YUMANITY THERAPEUTICS, INC.

(YMTX)
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08/04YUMANITY THERAPEUTICS : Reports Second Quarter 2022 Financial Results and Recent Corporate Developments - Form 8-K
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08/04YUMANITY THERAPEUTICS : Quarterly Report for Quarter Ending June 30, 2022 (Form 10-Q)
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08/04YUMANITY THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)
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YUMANITY THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

08/04/2022 | 05:16pm EDT

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 24, 2022. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.

Overview

We are a biopharmaceutical company focused on the discovery and development of innovative, disease-modifying therapies for neurodegenerative diseases. Neurodegenerative diseases cause a progressive loss of structure and function in the brain, leaving patients with devastating damage to their nervous system and widespread functional impairment. Although treatments may help relieve some of the physical or mental symptoms associated with neurodegenerative diseases, few of the currently available therapies slow or stop the continued loss of neurons, resulting in a critical unmet need. We are specifically focused on developing novel therapies to treat devastating conditions, either with large or orphan disease markets, including Parkinson's disease, dementia with Lewy bodies, multiple system atrophy, amyotrophic lateral sclerosis, or ALS (also known as Lou Gehrig's disease), and frontotemporal lobar degeneration, or FTLD.

Exploration of Strategic Alternatives and Restructuring

In February 2022, we announced that we are exploring strategic alternatives to enhance shareholder value and engaged H.C. Wainwright as our financial advisor to assist in this process. In February 2022, we also began implementation of a strategic restructuring with the objective of preserving capital. In the first quarter of 2022, our board of directors approved a restructuring plan following a review of our operations, cost structure and growth opportunities. The restructuring included a reduction in headcount of approximately 60% across the Company. We recorded a charge of $1.4 million in the six months ended June 30, 2022 as a result of the restructuring, which consisted of one-time termination benefits for employee severance, benefits and related costs, all of which are expected to result in cash expenditures and substantially all of which will be paid out by the end of 2022.

After a comprehensive review of strategic alternatives, on June 5, 2022, we entered into the Merger Agreement with Kineta, Inc. ("Kineta"). Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, at the effective time of the Merger, Yacht Merger Sub, Inc., a wholly-owned subsidiary of ours, will merge with and into Kineta (the "Merger"), with Kineta continuing as a wholly-owned subsidiary of ours and the surviving corporation of the Merger.

On June 5, 2022, we also entered into an Asset Purchase Agreement with Janssen Pharmaceutica NV ("Janssen"). Pursuant to the Asset Purchase Agreement and subject to the satisfaction or waiver of the conditions set forth in the Asset Purchase Agreement, at the closing of the transactions contemplated by the Asset Purchase Agreement, we will sell to Janssen all of our rights, title and interest in YTX-7739 as well as our unpartnered preclinical and discovery-stage product candidates including intellectual property rights, biological materials, regulatory documentation, books and records, inventory, contracts, permits, actions and rights of recovery and other properties, assets and rights related thereto (the "Purchased Assets"), and Janssen will assume certain of our liabilities, for a purchase price of $26 million in cash (the "Asset Sale").

Our future operations are highly dependent on the success of the Merger with Kineta.

Clinical and Regulatory Update

Our lead program, YTX-7739, is in development for the potential treatment and disease modification of Parkinson's disease. YTX-7739 targets an enzyme known as stearoyl-CoA desaturase, or SCD. Inhibition of SCD in multiple cellular systems, including patient-derived neurons, as well as in a novel mouse model of Parkinson's disease, has been demonstrated to overcome the toxicity of misfolded alpha-synuclein or ?-synuclein, a protein strongly associated with Parkinson's disease.

In January 2022, the FDA placed a partial clinical hold on future multidose clinical trials of YTX-7739 in the United States until the FDA's concerns have been addressed. The FDA has not halted all clinical programming and is permitting a proposed single dose formulation clinical trial to proceed. We have paused our previously planned studies of YTX-7739 while the partial clinical hold is in effect.

On November 10, 2021, we announced the top-line results of a European Phase 1b clinical trial of YTX-7739 in patients with mild-to-moderate Parkinson's disease. The Phase 1b clinical trial was a randomized, placebo-controlled, double-blind multi dose study


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to investigate the safety, tolerability, pharmacokinetics and pharmacodynamics of YTX-7739. Data were reported from 20 patients with mild-to-moderate Parkinson's disease. Patients received once-daily oral doses of YTX-7739 (20 mg or placebo) for 28 days. YTX-7739 was shown to inhibit its primary target, SCD, an enzyme whose inhibition has been closely linked to neuronal survival and improved motor function in a Parkinson's disease model.

After 28 days of treatment, the 20 mg dose given once-daily reduced the fatty acid desaturation index (FA-DI), a biomarker of SCD inhibition, by approximately 20%-40%, the range expected to be clinically relevant based on preclinical studies. Target engagement in the cerebrospinal fluid suggested that YTX-7739 effectively crossed the blood-brain barrier. Additionally, the pharmacokinetic/pharmacodynamic profile of YTX-7739 was consistent with previous studies and we believe informs dose selection for future studies.

