

 

122

 

 

 

173

 

Impairment loss on operating lease

 

 

98

 

 

 

 

Loss on disposal of fixed assets

 

 

77

 

 

 

 

Amortization of premium on available for sale investments

 

 

175

 

 

442

 

Change in deferred tax liabilities due to acquisition of Novosteo, Inc.

 

 

(284

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

1,750

 

 

 

(1,851

)

Other assets

 

 

147

 

 

 

(106

)

Accounts payable

 

 

(4,664

)

 

 

3,638

 

Accrued expenses and other current liabilities

 

 

(5,014

)

 

 

(2,557

)

Net cash used in operating activities

 

 

(31,506

)

 

 

(31,172

)

Cash flow from investing activities:

 

 

 

 

 

 

Purchase of investments

 

 

(36,849

)

 

 

(25,165

)

Proceeds from maturities of investments

 

 

34,388

 

 

 

62,568

 

Cash acquired from Novosteo, Inc.

 

 

10,593

 

 

 

 

Proceeds from disposal of assets

 

 

35

 

 

 

 

Purchase of property and equipment

 

 

(5

)

 

 

(136

)

Net cash provided by investing activities

 

 

8,162

 

 

 

37,267

 

Cash flows from financing activities:

 

 

 

 

 

 

Payments of finance leases

 

 

(12

)

 

 

 

Proceeds from issuance of common stock upon exercise of stock options

 

 

134

 

 

 

1,113

 

Proceeds from issuance of common stock in connection with open market sales agreement, net of issuance costs

 

 

608

 

 

 

 

Net cash provided by financing activities

 

 

730

 

 

 

1,113

 

Effect of exchange rate changes on cash

 

 

(182

)

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(22,796

)

 

 

7,208

 

Cash and cash equivalents at beginning of period

 

 

69,724

 

 

 

66,841

 

Cash and cash equivalents at end of period

 

$

46,928

 

 

$

74,049

 

 

 

 

 

 

 

 

Supplemental disclosures of non-cash information:

 

 

 

 

 

 

Net assets acquired of Novosteo, Inc. in exchange for common stock

 

$

16,210

 

 

$

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

$

256

 

 

$

1,210

 

Right-of-use asset and operating lease liability reduction as a result of lease modification

 

$

(640

)

 

$

 

 

See accompanying notes.

5


 

Quince Therapeutics, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Organization

Description of Business

 

Effective August 1, 2022, Cortexyme Inc. changed its name to Quince Therapeutics, Inc (the "Company"). The Company was incorporated in the State of Delaware in June 2012 and is headquartered in South San Francisco, California. In April 2021, the Company established a wholly owned subsidiary in Australia, Cortexyme Australia, Pty Ltd. The Company is a preclinical stage biopharmaceutical company advancing innovative precision therapeutics for debilitating and rare diseases. In May 2022, the Company completed the acquisition of Novosteo, Inc. ("Novosteo"), a Delaware corporation, a privately held biotech focused on targeted therapeutics to treat rare skeletal diseases, bone fractures, and injury. In addition to the skeletal disease candidate, the Company’s pipeline includes proprietary drug candidates for the treatment of Central Nervous System ("CNS") disorders including Alzheimer’s disease, oncology applications designed to prevent the development of oral squamous cell carcinoma, as well as for the treatment of underserved and chronic conditions like periodontitis. The Company’s pipeline also includes a proprietary irreversible protease inhibitor under development for the treatment of coronavirus infection.

Novosteo, Inc. Acquisition

On May 9, 2022, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Novosteo, Quince Merger Sub I, Inc., a Delaware corporation and a wholly owned subsidiary of the Company, Quince Merger Sub II, LLC, a Delaware limited liability company and a wholly owned subsidiary of Company, Novosteo, and Fortis Advisors LLC, a Delaware limited liability company, solely in its capacity as the securityholders’ representative.. The transaction closed on May 19, 2022. Pursuant to the terms of the Merger Agreement, at the closing of the Acquisition ("Acquisition"), 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, of the Company. The Company issued 5,520,000 shares and assumed 507,108 outstanding Novosteo options after conversion with the awards, retaining the same vesting and other terms and conditions as in effect immediately prior to consummation of the Acquisition.

 

Pursuant to the Merger Agreement, upon the terms and subject to the conditions set forth therein, Merger Sub I merged with and into Novosteo (the “First Merger”), with Novosteo as the surviving entity in the First Merger (the “First Step Surviving Corporation”). Immediately following the First Merger, the First Step Surviving Corporation merged with and into Merger Sub II, with Merger Sub II surviving the Acquisition. Merger Sub II was renamed Novosteo, LLC and is a wholly-owned single member limited liability corporation. Novosteo, LLC has a wholly owned subsidiary in Australia, Novosteo Pty Ltd.

