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 endedDecember 31, 2020 filed with theSEC onMarch 31, 2021 . 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 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 asLou Gehrig's disease), frontotemporal lobar degeneration ("FTLD"), and Alzheimer's disease. 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 overcome the toxicity of misfolded alpha-synuclein or ?-synuclein, a protein strongly associated with Parkinson's disease. InFebruary 2021 , we announced the results of 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 also completed a Phase 1a multiple ascending dose ("MAD") study in healthy volunteers, and announced results inApril 2021 . A Phase 1b clinical study of YTX-7739 in patients with Parkinson's disease has commenced as a continuation of the MAD study. The Phase 1b part of the study will assess safety, tolerability and pharmacokinetics of YTX-7739 as well as proof of biology in patients with Parkinson's disease by exploring biomarkers of target engagement. The study will also explore potential correlative clinical parameters such as electroencephalography and neuroimaging measurements to monitor for early effects of YTX-7739, noting, however, that such effects may be difficult to see given the relatively short duration of the trial (28 days) compared to the length of Parkinson's disease progression. Early results from the Phase 1b part are anticipated in the fall of 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, a devastating neurodegenerative disease which is also characterized by the abnormal accumulation of aggregates of ?-synuclein. Pending the results of the Phase 1b study in YTX-7739 and additional preclinical data, we may choose to study YTX-7739 for the potential treatment of dementia with Lewy bodies (or other disorders of ?-synuclein) instead of YTX-9184, as this may provide an opportunity to see results in patients sooner, given the studies done to date of YTX-7739. Additionally, based on promising preclinical data in one animal model, we plan to initiate a window-of-opportunity study of an SCD inhibitor in glioblastoma multiforme patients in 2022 once further validation of the preclinical data has been achieved in a second animal model. At the center of our scientific foundation is our drug discovery engine, which is based on technology licensed from theWhitehead Institute , an affiliate of theMassachusetts Institute of Technology . This core technology, combined with investments and advancements by us, is 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. We believe this discovery platform will allow us to replenish our pipeline as programs advance into clinical development. 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$10.5 million and$19.1 million , respectively, for the three and six months endedJune 30, 2021 . As ofJune 30, 2021 , we had an accumulated deficit of$166.9 million . We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities particularly if and as we: • successfully complete preclinical and clinical development of our product candidates; 19
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Table of Contents • 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 inthe 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 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 expect to continue to incur significant operating losses for at least the next several years as we advance our product candidates through preclinical and clinical development, manufacture our product candidates for clinical or commercial use, and, ultimately, seek regulatory approval. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates. 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. 20
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Table of Contents 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 ofJune 30, 2021 , we had cash, cash equivalents and short-term investments of$55.6 million . We believe that our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements late into the third quarter of 2022 from the date of issuance of the condensed consolidated financial statements included in this Quarterly Report. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See "- Liquidity and Capital Resources." Our future viability beyond that point is dependent on our ability to raise additional capital to finance our operations. COVID-19 InMarch 2020 , COVID-19 was declared a global pandemic by theWorld 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. Certain of the sites in the YTX-7739 Phase 1b clinical trial have 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 OnAugust 22, 2020 ,Proteostasis Therapeutics, Inc , aDelaware corporation ("Proteostasis"),Pangolin Merger Sub, Inc. ("Merger Sub"),Yumanity, Inc. (formerlyYumanity Therapeutics, Inc. ), andYumanity Holdings, LLC ("Holdings"), entered into the Merger Agreement, as amended onNovember 6, 2020 , pursuant to which Merger Sub merged with and intoYumanity, Inc. Immediately prior to the closing of the transaction, Holdings merged with and intoYumanity, Inc. withYumanity, Inc. surviving the Merger (the "Yumanity Reorganization") and, upon the closing of the Merger,Yumanity, Inc. became a wholly owned subsidiary of Proteostasis. The Merger was completed onDecember 22, 2020 pursuant to the terms of the Merger Agreement. In