YTX-7739 was generally well tolerated with all treatment emergent adverse events being mild to moderate in severity. There were no serious adverse events. Moderate adverse events (AEs) in the active treatment group consisted of two patients with increased Parkinson's symptoms, two patients with lower back pain, one patient with headache, one patient with myalgia, one patient with insomnia, one patient with ligament strain, and one patient with vaccination complication. One patient on placebo had moderate worsening of tremors and Parkinsonism, which led to discontinuation. AEs occurring at a higher percentage in two or more patients administered YTX-7739 compared to placebo were procedural pain, myalgia, dry eye, hyperbilirubinemia, hypesthesia, lower back pain, and constipation. AEs occurring at a higher percentage with placebo included orthostatic hypotension, headache, tremor, fatigue and dizziness.

As expected, after only 28 days of dosing, there were no statistically significant differences in clinical assessments (Unified Parkinson's Disease Rating Scale Part III (UPDRS III), Montreal Cognitive Assessment (MoCA)) or most exploratory biomarkers. Quantitative electroencephalogram (qEEG) assessments of the effect of YTX-7739 on brain activity were completed in a subset of eight patients and demonstrated a statistically significant change compared to baseline, suggestive of a potential improvement in synaptic function.

Research and Discovery

At the center of our scientific foundation is our drug discovery engine, which is based on technology licensed from the Whitehead Institute, an affiliate of the Massachusetts Institute of Technology. This core technology, combined with investments and advancements by us, was designed to enable rapid screening to identify drugs with the potential to modify disease by overcoming toxicity in disease-causing gene networks. Toxicity in many neurodegenerative diseases results from an aberrant accumulation of misfolded proteins in the brain. We leverage our proprietary discovery engine to identify and screen novel drug targets and drug molecules for their ability to protect nerve cells from toxicity arising from misfolded proteins. To date, we have identified over 20 targets, most of which have not previously been linked to neurodegenerative diseases.

Financial Update

We have incurred significant operating losses since inception. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our current or future product candidates. Our net losses were $18.2 million and $19.1 million, respectively, for the six months ended June 30, 2022 and 2021. As of June 30, 2022, we had an accumulated deficit of $205.5 million. We expect to continue to incur significant expenses and increasing operating losses.

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates and do not enter into a commercialization partnership, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing, manufacturing and distribution activities. We also expect to incur additional costs associated with operating as a public company. We expect to continue to incur significant operating losses for the foreseeable future, although at reduced expected levels as a result of restructuring actions taken in the six months ended June 30, 2022.

As a result, we would need substantial additional funding to support our continuing operations. In February 2022, we announced that we are exploring strategic alternatives to enhance shareholder value and engaged H.C. Wainwright as our financial advisor to assist in this process. On June 5, 2022, we entered into the Merger Agreement with Kineta and the Asset Purchase Agreement with Janssen. If the proposed Merger or Asset Sale do not close, we may be unable to raise additional funds or enter into other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we will be forced to significantly delay, reduce or eliminate development and commercialization of one or more of our product candidates or delay or abandon our pursuit of potential in-licenses or acquisitions or initiate steps to cease operations.


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Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. Typically, it takes many years to develop one new product from the time it is discovered to when it is available for treating patients, and development may cease for a number of reasons. Because of the numerous risks and uncertainties associated with product development, including any impact from the ongoing COVID-19 pandemic, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of June 30, 2022, we had cash, cash equivalents and marketable securities of $11.8 million. As of the issuance date of the condensed consolidated financials for the periods ended June 30, 2022, we expect that, absent completing either strategic transaction, our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses early into the first quarter of 2023 and therefore substantial doubt exists about our ability to continue as a going concern. Our future viability is dependent on our ability to raise additional capital to finance our operations or execute other strategic alternatives.

COVID-19

In March 2020, COVID-19 was declared a global pandemic by the World Health Organization and to date, the COVID-19 pandemic continues to present a substantial public health and economic challenge around the world. The length of time and 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, subject to change and difficult to predict. While we continue to conduct our research and development activities, the COVID-19 pandemic may cause disruptions that affect our ability to initiate and complete preclinical studies and clinical trials or to procure items that are essential for our research and development activities. The pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could impact our ability to raise additional funds to support our operations. Moreover, the pandemic has significantly impacted economies worldwide and could result in adverse effects on our business and operations. Clinical trial sites in many countries, including those in which we operate, have incurred delays due to COVID-19. The YTX-7739 Phase 1b clinical trial site incurred delays due to COVID-19, resulting in a delay in the expected timing of early results from that study. There continues to be a risk of additional delays to our clinical programs.

We plan to continue to closely monitor the ongoing impact of the COVID-19 pandemic on our employees and our business operations. In an effort to provide a safe work environment for our employees, we have, among other things, implemented measures to enable remote work whenever possible. We expect to continue to take actions as may be required or recommended by government authorities or as we determine are in the best interests of our employees and other business partners in light of the pandemic.