Company Management and Board Member Changes

 

On May 19, 2022, the Company appointed Dirk Thye, M.D., the Chief Executive Officer of Novosteo, as Chief Executive Officer of the Company, Karen Smith, M.D., Ph.D., the Chief Medical Officer of Novosteo, as Chief Medical Officer of the Company and Brendan Hannah, the Chief Operating Officer of Novosteo, as Chief Business Officer of the Company. The Company also agreed to expand its Board of Directors (the “Board”) to appoint Dr. Thye and Philip Low, Ph.D., each a director of Novosteo prior to the Acquisition, as a Class II and Class I director of the Board, respectively.

 

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

 

On June 8, 2022, Christopher Lowe resigned as a member of the Board. Mr. Lowe resigned from his roles as the Chief Financial Officer and Chief Operating Officer of the Company, effective as of June 10, 2022 (the “CFO Departure Date”). In connection with the departure of Mr. Lowe from the Company, the Company entered into a separation agreement (the “CFO

6


 

Separation Agreement”) with Mr. Lowe on June 10, 2022, providing for (i) a release of claims against the Company; (ii) cash severance payments of $354,750, which equals to nine months of Mr. Lowe’s 2022 base salary, to be paid in accordance with the Company’s normal payroll practices; and (iii) certain health care continuation benefits. The CFO Separation Agreement also provides for an accelerated vesting of the restricted stock award issued to Mr. Lowe on March 3, 2022 and an extension of the post-termination exercise period for all vested stock options or other equity awards held by Mr. Lowe through the twelve-month period following the CFO Departure Date, provided that the specified severance preconditions are met. In addition, in the event the Company consummates a change in control within three months after the CFO Departure Date, subject to satisfaction of specified conditions, Mr. Lowe would also be entitled to additional cash severance and COBRA coverage, payment of target annual bonus and accelerated vesting with respect to his equity awards.

 

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

 

On June 9, 2022, upon recommendation of the Nominating and Corporate Governance Committee of the Board, the Board appointed June Bray to serve as a Class III director of the Company, 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 joined the class of directors whose term expires at the Company’s 2025 annual stockholders’ meeting.

 

On July 22, 2022, we announced the departure of Leslie Holsinger, Ph.D., the Executive Vice President of Research and Development, effective as of July 31, 2022 (the “EVP of Research Departure Date”). The Separation Agreement provides for (i) a release of claims against the Company, (ii) cash severance payments of $339,000, which equals to nine months of Dr. Holsinger’s 2022 base salary, to be paid in a lump sum; and (iii) certain health care continuation benefits. The Separation Agreement also provides for an extension of the post-termination exercise period for all vested stock options or other equity awards held by each of Dr. Holsinger through the twelve-month period following the EVP 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 VP 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.

 

Liquidity and Capital Resources

The Company has incurred losses and negative cash flows from operations since inception and expects to continue to generate operating losses for the foreseeable future. As of June 30, 2022, the Company had an accumulated deficit of $274.8 million. Since inception through June 30, 2022, the Company funded operations primarily with the net proceeds from the issuance of convertible promissory notes, from the issuance of redeemable convertible preferred stock, from the net proceeds from the Company’s initial public offering (the “IPO”), a private investment in public equity transaction (“PIPE Financing”), and an at-the-market offering under an open market sales agreement. As of June 30, 2022, the Company had cash, cash equivalents, and short-term investments of $94.7 million, which it believes will be sufficient to fund its planned operations for a period of at least 12 months from the date of the issuance of the accompanying unaudited consolidated financial statements. The Company also has long-term investments of $11.0 million.

Management expects to incur additional losses in the future to fund the Company's operations and conduct product research and development and may need to raise additional capital to fully implement its business plan. The Company may raise additional capital through the issuance of equity securities, debt financings or other sources including out-licensing or partnerships, in order to further implement its business plan. However, if such financing is not available when needed and at adequate levels, the Company will need to reevaluate its operating plan and may be required to delay the development of its product candidates.

Note 2. Summary of Significant Accounting Policies

Basis of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Quince Therapeutics, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to

7


 

the instructions of the SEC on Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the management’s opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results of operations and cash flows for the periods presented have been included.

The condensed consolidated balance sheet as of June 30, 2022, the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2022 and 2021, the condensed consolidated statements of stockholders’ equity for the three and six months ended June 30, 2022 and 2021, the condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021, and the financial data and other financial information disclosed in the notes to the condensed consolidated financial statements are unaudited. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2021 included in the Company’s Form 10-K filed with the SEC on March 1, 2022. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022, or for any other future annual or interim period.

