(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and the corresponding notes included in this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those referenced or set forth under "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" in Item 1A of this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.
We are a clinical-stage biopharmaceutical company focused on discovering, developing and commercializing innovative medicines for people with serious diseases of the CNS, including cognitive and neurodegenerative disorders. Our current lead asset, CY6463, is a pioneering CNS-penetrant sGC stimulator in clinical development for MELAS, ADv, and CIAS. sGC stimulators are small molecules that act synergistically with nitric oxide on sGC to boost production of cyclic guanosine monophosphate, or cGMP. cGMP is a key second messenger that, when produced by sGC, regulates diverse and critical biological functions in the CNS including blood flow and vascular dynamics, inflammatory and fibrotic processes, bioenergetics, metabolism and neuronal function.
We operate in one reportable business segment-human therapeutics.
Research and Development Expense. Research and development expenses are incurred in connection with the discovery and development of our product candidates. These expenses consist primarily of the following costs: compensation, benefits and other employee-related expenses, research and development related facilities, third-party contracts relating to nonclinical study and clinical trial activities. All research and development expenses are charged to operations as incurred.
CNS assets. The core of our portfolio is CY6463, an orally administered CNS-penetrant sGC stimulator that is being developed as a symptomatic and potentially disease-modifying therapy for CNS diseases associated with cognitive impairment. Nitric oxide-sGC-cGMP is a fundamental CNS signaling network, but it has not yet been leveraged for its full therapeutic potential. CY6463 enhances the brain's natural ability to produce cGMP, an important second messenger in the CNS, by stimulating sGC, a key node in the NO-sGC-cGMP pathway. This pathway is critical to basic CNS functions, and deficient NO-sGC-cGMP signaling is believed to play an important role in the pathogenesis of many CNS diseases. Agents that stimulate sGC to produce cGMP may compensate for deficient NO signaling.
In January 2020, we announced positive Phase 1 study results that provided the foundation for continued development of CY6463. The Phase 1 healthy participant study results indicate that CY6463 was well tolerated. Pharmacokinetic (PK) data, obtained from both blood and cerebral spinal fluid (CSF), support once-daily dosing with or without food and demonstrated CY6463 penetration of the blood-brain-barrier with CSF concentrations expected to be pharmacologically active.
In October 2020, we announced positive topline results from our CY6463 Phase 1 translational pharmacology study in healthy elderly participants. Treatment with CY6463 for 15 days in this 24-subject study confirmed and extended results seen in the earlier first-in-human Phase 1 study: once-daily oral treatment demonstrated blood-brain-barrier penetration with expected CNS exposure and target engagement. Results also showed significant improvements in neurophysiological and objective performance measures as well as in inflammatory biomarkers associated with aging and neurodegenerative diseases. CY6463 was safe and generally well tolerated in this study. Significant effects on cerebral blood flow and markers of bioenergetics were not observed in this study of healthy elderly participants. We believe that these results, together with nonclinical data, support continued development of CY6463 as a potential new medicine for serious CNS diseases.
We have initiated our CY6463 Phase 2a clinical trial in adult participants with MELAS. Study start-up activities are ongoing for our Phase 2a clinical trial in ADv, with enrollment expected to begin in mid-2021. The ADv study will be supported in part by a grant from the Alzheimer's Association's Part the Cloud-Gates Partnership Grant Program, which provides Cyclerion with $2 million of funding over two years. Startup activities are ongoing for our Phase 1b clinical study in CIAS, with enrollment expected to begin in the second half of 2021.
Our next-generation CNS asset, CY3018, is a differentiated CNS-penetrant sGC with greater CSF-to-plasma exposure relative to CY6463 based on nonclinical studies. CY3018 is intended to expand the potential of sGC stimulation for the treatment of disorders of the CNS.
Non-CNS assets. We have other assets that are outside of our current strategic focus. These non-core assets are not being internally developed at this time and, with the exception of praliciguat are available for licensing to a third-party partner. Praliciguat is an orally administered, once-daily systemic sGC stimulator. On June 3, 2021, we entered into a License Agreement with Akebia relating to the exclusive worldwide license to Akebia of our rights to the development, manufacture, medical affairs and commercialization of pharmaceutical products containing the pharmaceutical compound praliciguat and other related products and forms thereof enumerated in such agreement. Olinciguat is an orally administered, once-daily, vascular sGC stimulator that was evaluated in a Phase 2 study of participants with sickle cell disease. We released topline results from this study in October 2020.