Merger with Proteostasis

On August 22, 2020, Proteostasis Therapeutics, Inc., a Delaware corporation ("Proteostasis"), Pangolin Merger Sub, Inc. ("Pangolin Merger Sub"), Yumanity, Inc. (formerly Yumanity Therapeutics, Inc.), and Yumanity Holdings, LLC ("Holdings"), entered into the Proteostasis Merger Agreement, as amended on November 6, 2020, pursuant to which Pangolin Merger Sub merged with and into Yumanity, Inc. (the "Proteostasis Merger"). Immediately prior to the closing of the transaction, Holdings merged with and into Yumanity, Inc. with Yumanity, Inc. surviving the Proteostasis Merger (the "Yumanity Reorganization") and, upon the closing of the Proteostasis Merger, Yumanity, Inc. became a wholly owned subsidiary of Proteostasis. The Proteostasis Merger was completed on December 22, 2020 pursuant to the terms of the Proteostasis Merger Agreement. In connection with the completion of the Proteostasis Merger, Proteostasis changed its name to Yumanity Therapeutics, Inc., and the trading symbol changed from "PTI" to "YMTX." We refer to the historical operations of Holdings and Yumanity, Inc. as Yumanity and following the Proteostasis Merger, the business conducted by Yumanity became our primary business.

Pursuant to the terms of the Proteostasis Merger Agreement, upon closing of the Proteostasis Merger, all of Yumanity, Inc.'s outstanding common stock was exchanged for common stock of Proteostasis and all outstanding options and warrants to purchase common stock of Yumanity, Inc. were exchanged for options and warrants to purchase common stock of Proteostasis.

The transaction was accounted for as a reverse merger and as an asset acquisition in accordance with Generally Accepted Accounting Principles in the United States, or GAAP. Under this method of accounting, Yumanity was deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the facts that, immediately following the Proteostasis Merger: (i) Yumanity's equity holders owned a substantial majority of the voting rights in the combined organization, (ii) Yumanity designated a majority of the members (seven of nine) of the initial board of directors of the combined organization and (iii) Yumanity's senior management held all key positions in the senior management of the combined organization. Accordingly, for accounting purposes, the transaction was treated as the equivalent of Yumanity issuing stock to acquire the net assets of Proteostasis. As a result, as of the closing date of the Proteostasis Merger, the net assets of Proteostasis were recorded at their acquisition-date fair


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values in the financial statements of the Company and the reported operating results prior to the Proteostasis Merger are those of Yumanity.

At-the-Market Offering Program

In April 2021, we entered into a sales agreement (the "Prior Sales Agreement") with Jefferies LLC ("Jefferies") with respect to an at-the-market ("ATM") offering program under which we could have issued and sold, from time-to-time at our sole discretion, shares of our common stock, in an aggregate offering amount of up to $60.0 million. In December 2021, we terminated the Prior Sales Agreement and entered into a new sales agreement with Jefferies with respect to an ATM offering under which we may issue and sell, from time-to-time and at our sole discretion, shares of our common stock, in an aggregate offering amount of up to $60.0 million (the "New Sales Agreement"). Jefferies acts as our sales agent and will use commercially reasonable efforts to sell shares of common stock from time-to-time, based upon instruction from us.

We will pay Jefferies up to 3% of the gross proceeds from any common stock sold through the New Sales Agreement. We sold 216,332 shares of common stock under the New Sales Agreement during the six months ended June 30, 2022 for gross proceeds of $0.4 million and for aggregate net proceeds to us of approximately $0.4 million, after deducting sales commissions. As of June 30, 2022, $59.6 million of common stock remained available for future issuance under the New Sales Agreement, although these amounts may be limited as we will be subject to the general instructions of Form S-3 known as the "baby shelf rules." Under these instructions, the amount of funds we can raise through primary public offerings of securities in any twelve-month period using our registration statement on Form S-3 is limited to one-third of the aggregate market value of the shares of our common stock held by non-affiliates of the company. Therefore, we will be limited in the amount of proceeds it is able to raise by selling shares of our common stock using its Form S-3 until such time as our public float exceeds $75 million.

Financial Operations Overview

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products for the foreseeable future. If our development efforts for product candidates are successful and result in regulatory approval or licenses with third parties, we may generate revenue in the future from product sales, milestone payments under our existing collaboration agreement or payments from other license agreements that we may enter into with third parties.

In June 2020, we entered into a research collaboration and license agreement (the "Collaboration Agreement") with Merck Sharp & Dohme Corp. ("Merck"), focused on accelerating the development of new treatments for neurodegenerative diseases. Under the terms of the Collaboration Agreement, Merck will gain exclusive rights to two novel pipeline programs for the treatment of ALS and FTLD. We and Merck will collaborate to advance the two preclinical programs during the research term, after which Merck has the right to continue clinical development and commercialization. Under the Collaboration Agreement, we received an upfront payment totaling $15.0 million and are eligible to receive future milestone payments of up to $530.0 million associated with the successful research, development and sales of marketed products for pipeline programs, of which $5.0 million was paid to us in February 2022 as discussed below, as well as royalties on net sales. We will perform certain research and development activities over the research term pursuant to the Collaboration Agreement and will participate on a Joint Steering Committee to oversee research and development activities.