connection with the completion of the Merger, Proteostasis changed its name toYumanity Therapeutics, Inc. , and the trading symbol changed from "PTI" to "YMTX." We refer to the historical operations of Holdings andYumanity, Inc. as Yumanity and following the Merger, the business conducted by Yumanity became our primary business. Pursuant to the terms of the Merger Agreement, upon closing of the Merger, all ofYumanity, Inc.'s outstanding common stock was exchanged for common stock of Proteostasis and all outstanding options and warrants to purchase common stock ofYumanity, 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 inthe 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 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 (7 of 9) 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 Merger, the net assets of Proteostasis were recorded at their acquisition-date fair values in the financial statements of the Company and the reported operating results prior to the Merger are those of Yumanity. 21
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Table of Contents Private Placement OnDecember 14, 2020 , we entered into a subscription agreement with certain accredited investors for the sale by us in a private placement of 1,460,861 shares of our common stock for a price of$23.00 per share. We refer to this sale herein as the Private Placement. The Private Placement closed onDecember 22, 2020 . The aggregate gross proceeds for the issuance and sale of the common stock were$33.6 million and, after deducting certain of our expenses, the net proceeds we received in the Private Placement were$31.6 million . At-the-Market Offering Program InApril 2021 , we entered into a sales agreement withJefferies LLC ("Jefferies") with respect to an at-the-market ("ATM") offering program under which we may issue and sell, from time-to-time at our sole discretion, shares of our common stock, in an aggregate offering amount of up to$60.0 million . 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 us. We will pay Jefferies up to 3% of the gross proceeds from any common stock sold through the sales agreement. We sold 82,132 shares of its common stock under the ATM program during the three months endedJune 30, 2021 for gross proceeds of$1.3 million . As ofJune 30, 2021 , approximately$58.7 million of common stock remained available for future issuance under the ATM program. 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. InJune 2020 , we entered into a research collaboration and license agreement (the "Collaboration Agreement") withMerck 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, 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 aJoint Steering Committee to oversee research and development activities. We cannot provide assurance as to the timing of future milestone or royalty payments or that we will receive any of these payments at all. We will record revenue over the research term as we satisfy our performance obligation under the Collaboration Agreement. Accordingly, the upfront payment of$15.0 million will be 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$2.1 million and$5.6 million of collaboration revenue for the three and six months endedJune 30, 2021 , respectively, related to the Collaboration Agreement. We did not recognize any revenue during the three and six months endedJune 30, 2020 . 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; 22
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Table of Contents • 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. 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; • 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. 23
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Table of Contents 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 theSEC listing standards applicable to companies listed on a national securities exchange, director and officer insurance premiums and investor relations costs. 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. 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 finance leases. 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). 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 toU.S. federal or state income taxation. Holdings' directly held subsidiary was treated as a corporation forU.S. federal income tax purposes and subject to taxation inthe 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 ofU.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, 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. 24
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Table of Contents Results of Operations Comparison of the Three Months EndedJune 30, 2021 and 2020 The following table summarizes our results of operations for the three months endedJune 30, 2021 and 2020: Three Months Ended June 30, 2021 2020 Change (in thousands) Collaboration revenue$ 2,114 $ -$ 2,114 Operating expenses: Research and development 7,327 3,939 3,388 General and administrative 4,712 2,599 2,113 Total operating expenses 12,039 6,538 5,501 Loss from operations (9,925 ) (6,538 ) (3,387 ) Other income (expense): Change in fair value of preferred unit warrant liability - 21 (21 ) Interest expense (463 ) (455 ) (8 ) Interest income and other income (expense), net (66 ) - (66 ) Loss on debt extinguishment - - - Total other expense, net (529 ) (434 ) (95 ) Net loss$ (10,454 ) $ (6,972 ) $ (3,482 ) Collaboration Revenue Collaboration revenue recognized during the three months endedJune 30, 2021 of$2.1 million was related to our Collaboration Agreement with Merck. The upfront payment of$15.0 million received inJuly 2020 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, 2021 2020 Change (in thousands)
