YUMANITY THERAPEUTICS 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 at the end of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, 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 Annual Report on Form 10-K, 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 clinical stage 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 disease-modifying therapies to treat
devastating conditions, either with large or orphan disease markets, including
Parkinson's disease, dementia with Lewy bodies, multiple system atrophy ("MSA"),
amyotrophic lateral sclerosis ("ALS" (also known as
Our goal is to advance one new program into the clinic every year. Our lead program, YTX-7739, is now in Phase 1 clinical trials for the potential treatment and disease modification of Parkinson's disease. YTX-7739 targets an enzyme known as stearoyl-CoA desaturase ("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 reverse the toxicity of misfolded alpha-synuclein or ?-synuclein, a protein strongly associated with Parkinson's disease. We recently completed a Phase 1 single ascending dose ("SAD") study of YTX-7739 in healthy volunteers, which evaluated a broad range of doses of YTX-7739. We completed enrolment in a Phase 1a multiple ascending dose ("MAD") study in healthy volunteers with results anticipated in the beginning of the second quarter of 2021. A Phase 1b clinical study of YTX-7739 in patients with Parkinson's disease has commenced and initiated dosing as a continuation of the MAD study. A Phase 1b part of the study will assess safety, tolerability and pharmacokinetics of YTX-7739 as well as proof of biology by exploring biomarkers of target engagement and potential correlative clinical parameters such as neuroimaging measurements to monitor for early effects of YTX-7739. Early results from the Phase 1b part are anticipated in mid-2021. Our second program, YTX-9184,also inhibits SCD but is chemically distinct from YTX-7739. Good Laboratory Practice ("GLP") safety pharmacology and toxicological studies for YTX-9184 were initiated in the second quarter of 2020. We anticipate commencing the first in human studies of YTX-9184 in 2021 and intend to develop YTX-9184 for the potential treatment of dementia with Lewy bodies, which is another devasting neurodegenerative disease characterized by the abnormal accumulation of aggregates of ?-synuclein.
At the center of our scientific foundation is our drug discovery engine, which
is based on technology licensed from the
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for their ability to protect nerve cells from toxicity arising from misfolded proteins. To date, we have identified over one dozen targets, most of which have not previously been linked to neurodegenerative diseases. We believe this discovery platform will allow us to replenish our pipeline as programs graduate towards the clinic.
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
• successfully complete preclinical and clinical development of our product
candidates;
• successfully submit investigational new drug, or IND, applications or
comparable applications, for our product candidates;
• identify, assess or develop new product candidates from our discovery
engine platform;
• develop a sustainable and scalable manufacturing process for our product
candidates, as well as establish and maintain commercially viable supply
relationships with third parties that can provide adequate products and
services to support clinical activities and commercial demand for our
product candidates;
• negotiate favorable terms in any collaboration, licensing, or other
arrangements into which we may enter;
• obtain regulatory approvals for product candidates for which we
successfully complete clinical development;
• launch and successfully commercialize product candidates for which we
obtain regulatory approval, either by establishing a sales, marketing,
and distribution infrastructure or collaborating with a partner;
• negotiate and maintain an adequate price for our product candidates, both
in the United States and in foreign countries where our products are
commercialized;
• obtain market acceptance of our product candidates as viable treatment
options;
• build out new facilities or expand existing facilities to support our
ongoing development activity;
• address any competing technological and market developments;
• maintain, protect, expand, and enforce our portfolio of intellectual
property rights, including patents, trade secrets, and know-how; and
• attract, hire and retain qualified personnel.
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.
As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales or additional licensing agreements, we expect to finance our operations through the sale of equity offerings, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions. We may
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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 could have to significantly delay, reduce or eliminate development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.
Because of the numerous risks and uncertainties associated with product development, 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, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
We have incurred significant operating losses since inception. Our ability to
generate product revenue sufficient to achieve profitability will depend heavily
on the successful development and eventual commercialization of one or more of
our current or future product candidates. Our net losses were
As a result, until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through public or private securities offerings, debt financings or other sources, which may include licensing, collaborations or other strategic transactions or arrangements. We may be unable to raise additional funds or enter into such other transactions or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such transactions or arrangements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.
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 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
COVID-19
In
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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. To date, we have not experienced material business disruptions or incurred impairment losses in the carrying values of our assets as a result of the pandemic.