On December 17, 2021, Merck notified us that the first data package that we submitted for one program has met the requirements to progress to the next stage of the research collaboration. Achievement of this milestone triggered a $5.0 million milestone payment from Merck, which was received in February 2022. We cannot provide assurance as to the timing of future milestones or royalty payments or that we will receive any of the future payments at all.

We will record revenue over the research term as we satisfy our performance obligations under the Collaboration Agreement. Accordingly, the $15.0 million upfront payment has been recognized and the $5.0 million milestone payment is being recognized as revenue using the cost-to-cost method, which we believe best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. We recorded $2.7 million and $5.6 million of collaboration revenue during the six months ended June 30, 2022 and 2021, respectively, and deferred revenue totals $2.4 million at June 30, 2022 related to the Collaboration Agreement.


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Operating Expenses

Research and Development

Research and development expenses consist primarily of costs incurred in connection with the discovery, preclinical and clinical development and manufacture of our product candidates, and include:

salaries, benefits, stock/equity-based compensation, consultants and other related costs for individuals involved in research and development activities;

external research and development expenses incurred under agreements with contract research organizations ("CROs"), investigative sites and other scientific development services;

costs incurred under agreements with contract development and manufacturing organizations ("CDMOs") for developing and manufacturing material for preclinical studies and clinical trials;

licensing agreements and associated milestones;

costs related to compliance with regulatory requirements;

lab supplies and other lab related expenses; and

facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, insurance and other operating costs.

We expense research and development costs as incurred and recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. Nonrefundable advance payments for goods and services to be received in the future for use in research and development activities are deferred and capitalized in prepaid expenses and other current assets. The capitalized amounts are expensed as the related goods are delivered or the services are performed. Upfront payments, milestone payments and annual maintenance fees under license agreements are expensed in the period in which they are incurred.

Our external direct research and development expenses are tracked by product candidate and consist primarily of costs that include fees and other expenses paid to outside consultants, CROs, CDMOs and research laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities. Our direct research and development expenses by product candidate also include fees incurred under third-party license agreements. We do not allocate employee costs and costs associated with our platform technology, early stage discovery efforts, laboratory supplies and facilities, including depreciation or other indirect costs, to specific product candidates because these costs are deployed across multiple programs and our platform and, as such, are not separately classified.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We cannot accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of product candidates including future trial design and various regulatory requirements, many of which cannot yet be determined with accuracy based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development program and plans.

The successful development and commercialization of YTX-7739 and any other product candidates we may develop in the future is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:

the partial clinical hold that has been placed on our investigational new drug ("IND") application for YTX-7739 by the FDA;

the timing and progress of preclinical and clinical development activities;

the number and scope of preclinical and clinical programs we decide to pursue;

the ability to maintain current research and development programs and to establish new ones;

establishing an appropriate safety profile with IND-enabling or foreign equivalent studies;


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successful patient enrollment in, and the initiation and completion of, clinical trials;

the successful completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;

the receipt of regulatory approvals from applicable regulatory authorities;

the timing, receipt and terms of any marketing approvals from applicable regulatory authorities;

our ability to establish new licensing or collaboration arrangements;

the performance of our future collaborators, if any;

establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

development and timely delivery of commercial-grade drug formulations that can be used in our planned clinical trials and for commercial launch;

obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;

launching commercial sales of product candidates, if approved, whether alone or in collaboration with others; and

maintaining a continued acceptable safety profile of the product candidates following approval.

Any changes in the outcome of any of these variables with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect, or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time to complete clinical development of that product candidate. As a result, we expect research and development costs to continue to decrease for the foreseeable future since we have paused the development of YTX-7739 and any other product candidates we may develop in the future. We may never obtain regulatory approval for any of our product candidates. Drug commercialization will take several years and millions of dollars in development costs.

General and Administrative

General and administrative expenses consist primarily of personnel-related expenses, including salaries, benefits, and stock/equity-based compensation expenses for personnel in executive, finance, accounting, human resources and other administrative functions. Other significant general and administrative expenses include legal fees relating to patent, intellectual property and corporate matters, and fees paid for accounting, audit, consulting and other professional services, as well as facilities, and other allocated expenses, which include direct and allocated expenses for rent, insurance and other operating costs.

We anticipate that our general and administrative expenses will increase in the near future in connection with the proposed Merger with Kineta and proposed Asset Sale with Janssen. These increases will likely include legal fees and fees to outside consultants, among other expenses.


Other Income (Expense)

Interest Expense

Interest expense consists of interest charged on outstanding borrowings associated with our loan and security agreements, as well as amortization of debt issuance costs and accretion of a final payment payable upon the maturity or the repayment in full of all obligations under such loans. Interest expense also consists of interest related to finance leases and short-term borrowings.

Interest Income and Other Income (Expense), Net

Interest income consists of interest earned on our invested cash balances. Other income (expense), net includes a gain on the extinguishment of debt upon forgiveness of the PPP loan (see Paycheck Protection Loan section of the Description of Indebtedness below).