Direct research and development expenses by program: YTX-7739
$ 2,397 $ 804 1,593 YTX-9184 642 (9 ) 651 Platform, research and discovery, and unallocated expenses: - Platform and other early stage research external costs 731 117 614 Personnel related (including equity-based compensation) 2,126 1,896 230 Facility related and other 1,431 1,131 300 Total research and development expenses$ 7,327 $ 3,939 $ 3,388 Research and development expenses were$7.3 million for the three months endedJune 30, 2021 , an increase of$3.4 million from$3.9 million for the three months endedJune 30, 2020 . Direct expenses of our YTX-7739 program increased by$1.6 million in the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 . The change was due primarily to an increase in clinical and consultant costs as YTX-7739 progressed from a SAD study in 2020 to MAD clinical studies during the first quarter of 2021. Direct expenses of our YTX-9184 program increased by$0.7 million from near zero for the three months endedJune 30, 2020 to$0.6 million for the three months endedJune 30, 2021 . The change was primarily due to preclinical and consulting costs as the program progresses towards clinical studies. Platform and other early-stage research external costs increased by$0.6 million from$0.6 million in the three months endedJune 30, 2020 to$0.7 million in the three months endedJune 30, 2021 . This change was primarily due to decreased laboratory activities as a result of COVID-19 in 2020 as well as preparations for the move to new office and laboratory space in the second quarter of 2020. Personnel related costs increased by$0.2 million primarily due to hiring in the research and development function during the fourth quarter of 2020 which continued to be reflected in the three months endedJune 30, 2021 . 25
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Table of Contents General and Administrative Expenses Three Months Ended June 30, 2021 2020 Change (in thousands)
Personnel related (including equity-based compensation)
1,403 1,094 309 Facility related and other 1,171 333 838 Total general and administrative expenses$ 4,712 $ 2,599 $ 2,113
General and administrative expenses were
Six Months Ended June 30, 2021 2020 Change (in thousands) Collaboration revenue$ 5,646 $ -$ 5,646 Operating expenses: Research and development 14,106 8,968 5,138 General and administrative 10,764 4,631 6,133 Total operating expenses 24,870 13,599 11,271 Loss from operations (19,224 ) (13,599 ) (5,625 ) Other income (expense): Change in fair value of preferred unit warrant liability - 26 (26 ) Interest expense (951 ) (909 ) (42 ) Interest income and other income (expense), net (95 ) 45 (140 ) Loss on debt extinguishment 1,134 - 1,134 Total other expense, net 88 (838 ) 926 Net loss$ (19,136 ) $ (14,437 ) $ (4,699 ) 26
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Table of Contents Collaboration Revenue Collaboration revenue recognized during the six months endedJune 30, 2021 of$5.6 million was related to our Collaboration Agreement with Merck. The upfront payment of$15.0 million received inJuly 2020 was initially recorded as deferred revenue and is being recognized as revenue under the cost-to-cost method as research and development is being performed. Research and Development Expenses Six Months Ended June 30, 2021 2020 Change (in thousands) Direct research and development expenses by program: YTX-7739$ 4,118 $ 1,598 $ 2,520 YTX-9184 1,145 306 839 Platform, research and discovery, and unallocated expenses: Platform and other early stage research external costs 1,801 832 969 Personnel related (including equity-based compensation) 4,154 4,168 (14 ) Facility related and other 2,888 2,064 824 Total research and development expenses$ 14,106 $ 8,968 $ 5,138 Research and development expenses were$14.1 million for the six months endedJune 30, 2021 , an increase of$5.1 million from$9.0 million for the six months endedJune 30, 2020 . Direct expenses of our YTX-7739 program increased by$2.5 million in the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 . The change was due primarily to an increase in clinical and consultant costs as YTX-7739 progressed from a SAD study in 2020 to MAD clinical studies starting in the first quarter of 2021. Direct expenses of our YTX-9184 program increased by$0.8 million from$0.3 million for the six months endedJune 30, 2020 to$1.1 million for the six months endedJune 30, 2021 . The change was primarily due to preclinical and consulting costs as the program progresses towards clinical studies. Platform and other early-stage research external costs increased by$1.0 million from$0.8 million in the six months endedJune 30, 2020 to$1.8 million in the six months endedJune 30, 2021 . This change was primarily due to decreased laboratory activities as a result of COVID-19 in 2020 as well as preparations for the move to new office and laboratory space in the second quarter of 2020. Personnel related costs decreased by less than$0.1 million primarily due to employee turnover in the research and development function during 2020 which continued to be reflected in the six months endedJune 30, 2021 . General and Administrative Expenses Six Months Ended June 30, 2021 2020 Change (in thousands) Personnel related (including equity-based compensation)$ 4,407 $ 2,423 1,984 Professional and consultant fees 3,488 1,743 1,745 Facility related and other 2,869 465 2,404 Total general and administrative expenses$ 10,764 $ 4,631 $ 6,133