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
Pursuant to the terms of the Merger Agreement, upon closing of the Merger, all
of
The transaction was accounted for as a reverse merger and as an asset
acquisition in accordance with Generally Accepted Accounting Principles in
Private Placement
On
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refer to this sale herein as the Private Placement. The Private Placement closed
on
Financial Operations Overview
Revenue
To date, we have not generated any revenue from product sales and does 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
We will record revenue over the research term as we satisfy our performance
obligation under the Collaboration Agreement. Accordingly, the upfront payment
of
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
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• 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. As a result, we expect research and development costs to increase significantly for the foreseeable future as we continue the development of YTX-7739 and YTX-9184 and any product candidates we may develop in the future. 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 YTX-9184 and any 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 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;
• 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;
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• 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. 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
future as our business expands to support our continued research and development
activities, including our future clinical programs. These increases will likely
include increased costs related to the hiring of additional personnel and fees
to outside consultants, among other expenses. We also anticipate increased
expenses associated with being a public company, including costs for audit,
legal, regulatory, and tax-related services related to compliance with the rules
and regulations of the
We acquired in-process research and development assets in connection with the
Merger. As the acquired in-process research and development assets were deemed
to have no current or alternative future use, the entire amount was recognized
as expense in the consolidated statements of operations for the year ended
Other Income (Expense)
Change in Fair Value of Warrant Liabilities
In connection with our loan and security arrangements, we issued warrants to purchase preferred units. These warrants were liability classified and remeasured to fair value at each reporting date, with changes in the fair value recognized as a component of other income (expense) in our statement of operations.
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Immediately prior to the Merger, all of our outstanding warrants to purchase preferred units were exchanged and became warrants to purchase shares of common stock. As a result, the fair value of the warrants was reclassified to additional paid-in capital and there is no longer a warrant liability to remeasure.
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 capital leases, which upon our adoption of
the new lease standard as of
Interest Income and Other Income (Expense), Net
Interest income consists of interest earned on our invested cash balances. Other income (expense), net has not been significant for the periods presented.
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
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Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years endedDecember 31, 2020 and 2019: Year Ended December 31, 2020 2019 Change (in thousands) Collaboration revenue$ 6,896 $ -$ 6,896 Operating expenses: Research and development 22,310 22,969 (659 ) General and administrative 11,881 7,062 4,819 In-process research and development assets acquired 28,336 - 28,336 Total operating expenses$ 62,527 30,031 32,496 Loss from operations$ (55,631 ) (30,031 ) (25,600 ) Other income (expense): Change in fair value of preferred unit warrant liability 72 12 60 Interest expense (1,900 ) (1,209 ) (691 ) Interest income and other income (expense), net (28 ) 530 (558 ) Loss on debt extinguishment - (511 ) 511 Total other expense, net$ (1,856 ) (1,178 ) (678 ) Net loss$ (57,487 ) $ (31,209 ) $ (26,278 ) Collaboration Revenue
Collaboration revenue recognized during the year ended
Research and Development Expenses
Year Ended December 31,
2020 2019 Change
(in thousands)
Direct research and development expenses by
program:
YTX-7739 $ 5,449 $ 4,556 $ 893
YTX-9184 1,826 537 1,289
Platform, research and discovery, and unallocated
expenses:
Platform and other early stage research external
costs 2,478 4,927 (2,449 )
Personnel related (including equity-based
compensation) 7,293 7,700 (407 )
Facility related and other 5,264 5,249 15
Total research and development expenses $ 22,310 $ 22,969 $ (659 ) Research and development expenses were
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offset by a decrease in preclinical and manufacturing costs. Direct expenses of
our YTX-9184 program in 2020 increased by
General and Administrative Expenses
Year Ended December 31,
2020 2019 Change
(in thousands)
Personnel related (including equity-based
compensation) $ 5,837 $ 3,966 $ 1,871
Professional and consultant fees 5,090 2,575 2,515
Facility related and other 954 521 433
Total general and administrative expenses
General and administrative expenses were
In connection with the Merger, we recognized a charge of
Other Income (Expense)
Interest expense increased by
Interest income and other income (expense), net decreased by
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
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Cash Flows
The following table summarizes our sources and uses of cash for each of the
periods presented:
Year Ended December 31,
2020 2019
(in thousands)
Cash used in operating activities $ (17,938 ) $ (27,208 )
Cash provided by investing activities 31,041 33,250
Cash provided by financing activities 55,536 3,025
Net increase in cash, cash equivalents, and restricted cash
During the year ended
During the year ended
Changes in accounts payable, accrued expenses and prepaid expenses in all periods were generally due to growth in our business and the timing of vendor invoicing and payments.