The following table summarizes our research and development expenses, employee and facility related costs allocated to research and development expense, and discovery and pre-clinical phase programs, for the three and six months ended June 30, 2021, and 2020. The product pipeline expenses relate primarily to external costs associated with nonclinical studies and clinical trial costs, which are presented by development candidate.
Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) (in thousands) Product pipeline external costs: CY6463 2,884 1,500 4,050 2,838 CY3018 606 - 606 - Olinciguat 74 1,635 240 4,261 Praliciguat 54 79 (414 ) 215 Discovery research - 189 700 202 Total product pipeline external costs 3,618 3,403 5,182 7,516 Personnel and related internal costs 2,488 6,738 6,312 14,474 Facilities and other 5,948 3,653 8,652 8,629 Total research and development expenses $ 12,054 $ 13,794 $ 20,146 $ 30,619
Securing regulatory approvals for new drugs is a lengthy and costly process. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall.
Given the inherent uncertainties of pharmaceutical product development, we cannot estimate with any degree of certainty how our programs will evolve, and therefore the amount of time or money that would be required to obtain regulatory approval to market them. As a result of these uncertainties surrounding the timing and outcome of any approvals, we are currently unable to estimate precisely when, if ever, our discovery and development candidates will be approved. We invest carefully in our pipeline, and the commitment of funding for each subsequent stage of our development programs is dependent upon the receipt of clear, supportive data.
The successful development of our product candidates is highly uncertain and subject to a number of risks including, but not limited to:
The full impact of COVID-19 pandemic continues to develop and could continue to adversely affect our programs and operations, including our clinical trials, and corporate development and
other activities. Cyclerion works closely with its clinical trial sites and investigators to deliver trials in a manner consistent with the safety of study participants and healthcare professionals.
The duration of clinical trials may vary substantially according to the type and complexity of the product candidate and may take longer than expected.
The United States FDA and comparable agencies outside the United States. impose substantial and varying requirements on the introduction of therapeutic pharmaceutical products, which typically require lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures.
Data obtained from nonclinical and clinical activities at any step in the testing process may be adverse and lead to discontinuation or redirection of development activity. Data obtained from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval.
The duration and cost of discovery, nonclinical studies and clinical trials may vary significantly over the life of a product candidate and are difficult to predict.
The costs, timing and outcome of regulatory review of a product candidate may not be favorable, and, even if approved, a product may face post-approval development and regulatory requirements.
The emergence of competing technologies and products and other adverse market developments may reduce or eliminate the potential value of our pipeline.
As a result of the factors listed in the "Risk Factors" section in Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2020, and elsewhere in this Quarterly Report on Form 10-Q, we are unable to determine the duration and costs to complete current or future nonclinical and clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of our product candidates. Development timelines, probability of success and development costs vary widely. We anticipate that we will make determinations as to which additional programs to pursue and how much funding to direct to each program on an ongoing basis in response to the data from the studies of each product candidate, the competitive landscape and ongoing assessments of such product candidate's commercial potential.
General and Administrative Expense. General and administrative expense consists primarily of compensation, benefits and other employee-related expenses for personnel in our administrative, finance, legal, information technology, business development, and human resource functions. Other costs include the legal costs of pursuing patent protection of our intellectual property, general and administrative related facility costs, insurance costs and professional fees for accounting and legal services. Certain costs associated with our separation from Ironwood are included in these expenses. We record all general and administrative expenses as incurred.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the amounts of expenses during the reported periods. We base our estimates on our historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from our estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.
We believe that our application of accounting policies requires significant judgments and estimates on the part of management and is the most critical to aid in fully understanding and evaluating our reported financial results. Our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies, of the consolidated financial statements elsewhere in this Quarterly Report on Form 10-Q.
All research and development expenses are expensed as incurred. We defer and capitalize nonrefundable advance payments we make for research and development activities until the related goods are received or the related services are performed. See Note 2, Summary of Significant Accounting Policies, of the consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Results of Operations
The expenses reflected in the consolidated financial statements may not be indicative of revenue and expenses that will be incurred by us in the future. The following discussion summarizes the key factors we believed are necessary for an understanding of our consolidated financial statements.