General and administrative expenses were
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Table of Contents Other Income (Expense) Other income (expense), net increased by$0.9 million from the six months endedJune 30, 2021 to the six months endedJune 30, 2020 resulting primarily from a$1.1 million gain on the extinguishment of debt upon forgiveness of the PPP loan (see Paycheck Protection Loan section of the Description of Indebtedness below). This loan was obtained inApril 2020 , prior to entering into the Merger Agreement with Proteostasis inAugust 2020 . 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 inJuly 2020 . InDecember 2020 , we completed the Merger with Proteostasis and acquired its$35.9 million of cash, cash equivalents and restricted cash. Immediately following the 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$31.6 million . We have also funded operations using borrowings under loan and security agreements. Cash Flows The following table summarizes our sources and uses of cash for the six months endedJune 30, 2021 and 2020: Six Months Ended June 30, 2021 2020 (in thousands) Cash used in operating activities$ (31,903 ) $ (14,304 ) Cash (used in) provided by investing activities (3,884 ) 1,193 Cash provided by financing activities 1,159 22,295
Net (decrease) increase in cash, cash equivalents, and restricted cash
$ (34,628 ) $ 9,184 Net Cash Used in Operating Activities During the six months endedJune 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 and the add back of the$1.1 million gain on extinguishment included in our net loss for the period. Those changes were offset by non-cash charges of$4.8 million , including$2.5 million of non-cash lease expense and$2.6 million of stock/equity-based compensation expense. Net cash provided by changes in our operating assets and liabilities for the six months endedJune 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. During the six months endedJune 30, 2020 , operating activities used$14.3 million of cash, resulting from our net loss of$14.4 million and net cash used by changes in our operating assets and liabilities of$2.4 million , partially offset by non-cash charges of$2.6 million . Net cash used by changes in our operating assets and liabilities for the six months endedJune 30, 2020 consisted of a$1.3 million decrease in accounts payable and accrued expenses and other current liabilities, a$0.3 million decrease in operating lease liabilities, a$0.5 million increase in prepaid expenses and other current assets, and a$0.3 million increase in deposits. 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 (Used in)/Provided by Investing Activities During the six months endedJune 30, 2021 , net cash used in investing activities was$3.9 million , primarily related to net cash used of$3.8 million for net purchases of marketable securities and$0.1 million of purchases of property and equipment. 28
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Table of Contents During the six months endedJune 30, 2020 , net cash provided by investing activities was$1.2 million , primarily related to cash provided by the net sales and maturities of marketable securities, partially offset by the purchase of property and equipment. Net Cash Provided by Financing Activities Net cash used in financing activities for the six months endedJune 30, 2021 was$1.2 million , consisting primarily of proceeds from issuance of common stock of$1.3 million , payments of debt issuance costs of$0.1 million and payments of finance lease obligations of$0.1 million . Net cash used in financing activities for the six months endedJune 30, 2020 was$22.3 million , consisting primarily of net proceeds from the issuance of Class C preferred units and proceeds from a government loan (Paycheck Protection Program ("PPP") loan). Description of Indebtedness Loan and Security Agreement We have outstanding borrowings of$15.0 million ("Tranche 1"), under a loan and security agreement entered into inDecember 2019 (the "Term Loan") with Hercules Capital, Inc. (the "Lender"). Another$5.0 million became available upon the occurrence of a developmental milestone and an equity event defined in the agreement ("Trance 2"), but we elected not to draw it. An additional$10.0 million may become available to be drawn upon lender approval. Borrowings under the Term Loan are repayable in monthly interest-only payments untilAugust 1, 2021 . The interest-only period will be followed by monthly payments of equal principal plus interest until the loan maturity date ofJanuary 1, 2024 . Outstanding borrowings bear interest at the greater of (i) 8.75% and (ii) the prime rate as reported in theWall Street Journal plus 4.00%. A final payment fee of 5.25% of the amounts drawn under the Term Loan is due upon the earlier of the maturity date or the repayment date if paid early, whether voluntary or upon acceleration due to default. We may repay the Term Loan at any