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Income Taxes

Prior to the Yumanity Reorganization, Holdings was treated as a partnership for federal income tax purposes and, therefore, its owners, and not Holdings, were subject to U.S. federal or state income taxation. Holdings' directly held subsidiary was treated as a corporation for U.S. federal income tax purposes and subject to taxation in the United States. After the Yumanity Reorganization, the Company and its subsidiary are both taxpaying entities. In each reporting period, our tax provision included the effects of consolidating our subsidiary's results of operations. Since our inception, we have not recorded any income tax benefits for the net losses we incurred in each year or for our earned research and development tax credits, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. Utilization of U.S. federal and state net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 ("Section 382"), and corresponding provisions of state law, due to ownership changes that be occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date.

Results of Operations

Comparison of the Three Months Ended June 30, 2022 and 2021

The following table summarizes our results of operations for the three months ended June 30, 2022 and 2021:

                                                    Three Months Ended
                                                         June 30,
                                                    2022          2021         Change
                                                             (in thousands)
Collaboration revenue                             $   1,657     $   2,114     $   (457 )
Operating expenses:
Research and development                              1,141         7,327       (6,186 )
General and administrative                            5,557         4,712          845
Impairment loss                                           -             -            -
Total operating expenses                              6,698        12,039       (5,341 )
Loss from operations                                 (5,041 )      (9,925 )      4,884
Other income (expense):
Interest expense                                         (7 )        (463 )        456
Interest income and other income (expense), net         203           (66 )        269
Total other income (expense), net                       196          (529 )        725
Net loss                                          $  (4,845 )   $ (10,454 )   $  5,609




Collaboration Revenue

Collaboration revenue recognized during the three months ended June 30, 2022 of $1.7 million was related to our Collaboration Agreement with Merck. The milestone payment of $5.0 million received in February 2022 was initially recorded as deferred revenue and is being recognized as revenue under the cost-to-cost method as research and development is being performed.

Research and Development Expenses


                                                     Three Months Ended
                                                          June 30,
                                                   2022             2021           Change
                                                              (in thousands)
Direct research and development expenses by
program:
YTX-7739                                        $       231      $     2,397         (2,166 )
YTX-9184                                                 38              642           (604 )
Platform, research and discovery, and
unallocated expenses:
Platform and other early stage research
external costs                                           19              731           (712 )
Personnel related (including equity-based
compensation)                                           387            2,126         (1,739 )
Facility related and other                              466            1,431           (965 )

Total research and development expenses $ 1,141 $ 7,327 $ (6,186 )





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Research and development expenses were $1.1 million for the three months ended June 30, 2022, a decrease of $6.2 million from $7.3 million for the three months ended June 30, 2021. Direct expenses of our YTX-7739 program decreased by $2.2 million during the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Overall costs of the YTX-7739 clinical programs declined sharply as a result of our pause in early 2022 of previously planned clinical studies while the partial clinical hold is pending with the FDA. Direct expenses of our YTX-9184 program decreased by $0.6 million from $0.6 million for the three months ended June 30, 2021 to less than $0.1 million for the three months ended June 30, 2022. The change was primarily due to the decision in late 2021 not to pursue near-term clinical studies of YTX-9184. Platform and other early-stage research external costs decreased by $0.7 million from $0.7 million in the three months ended June 30, 2021 to less than $0.1 million in the three months ended June 30, 2022. This change was primarily due to decreased laboratory activities in the three months ended June 30, 2022 after we announced a restructuring that eliminated approximately 60% of our workforce. That restructuring also impacted personnel related costs which decreased by $1.7 million to $0.4 million in the three months ended June 30, 2022. Facility related and other costs decreased $1.0 million, mostly due to the amendment in February 2022 of our headquarters lease which reduced lease expense by approximately 80%. The decrease was also partially due to the change in the proportion of research and development personnel that made up total personnel, resulting in a decreased allocation of facility related costs.

General and Administrative Expenses


                                                    Three Months Ended
                                                         June 30,
                                                   2022            2021           Change
                                                              (in thousands)
Personnel related (including equity-based
compensation)                                   $    1,962      $     2,138            (176 )
Professional and consultant fees                     2,584            1,403           1,181
Facility related and other                           1,011            1,171            (160 )

Total general and administrative expenses $ 5,557 $ 4,712 $ 845

General and administrative expenses were $5.6 million for the three months ended June 30, 2022, an increase of $0.8 million from $4.7 million for the three months ended June 30, 2021. The decrease of $0.2 million in personnel related costs was primarily due to the restructuring announced in February 2022. Personnel-related costs for each of the three months ended June 30, 2022 and 2021 included stock/equity-based compensation of $1.0 million and $0.9 million, respectively. Professional and consultant fees increased by $1.2 million primarily due to higher legal and investment banking fees incurred to put in place the Merger Agreement with Kineta and the Asset Purchase Agreement with Janssen. Facility and other related costs decreased by $0.2 million primarily due to the change in the proportion of general and administrative personnel that made up total personnel, resulting in an increased allocation of facility related costs.