Net Cash Provided by Investing Activities
During the year ended
During the year ended
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the year ended
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issuance of Class C preferred units of
Net cash provided by financing activities for the year ended
Description of Indebtedness Loan and Security Agreement
We have outstanding borrowings of
In
On
Borrowings under the New Loan are collateralized by substantially all of our personal property, other than our intellectual property. There were no financial covenants associated with the New 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 New Loan are subject to acceleration upon the occurrence of specified events of default,
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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
Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates in development. In addition, we expect to incur additional costs associated with operating as a public company. The timing and amount of our operating expenditures will depend largely on:
• the scope, number, initiation, progress, timing, costs, design, duration,
any potential delays and results of clinical trials and nonclinical
studies for our current or future product candidates;
• the clinical development plans we establish for these product candidates;
• the number and characteristics of product candidates and programs that we
develop or may in-license;
• the outcome, timing and cost of regulatory reviews, approvals or other
actions to meet regulatory requirements established by the FDA and
comparable foreign regulatory authorities, including the potential for
the FDA or comparable foreign regulatory authorities to require that we
perform more studies for our product candidates than those that we
currently expect;
• our ability to obtain marketing approval for our product candidates;
• the cost of filing, prosecuting, defending and enforcing our patent
claims and other intellectual property rights covering our product
candidates;
• our ability to maintain, expand and defend the scope of our intellectual
property portfolio, including the cost of defending intellectual property
disputes, including patent infringement actions brought by third parties
against us or our product candidates;
• the cost and timing of completion of commercial-scale outsourced
manufacturing activities with respect to our product candidates;
• our ability to establish and maintain licensing, collaboration or similar
arrangements on favorable terms and whether and to what extent we retain
development or commercialization responsibilities under any new
licensing, collaboration or similar arrangement;
• the cost of establishing sales, marketing and distribution capabilities
for any product candidates for which we may receive regulatory approval
in regions where we choose to commercialize our products on our own;
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• the success of any other business, product or technology that we acquire
or in which we invest;
• the costs of acquiring, licensing or investing in businesses, product
candidates and technologies;
• our need and ability to hire additional management and scientific and
medical personnel;
• the costs to operate as a public company in the U.S. including the need
to implement additional financial and reporting systems and other
internal systems and infrastructure for our business;
• market acceptance of our product candidates, to the extent any are
approved for commercial sale; and
• the effect of competing technological and market developments.
The Merger and a concurrent private placement were completed in
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, and marketing, distribution or licensing arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect the rights of the our stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, reduce or eliminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
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.
While our accounting policies are described in more detail in Note 2 to our consolidated financial statements, we believe that the following accounting policies require the most significant judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
We account for our one collaboration arrangement, entered into in
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recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer.
We assess the goods or services promised within each contract and determines those that are performance obligations. Arrangements that include rights to additional goods or services that are exercisable at a customer's discretion are generally considered options. We assess if these options provide a material right to the customer and if so, they are considered performance obligations. The identification of material rights requires judgments related to the determination of the value of the underlying license relative to the option exercise price, including assumptions about technical feasibility and the probability of developing a candidate that would be subject to the option rights. The exercise of a material right is accounted for as a contract modification for accounting purposes.
We assess whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct) and (ii) the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract). In assessing whether a promised good or service is distinct, we consider factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. We also consider the intended benefit of the contract in assessing whether a promised good or service is separately identifiable from other promises in the contract. If a promised good or service is not distinct, an entity is required to combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct.
The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices ("SSP") on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations.
If the consideration promised in a contract includes a variable amount, we estimate the amount of consideration to which we will be entitled in exchange for transferring the promised goods or services to a customer. We determine the amount of variable consideration by using the expected value method or the most likely amount method. We include the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, we re-evaluate the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment.
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If an arrangement includes development and regulatory milestone payments, we evaluate whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the licensee's control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.
For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied.
We record amounts as accounts receivable when the right to consideration is deemed unconditional. When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded for deferred revenue.
In determining the transaction price, we adjust consideration for the effects of the time value of money if the timing of payments provides us with a significant benefit of financing. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied, either at a point in time or over time, and if over time, recognition is based on the use of an output or input method.
We assessed the promised goods and services within the Collaboration Agreement
with Merck to determine if they are distinct. Based on this assessment, we
determined that Merck cannot benefit from the promised goods and services
separately from the others as they are highly interrelated and therefore not
distinct. Accordingly, the promised goods and services represent one combined
performance obligation and the entire transaction price was allocated to that
single combined performance obligation. The performance obligation is being
satisfied over the research term as we perform the research and development
activities through the first substantive option period and participate in a
We assessed the Collaboration Agreement to determine whether a significant financing component exists and concluded that a significant financing component does not exist.
Research and Development
As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders,
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communicating with our applicable 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. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of these estimates with the service providers and makes adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to:
• vendors in connection with clinical and preclinical development activities;
• CROs and investigative sites in connection with clinical trials; and
• CDMOs in connection with the production of preclinical and clinical trial
materials.
We base the expense recorded related to external research and development on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CDMOs, CROs and other vendors that supply, conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period.
Stock/Equity-Based Compensation
We measure stock/equity-based awards based on the fair value on the date of the grant and recognize compensation expense over the requisite service period for employees and directors and as services are delivered for non-employees, both of which are generally the vesting period of the respective award. We have issued stock/equity-based awards with only service-based and performance-based vesting conditions. We record the expense for awards with only service-based vesting conditions using the straight-line method. record the expense for awards with both service-based and performance-based vesting conditions using the graded vesting method, commencing once achievement of the performance condition becomes probable. Prior to the Yumanity Reorganization, Holdings had granted restricted incentive units, which were accounted for as equity-classified awards. Holdings determined the fair value of restricted unit awards using the fair value of its common units less any applicable purchase price.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, which used as assumption inputs: the fair value of our common stock/units, calculation of volatility of our common stock/units using historical benchmarking to peer companies, the expected term of the options, the risk-free interest rate for a period that approximates the expected term of the options and our expected dividend yield.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any
off-balance sheet arrangements, as defined in the rules and regulations of the
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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 consolidated financial statements included in this Annual Report on Form 10-K.
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