Expenses Three Months Ended Six Months Ended June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) (dollars in thousands) Revenues: Revenue from license agreement $ 3,000 $ - $ 3,000 100 % $ 3,000 $ - $ 3,000 100 % Revenue from development agreement $ - $ - $ - 100 % $ 62 $ - $ 62 100 % Revenue from related party $ - $ 749 $ (749 ) (100 )% $ - $ 1,763 $ (1,763 ) (100 )% Total revenues $ 3,000 $ 749 $ 2,251 301 % $ 3,062 $ 1,763 $ 1,299 74 % Cost and expenses: Research and development 12,054 13,794 (1,740 ) (13 )% 20,146 30,619 (10,473 ) (34 )% General and administrative 6,241 6,627 (386 ) (6 )% 11,606 13,518 (1,912 ) (14 )% (Gain) / loss on lease modification and termination 881 - 881 100 % 881 (2,113 ) 2,994 (142 )% Total cost and expenses 19,176 20,421 (1,245 ) (6 )% 32,633 42,024 (9,391 ) (22 )% Loss from operations (16,176 ) (19,672 ) 3,496 (18 )% (29,571 ) (40,261 ) 10,690 (27 )% Interest and other income, net (6 ) 138 (144 ) (104 )% (10 ) 499 (509 ) (102 )% Net loss $ (16,182 ) $ (19,534 ) $ 3,352 (17 )% $ (29,581 ) $ (39,762 ) $ 10,181 (26 )%
Revenues. As of January 2021, revenues earned from the services performed under the Development Agreement for Ironwood, are not considered to be related party revenues (See Note 3). The increase in revenue of approximately $2.3 million for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, can be attributed to the revenue from the License Agreement, which was executed in June 2021, offset by a decrease in revenue generated from services performed under the Development Agreement, which ended on March 31, 2021.
The increase in revenue of approximately $1.3 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 can be attributed to the revenue from the License Agreement, offset by a decrease in revenue generated from services performed under the Development Agreement.
Research and development expense. The decrease in research and development expense of approximately $1.7 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was driven by a decrease of approximately $4.2 million in salaries, stock-based compensation and other employee-related expenses primarily due to lower average headcount, partially offset by a net increase of approximately $2.3 million in facilities and operating costs allocated to research and development primarily due to $4.2 million of non-cash write off of leasehold improvements, and $1.9 million reduction in the Company's total leased premises cost, and a net increase of approximately $0.2 million in external research costs. The net increase in external research costs was primarily due to increases of approximately $1.4 million associated with the startup of CY6463 studies, CIAS and ADv, in Q2'21, and approximately $0.6 million for CY3018 costs, offset by a decrease of $1.6 million related to olinciguat due to the completion of the STRONG-SCD study, with topline data read out on October 14, 2020, and a decrease of approximately $0.2 million in discovery research.
The decrease in research and development expense of approximately $10.5 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was driven by a decrease of approximately $8.2 million in salaries, stock-based compensation, and other employee-related expenses primarily due to lower average headcount, a decrease of approximately $4.2 million in facilities and operating costs, and a net decrease of approximately $2.3 million in external research costs, partially offset by an increase due to $4.2 million of non-cash write-off of leasehold improvements. The net decrease in external research costs was primarily due to decreases over the periods of approximately $4.0 million related to olinciguat and $0.6 million related to praliciguat studies, due to the completion of both studies, partially offset by an increase of approximately $1.2 million in startup costs for CY6463 studies in CIAS and ADv, an increase of approximately $0.6 million associated with CY3018 and an increase of approximately $0.5 million in discovery research.
General and administrative expense. The decrease in general and administrative expenses of approximately $0.4 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily driven by decreases of approximately $1.3 million in salaries, stock-based compensation and other employee-related expenses due to lower average headcount, and a decrease of approximately $1.2 million in facilities and operating costs, partially offset by an increase of approximately $2.1 million of non-cash write off of leasehold improvements.
The decrease in general and administrative expenses of approximately $1.9 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily driven by a decrease of approximately $2.5 million in salaries, stock-based compensation and other employee-related costs due to lower average headcount, a decrease of approximately $1.1 million in facilities and operating costs, and approximately $0.4 million in professional services, partially offset by $2.1 million of non-cash write off of leasehold improvements.
(Gain) loss on lease modification and termination. The loss on lease modification and termination of approximately $0.9 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, which is related to the Lease Termination of the Head Lease at 301 Binney Street in Cambridge, Massachusetts that was executed on April 30, 2021. (see Note 8 to the Condensed Consolidated Financial Statements).
The loss on lease modification and termination of approximately $0.9 million for the six months ended June 30, 2021 is related to the Lease Termination of the Head Lease at 301 Binney Street in Cambridge, Massachusetts that was executed on April 30, 2021, compared to the gain on lease modification and termination of $2.1 million in the six months ended June 30, 2020 related to the Lease Amendment of the Head Lease at 301 Binney Street in Cambridge, Massachusetts that was executed on February 28, 2020 (see Note 8 to the Condensed Consolidated Financial Statements).