Other Income (Expense)

Other income (expense) changed by $0.7 million to net other income of $0.2 million for the three months ended June 30, 2022 from net other expense of $0.5 million for the three months ended June 30, 2021, primarily due to reduction of interest expense by $0.5 million due to the extinguishment of the Term Loan in February 2022.


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Comparison of the Six Months Ended June 30, 2022 and 2021

The following table summarizes our results of operations for the six months ended June 30, 2022 and 2021:

                                             Six Months Ended June 30,
                                             2022                 2021             Change
                                                           (in thousands)
Collaboration revenue                    $       2,679       $        5,646     $     (2,967 )
Operating expenses:
Research and development                         6,037               14,106           (8,069 )
General and administrative                      10,382               10,764             (382 )
Impairment loss                                  3,901                    -            3,901
Total operating expenses                        20,320               24,870           (4,550 )
Loss from operations                           (17,641 )            (19,224 )          1,583
Other income (expense):
Interest expense                                  (217 )               (951 )            734
Interest income and other income
(expense), net                                    (168 )                (95 )            (73 )
Loss on debt extinguishment                       (200 )              1,134           (1,334 )
Total other income (expense), net                 (585 )                 88             (673 )
Net loss                                 $     (18,226 )     $      (19,136 )   $        910


Collaboration Revenue

Collaboration revenue recognized during the six months ended June 30, 2022 of $2.7 million was related to our Collaboration Agreement with Merck. The milestone payment of $5.0 million received in February 2022 was initially recorded as deferred revenue and is being recognized as revenue under the cost-to-cost method as research and development is being performed.

Research and Development Expenses


                                              Six Months Ended June 30,
                                               2022               2021             Change
                                                            (in thousands)
Direct research and development expenses
by program:
YTX-7739                                   $      1,965       $       4,118     $     (2,153 )
YTX-9184                                            113               1,145           (1,032 )
Platform, research and discovery, and
unallocated expenses:
Platform and other early stage research
external costs                                      341               1,801           (1,460 )
Personnel related (including
equity-based compensation)                        2,049               4,154           (2,105 )
Facility related and other                        1,569               2,888           (1,319 )

Total research and development expenses $ 6,037 $ 14,106 $ (8,069 )

Research and development expenses were $6.0 million for the six months ended June 30, 2022, a decrease of $8.1 million from $14.1 million for the six months ended June 30, 2021. Direct expenses of our YTX-7739 program decreased by $2.2 million to $2.0 million in the six months ended June 30, 2022 from $4.1 million in the six months ended June 30, 2021. Overall costs of the YTX-7739 clinical programs declined as a result of our pause in early 2022 of previously planned clinical studies while the partial clinical hold is pending with the FDA. Direct expenses of our YTX-9184 program decreased by $1.0 million from $1.1 million for the six months ended June 30, 2021 to $0.1 million for the six months ended June 30, 2022. The change was primarily due to the decision in late 2021 not to pursue near-term clinical studies of YTX-9184. Platform and other early-stage research external costs decreased by $1.5 million from $1.8 million in the six months ended June 30, 2021 to $0.3 million in the six months ended June 30, 2022. This change was primarily due to decreased laboratory activities in the six months ended June 30, 2022 after we announced a restructuring in February 2022 that eliminated approximately 60% of our workforce. That restructuring also impacted personnel related costs which decreased by $2.1 million to $2.0 million in the six months ended June 30, 2022. Facility related and other costs decreased $1.3 million, mostly due to the amendment in February 2022 of our headquarters lease which reduced lease expense by approximately 80%. The decrease was also partially due to the change in the proportion of research and development personnel that made up total personnel, resulting in a decreased allocation of facility related costs.




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General and Administrative Expenses

                                               Six Months Ended June 30,
                                               2022                2021             Change
                                                             (in thousands)
Personnel related (including
equity-based compensation)                 $       4,661       $       4,407               254
Professional and consultant fees                   3,399               3,488               (89 )
Facility related and other                         2,322               2,869              (547 )
Total general and administrative
expenses                                   $      10,382       $      10,764     $        (382 )



General and administrative expenses were $10.4 million for the six months ended June 30, 2022, a decrease of $0.4 million from $10.8 million for the six months ended June 30, 2021. The increase of $0.3 million in personnel related costs was primarily due to a restructuring charge of $0.9 million during the six months ended June 30, 2022. Personnel-related costs for each of the six months ended June 30, 2022 and 2021 included stock/equity-based compensation of $2.1 million and $1.9 million, respectively. Professional and consultant fees decreased by less than $0.1 million, as the higher audit expenses and legal fees in the six months ended June 30, 2021 as we transitioned to operating as a public company after the Merger were similar to the higher legal and investment banking fees incurred to put in place the Merger Agreement with Kineta and the Asset Purchase Agreement with Janssen. Facility and other related costs decreased by $0.6 million, primarily due to the amendment in February 2022 of our headquarters lease which reduced lease expense by approximately 80%.