time by paying the outstanding principal balance in full, along with any unpaid accrued interest, the final payment fees of 5.25% of the amounts drawn and a prepayment fee calculated on amounts being prepaid. The prepayment fee is 3.0% if the Term Loan is repaid within the one-year anniversary of the draw date, 2.0% if paid between the first and second-year anniversary of the draw date and 1.0% if paid after the second anniversary of the draw date but before the maturity date. InApril 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. InJune 2020 , the Term Loan was amended and an additional final payment fee of$0.3 million became due upon repayment of the loan. OnDecember 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 Merger under the Term Loan between us as borrower and the Lender. Immediately prior to the Merger, we entered into a Fourth Amendment and Consent to Loan and Security Agreement dated as ofDecember 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 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 controlYumanity, 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. OnMarch 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 onApril 23, 2021 . OnApril 13, 2021 , the Term Loan was amended to reduce the additional final payment fee from$0.3 million to$0.1 million and to extend the availability of Tranche 2 fromMarch 31, 2021 toJune 30, 2021 . Borrowings under the Term Loan are 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. 29
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Table of Contents Paycheck Protection Program Loan InApril 2020 , prior to entering into the Merger Agreement with Proteostasis inAugust 2020 , we issued a Promissory Note toSilicon 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 theU.S. Small Business Administration . The PPP Loan was unsecured, was scheduled to mature onApril 24, 2022 , and had a fixed interest rate of 1.0% per annum. Equal monthly payments of principal and interest were to begin commencing inAugust 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 underU.S. Small Business Administration requirements. OnApril 3, 2021 , we were notified bySilicon Valley Bank that our forgiveness application was accepted by theSmall Business Association as ofMarch 30, 2021 . Accordingly, we have recognized$1.1 million in income for debt extinguishment. At-the-Market Offering Program InApril 2021 , we entered into a sales agreement withJefferies LLC ("Jefferies") with respect to an at-the-market ("ATM") offering program under which we may issue and sell, from time-to-time at our sole discretion, shares of our common stock, in an aggregate offering amount of up to$60.0 million . 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 us. We will pay Jefferies up to 3% of the gross proceeds from any common stock sold through the sales agreement. We sold 82,132 shares of its common stock under the ATM program during the three months endedJune 30, 2021 for gross proceeds of$1.3 million . As ofJune 30, 2021 , approximately$58.7 million of common stock remained available for future issuance under the ATM program. 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. We believe that our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements late into the third quarter of 2022 from the date of issuance of the condensed consolidated financial statements included in this quarterly report. 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; • 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; 30
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Table of Contents • our need and ability to hire additional management and scientific and medical personnel; • the costs to operate as a public company in theU.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 inDecember 2020 , which provided us with$35.1 million incremental cash from the Merger and net proceeds of$31.6 million from the concurrent private placement. As ofAugust 12, 2021 , the issuance date of the condensed consolidated financial statements for the six months endedJune 30, 2021 , we expect that our existing cash, cash equivalents and marketable securities will fund our operating expenses, capital expenditure requirements and debt service payments late into the third quarter of 2022. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. 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 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. 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk. We are a smaller reporting company, as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, for this reporting period and are not required to provide the information required under this item. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our President and Chief Executive Officer and our Chief Business Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as ofJune 30, 2021 . The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as ofJune 30, 2021 , our President and Chief Executive Officer and our Chief Business Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. 31
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Table of Contents Changes in Internal Control over Financial Reporting No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months endedJune 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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