Interest and other income, net. Interest and other income, net decreased by approximately $0.1 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 due to a decrease of approximately $0.1 million in net sublease income.
Interest and other income, net decreased by approximately 0.5 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to a decrease of approximately $0.3 million in interest income driven by a lower cash balances and lower interest rates, partially offset by a decrease of approximately $0.2 million in net sublease income.
Liquidity and Capital Resources
Prior to the Separation, the primary source of liquidity for our business was cash flow allocated to Cyclerion from Ironwood. Post Separation, transfers of cash to and from Ironwood related to the Transition Service Agreements, Development Agreement, and provisions of the Separation Agreement, have been reflected in the consolidated statement of cash flows.
After the Separation on April 1, 2019, we raised approximately $165 million net of direct financing expenses with the closing of the 2019 Equity Private Placement on April 2, 2019.
On July 29, 2020, we closed on a private placement of 6,062,500 shares of our common stock, pursuant to a Common Stock Purchase Agreement, for total gross proceeds of approximately $24.3 million. There were no material fees or commissions related to the transaction. The Company intends to use the proceeds to fund working capital and other general corporate purposes.
On September 3, 2020, the Company entered into the Sales Agreement with Jefferies with respect to the ATM Offering under the Shelf. Under the ATM Offering, the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, having an aggregate offering price of up to $50.0 million through Jefferies as its sales agent. The Company will pay to Jefferies cash commissions of 3.0 percent of the gross proceeds of sales of common stock under the Sales Agreement. During the three and six months ended June 30, 2021, the Company sold 3,351,559 shares of common stock for net proceeds of $12.5 million under the ATM Offering.
On June 7, 2021, we closed on a private placement of 5,735,988 shares of our common stock, pursuant to a Common Stock Purchase Agreement, for total gross proceeds of approximately $18 million. There were no material fees or commissions related to the transaction. The Company intends to use the proceeds to fund working capital and other general corporate purposes.
Our ability to continue to fund our operations and meet capital needs will depend on our ability to generate cash from operations and access to capital markets and other sources of capital, as further described below. We anticipate that our principal uses of cash in the future will be primarily to fund our operations, working capital needs, capital expenditures and other general corporate purposes.
On June 30, 2021, we had approximately $70.4 million of unrestricted cash and cash equivalents. Our cash equivalents include amounts held in U.S. government money market funds. We invest cash in excess of immediate requirements in accordance with our investment policy, which requires all investments held by us to be at least "AAA" rated or equivalent, with a remaining final maturity when purchased of less than twelve months, so as to primarily achieve liquidity and capital preservation.
Based on the timing expectations of our research and development plans, including our clinical trials, we expect that our existing cash and cash equivalents as of June 30, 2021 will be sufficient to fund our planned operating expenses and capital expenditure requirements at least through the next 12 months following the date of this Quarterly Report on Form 10-Q. We have based this estimate on assumptions that may prove to be wrong, particularly as the process of testing drug candidates in clinical trials is costly and the timing of progress in these trials is uncertain.
Cash Flows The following is a summary of cash flows for the years ended June 30, 2021 and 2020: Six Months Ended June 30, Change 2021 2020 $ % (dollars in thousands) Net cash used in operating activities $ (19,964 ) $ (43,401 ) $ 23,437 (54 )% Net cash provided by (used in) investing activities $ 1,464 $ (1,421 ) $ 2,885 (203 )% Net cash provided by financing activities $ 30,657 $ 3,664 $ 26,993 737 %
Cash Flows from Operating Activities
Net cash used in operating activities was $20.0 million for the six months ended June 30, 2021 compared to $43.4 million for the six months ended June 30, 2020. The decrease in net cash used in operations of $23.4 million primarily relates to a decrease in our net loss of $10.1 million, non-cash leasehold improvement write off of $6.3 million in the current year, the recording of non-cash loss on lease termination of $0.9 million in the current year and non-cash gain on lease modification of $2.1 million in prior year, and a decrease in working capital accounts of $8.4 million, partially offset by a decrease of stock-based compensation and other non-cash items of $4.4 million.
Cash Flows from Investing Activities
Net cash provided by investing activities was $1.5 million for the six months ended June 30, 2021 compared to net cash used in investing activities of $1.4 million for the six months ended June 30, 2020. The increase in net cash provided by investing activities of $2.9 million was primarily from an increase in cash received from sale of lab equipment in 2021 compared to purchases of leasehold improvements and other property and equipment in 2020.
Cash Flows from Financing Activities
Net cash provided by financing activities was $30.7 million for the six months . . .
Jul 29, 2021
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