Other Income (Expense)

Other income (expense) changed by $0.7 million to net other expense of $0.6 million for the six months ended June 30, 2022 from net other income of less than $0.1 million for the six months ended June 30, 2021, primarily due to the $1.1 million gain on extinguishment of a PPP loan recorded in the period ended March 31, 2021 compared with a $0.2 million loss on extinguishment of our long-term debt during the period ended June 30, 2022.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception, we have not generated revenue from product sales and have incurred significant operating losses and negative cash flows from our operations. We have funded our operations to date primarily with proceeds from sales of preferred units and an upfront payment from our collaboration agreement with Merck received in July 2020. In December 2020, we completed the Proteostasis Merger and acquired its $35.9 million of cash, cash equivalents and restricted cash. Immediately following the Proteostasis Merger, we also completed a private placement of an aggregate of 1,460,861 shares of our common stock and received net proceeds of approximately $31.6 million. We have also funded operations using borrowings under loan and security agreements.

As of the issuance date of the condensed consolidated financial statements for the quarter ended June 30, 2022, we expect that, absent either strategic transaction, our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses early into the first quarter of 2023. We expect to continue to generate operating losses for the foreseeable future, although at reduced expected levels as a result of restructuring actions taken in the six months ended June 30, 2022. These conditions give rise to substantial doubt over our ability to continue as a going concern.

Cash Flows

The following table summarizes our sources and uses of cash for the six months ended June 30, 2022 and 2021:


                                                                 Six Months Ended
                                                                     June 30,
                                                                2022          2021
                                                                  (in thousands)
Cash used in operating activities                             $ (13,118 )   $ (31,903 )
Cash provided by (used in) investing activities                   1,610        (3,884 )
Cash provided by (used in) financing activities                 (11,798 )       1,159

Net decrease in cash, cash equivalents, and restricted cash $ (23,306 ) $ (34,628 )





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Net Cash Used in Operating Activities

During the six months ended June 30, 2022, operating activities used $13.1 million of cash, resulting from our net loss of $18.2 million, primarily due to net cash changes in our working capital of $3.4 million offset by the add back of non-cash charges of $8.5 million, which included $2.0 million of non-cash lease expense, $3.9 million of loss on extinguishment of a lease, and $2.3 million of stock/equity-based compensation expense. Net cash provided by changes in our operating assets and liabilities for the six months ended June 30, 2022 consisted of a $2.1 million decrease in operating lease liabilities (see Note 10 to the financial statements) and a $2.7 million decrease in deferred revenue due to the recognition of revenue related to the Collaboration Agreement (see Note 4 to the financial statements). Additionally, there was a $3.3 million decrease in accounts payable and accrued expenses and other current liabilities, primarily due to payment of $1.5 million of 2021 performance bonuses.

During the six months ended June 30, 2021, operating activities used $31.9 million of cash, resulting from our net loss of $19.1 million, primarily due to net cash changes in our operating assets and liabilities of $17.6 million offset by the add back of non-cash charges of $4.8 million, which included $2.5 million of non-cash lease expense and $2.7 million of stock/equity-based compensation expense. Net cash provided by changes in our operating assets and liabilities for the six months ended June 30, 2021 consisted of a $5.6 million decrease in deferred revenue due to the recognition of revenue related to the Collaboration Agreement (see Note 4 to the financial statements). Additionally, there was a $9.6 million decrease in accounts payable and accrued expenses and other current liabilities, primarily due to $5.7 million that was paid to settle severance and other obligations resulting from the merger, as well as payment of $1.7 million of 2020 performance bonuses offset by 2021 bonus expense accrued, and $1.7 million of banking commissions paid related to the Private Placement that closed in the fourth quarter of 2020. There was also a decrease of $2.2 million in operating lease liabilities resulting from lease payments.

Changes in accounts payable, accrued expenses and prepaid expenses in all periods were generally due to changes in our business and the timing of vendor invoicing and payments.

Net Cash (Used in)/Provided by Investing Activities

During the six months ended June 30, 2022, net cash provided by investing activities was $1.6 million, primarily related to the maturity of $1.4 million of marketable debt securities.

During the six months ended June 30, 2021, net cash used in investing activities was $3.9 million, primarily related to $3.8 million for net purchases of marketable debt securities and by $0.1 million of purchases of property and equipment.

Net Cash Provided by Financing Activities

Net cash used in financing activities for the six months ended June 30, 2022 was $11.8 million, consisting primarily of $12.7 million of payments of debt principal, offset by $1.7 million of net proceeds from short-term borrowings that financed payments of our directors' and officer's insurance premiums as well as by $0.4 million in proceeds from the ATM program.

Net cash provided by financing activities for the six months ended June 30, 2021 was $1.2 million, consisting primarily of $1.3 in proceeds from the ATM program, offset by payments of debt issuance costs of $0.1 million and payments of finance lease obligations of $0.1 million.