Risks and Uncertainties

 

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the

Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of results of clinical trials and reaching milestones, uncertainty of regulatory approval of the Company’s potential drug candidates, uncertainty of market acceptance of the Company’s drug candidates, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and dependence on key individuals and sole source suppliers. The Company’s drug candidates will require approvals from the U.S. Food and Drug Administration ("FDA") and comparable foreign regulatory agencies prior to commercial sales in their respective jurisdictions. There can be no assurance that any drug candidate will receive the necessary approvals. On January 25, 2022, the Company received a letter from the FDA Division of Neurology 1 placing a full clinical hold on atuzaginstat (COR388) IND application. Other divisions of the FDA may impose a clinical hold on atuzaginstat (COR388) as the Company explores other indications for this drug, or otherwise limit the Company’s ability to proceed with other clinical programs in the Company's pipeline, which could have a materially adverse impact on the Company.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and expenses, as well as related disclosure of contingent assets and liabilities. The most significant estimates used in the Company’s consolidated financial statements relate to the determination of the fair value of stock-based awards and other issuances, determination of the fair value of identifiable assets and liabilities in connection with the acquisition of Novosteo, Inc., including associated intangible assets and goodwill, accruals for research and development costs, useful lives of long-lived assets, stock-based compensation and related assumptions, the incremental borrowing rate for leases and income tax uncertainties, including a valuation allowance for deferred tax assets, eligibility of expenses for the Australia research and development refundable tax credits; and contingencies. The Company bases its estimates on historical experience and on various other market specific and other relevant assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from the Company’s estimates.

Foreign Currency Translation and Transactions

 

The functional currency of two of the Company’s wholly-owned subsidiaries is the Australian Dollar. Its financial results and financial position are translated into U.S. dollars using exchange rates at balance sheet dates for assets and liabilities and using average exchange rates for income and expenses. The resulting translation differences are presented as a separate component of accumulated other comprehensive income (loss), as a separate component of equity.

 

Foreign currency transactions are translated into the functional currencies using the exchange rates prevailing at the dates

of the transactions. Foreign exchange gains and losses, resulting from the settlement of such transactions and from the re-measurement of monetary assets and liabilities denominated in foreign currencies using exchange rates at balance sheet date and non-monetary assets and liabilities using historical exchange rates, are recognized in the consolidated statements of operations and comprehensive loss.

Significant Accounting Policies

There have been no significant changes to the accounting policies during the six months ended June 30, 2022, as compared to the significant accounting policies described in our Annual Report on Form 10-K other than as noted below:

 

8


 

Business Combinations

 

The Company accounts for business combinations using the acquisition method pursuant to the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 805. This method requires, among other things, that results of operations of acquired companies are included in the Company's financial results beginning on the respective acquisition dates, and that identifiable assets acquired and liabilities assumed are recognized at fair value as of the acquisition date. Intangible assets acquired in a business combination are recorded at fair value using one of three valuation approaches, the income approach, the market approach or the cost approach. The Company reviewed the three valuation approaches and determined the income approach was the most appropriate model to approximate fair value for the Acquisition. The income approach 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.

 

Intangible Assets

Intangible assets with a definite useful life are amortized on a straight-line basis over the estimated useful life of the related assets. Intangible assets with an indefinite useful life are not amortized. Intangible assets acquired in a business combination or an acquisition that are used in research and development activities (regardless of whether they have an alternative future use) shall be considered indefinite lived until the completion or abandonment of the associated research and development efforts. Intangible assets acquired in a business combination are initially recorded at fair value. During the period that those assets are considered indefinite lived, they shall not be amortized but shall be tested for impairment. Once the research and development efforts are completed or abandoned, the entity shall determine the useful life of the assets. An intangible asset shall be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the intangible asset is less than its carrying amount, If that is the case, the Company performs a quantitative impairment test, and, if the carrying amount of the Company exceeds its fair value, then the Company will recognize an impairment charge for the amount by which its carrying amount exceeds its fair value, not to exceed the carrying amount of the intangible asset. Qualitative factors to be considered include but are not limited to:

 

Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on future expected earnings and cash flows
Legal/regulatory factors or progress and results of clinical trials
Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset
Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment
Macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired as of the acquisition date. Goodwill has an indefinite useful life and is not amortized. The Company reviews its goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the Company may exceed its fair value. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the Company is less than its carrying amount, including goodwill. If that is the case, the Company performs a quantitative impairment test, and, if the carrying amount of the Company exceeds its fair value, then the Company will recognize an impairment charge for the amount by which its carrying amount exceeds its fair value, not to exceed the carrying amount of the goodwill.

 

The Company recognized no impairment charge for the three months ended June 30, 2022.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash and cash equivalents. Cash equivalents, which consist of amounts invested in money market funds, are stated at fair value. There are no unrealized gains or losses on the money market funds for the periods presented.