Description of Indebtedness

Loan and Security Agreement

We entered into a loan and security agreement with Hercules Capital, Inc. (the "Lender") in December 2019 (the "Term Loan"), pursuant to which we had $12.7 million in outstanding principal borrowings as of December 31, 2021. On February 25, 2022, we repaid to the Lender a payoff amount of $12.8 million and terminated the Term Loan, provided that we continue to be bound by certain indemnification obligations under Section 6.3 of the Term Loan. The payoff amount included payment of approximately $0.9 million consisting of the end of term cost, as well as an interest/non-use fee of less than $0.1 million.

In April 2020, the Term Loan was amended to permit indebtedness consisting of a loan under the PPP of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), provided that such loan shall be unsecured, shall not contain any terms or conditions that are adverse to the lender's rights under the loan and that we will not prepay such loan. In June 2020, the Term Loan was amended and an end of term cost of $0.3 million became due upon repayment of the loan.

On December 22, 2020, we entered into an Unconditional Secured Guaranty and Pledge Agreement (the "Guaranty") with the Lender as a condition to the Lender's consent to the Proteostasis Merger under the Term Loan between us as borrower and the Lender. Immediately prior to the Proteostasis Merger, we entered into a Fourth Amendment and Consent to Loan and Security Agreement


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dated as of December 22, 2020 with the Lender (the "Loan Amendment"). The Guaranty provides for our guaranty of our obligations under the Loan Agreement and provides the Lender a security interest in all of our assets other than intellectual property as collateral. The Loan Amendment provides for the Lender's consent to the Proteostasis Merger and to the creation and funding of a Silicon Valley Bank Paycheck Protection Program escrow account to hold funds in connection with our outstanding Paycheck Protection Program loan amounts for which we have submitted a forgiveness application. The Loan Amendment also amends the definition of "Change in Control" to include the situations in which we no longer control Yumanity, Inc., our wholly-owned subsidiary. The remaining terms and conditions of the Loan Agreement generally continue in the form existing prior to the Loan Amendment.

On March 29, 2021, the Term Loan was amended again to allow for the creation of a new foreign subsidiary, as well as changing certain covenants related to the financial operations of said subsidiary. The subsidiary was formed on April 23, 2021.

On April 13, 2021, the Term Loan was amended to reduce the end of term cost from $0.3 million to $0.1 million and to extend the availability of Tranche 2 from March 31, 2021 to June 30, 2021.

Borrowings under the Term Loan were collateralized by substantially all of our personal property, other than our intellectual property. There were no financial covenants associated with the Term Loan; however, we are subject to certain affirmative and negative covenants restricting our activities, including limitations on dispositions, mergers or acquisitions; encumbering our intellectual property; incurring indebtedness or liens; paying dividends; making certain investments; and engaging in certain other business transactions. The obligations under the Term Loan are subject to acceleration upon the occurrence of specified events of default, including a material adverse change to our business, operations or financial or other condition. Upon the occurrence of an event of default and until such event of default is no longer continuing, the annual interest rate will be 5.0% above the otherwise applicable rate.

Paycheck Protection Program Loan

In April 2020, prior to entering into the Proteostasis Merger Agreement in August 2020, we issued a Promissory Note to Silicon Valley Bank, pursuant to which we received loan proceeds of $1.1 million (the "PPP Loan"), provided under the PPP established under the CARES Act and guaranteed by the U.S. Small Business Administration. The PPP Loan was unsecured, was scheduled to mature on April 24, 2022, and had a fixed interest rate of 1.0% per annum. Equal monthly payments of principal and interest were to begin commencing in August 2021 until the maturity date. Interest would have accrued on the unpaid principal balance from the inception date of the loan. Forgiveness of the PPP Loan was only available for principal that is used for the limited purposes that expressly qualify for forgiveness under U.S. Small Business Administration requirements. On April 3, 2021, we were notified by Silicon Valley Bank that our forgiveness application was accepted by the Small Business Association as of March 30, 2021. Accordingly, we have recognized $1.1 million in income for debt extinguishment as of June 30, 2021.



Funding requirements

We expect to continue to incur significant expenses in connection with our ongoing activities, particularly as we explore our strategic alternatives and operate as a public company.

Our future funding requirements, both near- and long-term, will depend on many factors, including, but not limited to:

professional services and other fees associated with exploring our strategic alternatives;

the initiation, progress, timing, costs and results of clinical trials for our product candidates;

the outcome, timing and cost of the regulatory approval process for our product candidates by the FDA;

the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;

the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us;

the costs of operating as a public company; and

the extent to which we in-license or acquire other products, product candidates or technologies.

On June 5, 2022, we announced the Merger Agreement with Kineta and Asset Purchase Agreement with Janssen. We believe that, absent either strategic transaction, our cash and cash equivalents will be sufficient to fund our operations early into the first quarter of 2023. If neither strategic transaction closes, and we cannot obtain necessary funding from other sources, we will need to eliminate research and development programs and take other measures, including initiating steps to cease operations. If we cannot raise adequate financing, our business, financial condition and results of operations could be materially adversely affected.


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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe 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. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes in our critical accounting policies and estimates during the six months ended June 30, 2022, as compared to the critical accounting policies and estimates disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K.

Recently Issued and Adopted Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

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