9


 

Fair Value Measurements

The fair value of the Company’s financial instruments reflects the amounts that the Company estimates that it would receive in connection with the sale of an asset or pay in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:

Level 1 - Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;

Level 2 - Inputs other than quoted prices that are observable for the assets or liability either directly or indirectly, including inputs in markets that are not considered to be active;

Level 3 - Inputs that are unobservable. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period.


Recent Accounting Pronouncements Adopted

 

ASU 2021-10, Disclosures by Business Entities about Government Assistance. In November 2021, the FASB issued ASU

2021-10, “Government Assistance (Topic 832)," which requires business entities to disclose information about transactions with a government that are accounted for by applying a grant or contribution model by analogy (for example, IFRS guidance in IAS 20 or guidance on contributions for not-for-profit entities in ASC 958-605). For transactions within scope, the new standard requires the disclosure of information about the nature of the transaction, including significant terms and conditions, as well as the amounts and specific financial statement line items affected by the transaction. The new guidance is effective for annual reporting periods beginning after December 15, 2021. The adoption of this pronouncement did not have a material impact on its consolidated financial statements or disclosures.

Recent Accounting Pronouncements Not Yet Adopted

The following are new accounting pronouncements that the Company is evaluating for future impacts on its financial statements:

Financial Instruments—Credit Losses: In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which amends the principles around the recognition of credit losses by mandating entities incorporate an estimate of current expected credit losses when determining the value of certain assets. The guidance also amends reporting around allowances for credit losses on available-for-sale marketable securities. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which established that a one-time determination of the effective date for ASU 2016-13 would be based on the Company’s SEC reporting status as of November 15, 2019. The Company was a “smaller reporting company” as defined by Item 10 of Regulation S-K, and therefore, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is evaluating the impact of the guidance on its financial statements.

All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.

Note 3. Fair Value Measurements

The Company measures and reports its cash equivalents and investments at fair value.

Money market funds are measured at fair value on a recurring basis using quoted prices and are classified as Level 1. Investments are measured at fair value based on inputs other than quoted prices that are derived from observable market data and are classified as Level 2 inputs.

10


 

Financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements by major security type as of June 30, 2022 and December 31, 2021 are presented in the following tables (in thousands):

 

 

 

Fair Value Measurements at June 30, 2022

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

 

$

26,432

 

 

$

26,432

 

 

$

 

 

$

 

Certificates of Deposit

 

 

6,268

 

 

 

 

 

 

6,268

 

 

 

 

Repurchase Agreements

 

 

6,000

 

 

 

 

 

 

6,000

 

 

 

 

Corporate notes

 

 

18,083

 

 

 

 

 

 

18,083

 

 

 

 

Government and agency notes

 

 

32,387

 

 

 

 

 

 

32,387

 

 

 

 

Municipal notes

 

 

1,231

 

 

 

 

 

 

1,231

 

 

 

 

Commercial Paper

 

 

1,896

 

 

 

 

 

 

1,896

 

 

 

 

Total

 

$

92,297

 

 

$

26,432

 

 

$

65,865

 

 

$

 

 

 

 

Fair Value Measurements at December 31, 2021

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

 

$

15,954

 

 

$

15,954

 

 

$

 

 

$

 

Certificates of Deposit

 

 

11,503

 

 

 

 

 

 

11,503

 

 

 

 

Repurchase Agreements

 

 

13,500

 

 

 

 

 

 

13,500

 

 

 

 

Corporate notes

 

 

38,397

 

 

 

 

 

 

38,397

 

 

 

 

Government and agency notes

 

 

5,178

 

 

 

 

 

 

5,178

 

 

 

 

Municipal notes

 

 

1,933

 

 

 

 

 

 

1,933

 

 

 

 

Total

 

$

86,465

 

 

$

15,954

 

 

$

70,511

 

 

$

 

 

The following table summarizes the available-for-sale securities (in thousands):

 

 

 

Fair Value Measurements at June 30, 2022

 

 

 

Amortized
Cost

 

 

Unrealized
Gains

 

 

Unrealized
Losses

 

 

Fair Value

 

Money market funds

 

$

26,432

 

 

$

 

 

$

 

 

$

26,432

 

Certificates of Deposit

 

 

6,415

 

 

 

 

 

 

(147

)

 

 

6,268

 

Repurchase Agreements

 

 

6,000

 

 

 

 

 

 

 

 

 

6,000

 

Corporate notes

 

 

18,377

 

 

 

 

 

 

(294

)

 

 

18,083

 

Government and agency notes

 

 

32,558

 

 

 

 

 

 

(171

)

 

 

32,387

 

Commercial Paper

 

 

1,898

 

 

 

 

 

 

(2

)

 

 

1,896

 

Municipal notes

 

 

1,240

 

 

 

 

 

 

(9

)

 

 

1,231

 

Total cash equivalents and investments

 

$

92,920

 

 

$

 

 

$

(623

)

 

$

92,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified as: