The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this Quarterly Report on
Form 10-Q
and our audited financial statements included in our Annual Report on Form
10-K
for the year ended December 31, 2020 filed with the SEC on March 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 as Lou 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. In February 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 in April 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 the Whitehead Institute, an affiliate of the Massachusetts 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 ended June 30, 2021.
As of June 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;



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     •    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 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.

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Biopharmaceutical product development is a highly speculative undertaking and
involves a substantial degree of risk. Typically, it takes many years to develop
one new product from the time it is discovered to when it is available for
treating patients, and development may cease for a number of reasons. Because of
the numerous risks and uncertainties associated with product development,
including any impact from the
COVID-19
pandemic, we are unable to predict the timing or amount of increased expenses or
when or if we will be able to achieve or maintain profitability. Even if we are
able to generate product sales, we may not become profitable. If we fail to
become profitable or are unable to sustain profitability on a continuing basis,
we may be unable to continue our operations at planned levels and be forced to
reduce or terminate our operations.
As of June 30, 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
In
March 2020, COVID-19 was declared
a global pandemic by the World Health Organization and to date,
the COVID-19 pandemic
continues to present a substantial public health and economic challenge around
the world. The length of time and full extent to which
the COVID-19 pandemic
will directly or indirectly impact our business, results of operations and
financial condition will depend on future developments that are highly
uncertain, subject to change and difficult to predict. While we continue to
conduct our research and development activities,
the COVID-19 pandemic
may cause disruptions that affect our ability to initiate and complete
preclinical studies and clinical trials or to procure items that are essential
for our research and development activities. The pandemic has already caused
significant disruptions in the financial markets, and may continue to cause such
disruptions, which could impact our ability to raise additional funds to support
our operations. Moreover, the pandemic has significantly impacted economies
worldwide and could result in adverse effects on our business and operations.
Clinical trial sites in many countries, including those in which we operate,
have incurred delays due to
COVID-19.
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
On August 22, 2020, Proteostasis Therapeutics, Inc, a Delaware corporation
("Proteostasis"), Pangolin Merger Sub, Inc. ("Merger Sub"), Yumanity, Inc.
(formerly Yumanity Therapeutics, Inc.), and Yumanity Holdings, LLC ("Holdings"),
entered into the Merger Agreement, as amended on November 6, 2020, pursuant to
which Merger Sub merged with and into Yumanity, Inc. Immediately prior to the
closing of the transaction, Holdings merged with and into Yumanity, Inc. with
Yumanity, 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 on December 22, 2020 pursuant to the
terms of the Merger Agreement. In connection with the completion of the Merger,
Proteostasis changed its name to Yumanity Therapeutics, Inc., and the trading
symbol changed from "PTI" to "YMTX." We refer to the historical operations of
Holdings and Yumanity, Inc. as Yumanity and following the Merger, the business
conducted by Yumanity became our primary business.
Pursuant to the terms of the Merger Agreement, upon closing of the Merger, all
of Yumanity, Inc.'s outstanding common stock was exchanged for common stock of
Proteostasis and all outstanding options and warrants to purchase common stock
of Yumanity, Inc. were exchanged for options and warrants to purchase common
stock of Proteostasis.
The transaction was accounted for as a reverse merger and as an asset
acquisition in accordance with Generally Accepted Accounting Principles in the
United States, or GAAP. Under this method of accounting, Yumanity was deemed to
be the accounting acquirer for financial reporting purposes. This determination
was primarily based on the facts that, immediately following the 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.

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Private Placement
On December 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 on
December 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
In April 2021, we entered into a sales agreement with Jefferies 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 ended June 30,
2021 for gross proceeds of $1.3 million. As of June 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.
In June 2020, we entered into a research collaboration and license agreement
(the "Collaboration Agreement") with Merck Sharp & Dohme Corp. ("Merck"),
focused on accelerating the development of new treatments for neurodegenerative
diseases. Under the terms of the Collaboration Agreement, Merck will gain
exclusive rights to two novel pipeline programs for the treatment of ALS and
FTLD. We and Merck will collaborate to advance the two preclinical programs
during the research term, after which Merck has the right to continue clinical
development and commercialization. Under the Collaboration Agreement, we
received an upfront payment totaling $15.0 million and are eligible to receive
future milestone payments of up to $530.0 million associated with the successful
research, development and sales of marketed products for pipeline programs, as
well as royalties on net sales. We will perform certain research and development
activities over the research term pursuant to the Collaboration Agreement and
will participate on a Joint Steering Committee to oversee research and
development activities. 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 ended June 30, 2021,
respectively, related to the Collaboration Agreement. We did not recognize any
revenue during the three and six months ended June 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;



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  •   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.



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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 SEC 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 to U.S. federal or state income taxation. Holdings' directly held
subsidiary was treated as a corporation for U.S. federal income tax purposes and
subject to taxation in the United States. After the Yumanity Reorganization, the
Company and its subsidiary are both taxpaying entities. In each reporting
period, our tax provision included the effects of consolidating our subsidiary's
results of operations. Since our inception, we have not recorded any income tax
benefits for the net losses we incurred in each year or for our earned research
and development tax credits, as we believe, based upon the weight of available
evidence, that it is more likely than not that all of our net operating loss
carryforwards and tax credits will not be realized. Utilization of U.S. federal
and state net operating loss carryforwards and research and development tax
credit carryforwards may be subject to a substantial annual limitation under
Section 382 of the Internal Revenue Code of 1986, 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.

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Results of Operations
Comparison of the Three Months Ended June 30, 2021 and 2020
The following table summarizes our results of operations for the three months
ended June 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 ended June 30, 2021 of
$2.1 million was related to our Collaboration Agreement with Merck. The upfront
payment of $15.0 million received in July 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 ended
June 30, 2021, an increase of $3.4 million from $3.9 million for the three
months ended June 30, 2020. Direct expenses of our
YTX-7739
program increased by $1.6 million in the three months ended June 30, 2021,
compared to the three months ended June 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 ended
June 30, 2020 to $0.6 million for the three months ended June 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
ended June 30, 2020 to $0.7 million in the three months ended June 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 ended
June 30, 2021.

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General and Administrative Expenses

                                                              Three Months Ended

                                                                   June 30,
                                                              2021           2020        Change
                                                                      (in thousands)

Personnel related (including equity-based compensation) $ 2,138 $ 1,172 966 Professional and consultant fees

                                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 $4.7 million for the three months ended June 30, 2021, an increase of $2.1 million from $2.6 million for the three months ended June 30, 2020. The increase of $1.0 million in personnel related costs was primarily due to $0.5 million in stock/equity-based compensation and $0.3 million due to additional hiring in the general and administrative function. Personnel-related costs for each of the three months ended June 30, 2021 and 2020 included stock/equity-based compensation of $0.9 million and $0.4 million, respectively. Professional and consultant fees increased by $0.3 million primarily due to higher audit expenses and legal fees related to operating as a public company. Facility and other related costs increased by $0.8 million primarily due to incremental public company insurance premiums of $0.5 million and $0.2 million of lease expense in excess of sublease income. Other Income (Expense) Other income (expense), net increased by $0.1 million from the three months ended June 30, 2021 to the three months ended June 30, 2020 resulting primarily from a $0.1 million loss on disposal of fixed assets acquired in the Merger. Comparison of the Six Months Ended June 30, 2021 and 2020 The following table summarizes our results of operations for the six months ended June 30, 2021 and 2020:



                                                      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 )




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Collaboration Revenue
Collaboration revenue recognized during the six months ended June 30, 2021 of
$5.6 million was related to our Collaboration Agreement with Merck. The upfront
payment of $15.0 million received in July 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 ended
June 30, 2021, an increase of $5.1 million from $9.0 million for the six months
ended June 30, 2020. Direct expenses of our
YTX-7739
program increased by $2.5 million in the six months ended June 30, 2021,
compared to the six months ended June 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 ended
June 30, 2020 to $1.1 million for the six months ended June 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 ended June 30,
2020 to $1.8 million in the six months ended June 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 ended
June 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 $10.8 million for the six months ended June 30, 2021, an increase of $6.1 million from $4.6 million for the six months ended June 30, 2020. The increase of $2.0 million in personnel related costs was primarily due to $1.2 million in stock/equity-based compensation and $0.6 million due to additional hiring in the general and administrative function. Personnel-related costs for each of the six months ended June 30, 2021 and 2020 included stock/equity-based compensation of $1.9 million and $0.7 million, respectively. Professional and consultant fees increased by $1.7 million primarily due to higher audit expenses and legal fees related to operating as a public company. Facility and other related costs increased by $2.4 million primarily due to incremental public company insurance premiums of $1.1 million, $0.8 million of lease expense in excess of sublease income, and $0.2 million paid in settlement of litigation.



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Other Income (Expense)
Other income (expense), net increased by $0.9 million from the six months ended
June 30, 2021 to the six months ended June 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 in April 2020, prior to entering into the Merger
Agreement with Proteostasis in August 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 in July 2020. In December 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
ended June 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 ended June 30, 2021, operating activities used
$31.9 million of cash, resulting from our net loss of $19.1 million, primarily
due to net cash changes in our operating assets and liabilities of $17.6 million
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 ended June 30, 2021 consisted of a $5.6 million decrease in deferred
revenue due to the recognition of revenue related to the Collaboration Agreement
(see note 4 to the financial statements). Additionally, there was a $9.6 million
decrease in accounts payable and accrued expenses and other current liabilities,
primarily due to $5.7 million that was paid to settle severance and other
obligations resulting from the merger, as well as payment of $1.7 million of
2020 performance bonuses offset by 2021 bonus expense accrued, and $1.7 million
of banking commissions paid related to the Private Placement that closed in the
fourth quarter of 2020. There was also a decrease of $2.2 million in operating
lease liabilities resulting from lease payments.
During the six months ended June 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 ended June 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 ended June 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.

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During the six months ended June 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 ended June 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 ended June 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 in December 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 until
August 1, 2021. The interest-only period will be followed by monthly payments of
equal principal plus interest until the loan maturity date of January 1, 2024.
Outstanding borrowings bear interest at the greater of (i) 8.75% and (ii) the
prime rate as reported in the Wall 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.
In April 2020, the Term Loan was amended to permit indebtedness consisting of a
loan under the PPP of the Coronavirus Aid, Relief, and Economic Security Act
(the "CARES Act"), provided that such loan shall be unsecured, shall not contain
any terms or conditions that are adverse to the lender's rights under the loan
and that we will not prepay such loan. In June 2020, the Term Loan was amended
and an additional final payment fee of $0.3 million became due upon repayment of
the loan.
On December 22, 2020, we entered into an Unconditional Secured Guaranty and
Pledge Agreement (the "Guaranty") with the Lender as a condition to the Lender's
consent to the 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 of December 22, 2020 with the Lender
(the "Loan Amendment"). The Guaranty provides for our guaranty of our
obligations under the Loan Agreement and provides the Lender a security interest
in all of our assets other than intellectual property as collateral. The Loan
Amendment provides for the Lender's consent to the Merger and to the creation
and funding of a Silicon Valley Bank Paycheck Protection Program escrow account
to hold funds in connection with our outstanding Paycheck Protection Program
loan amounts for which we have submitted a forgiveness application. The Loan
Amendment also amends the definition of "Change in Control" to include the
situations in which we no longer control Yumanity, Inc., our wholly-owned
subsidiary. The remaining terms and conditions of the Loan Agreement generally
continue in the form existing prior to the Loan Amendment.
On March 29, 2021, the Term Loan was amended again to allow for the creation of
a new foreign subsidiary, as well as changing certain covenants related to the
financial operations of said subsidiary. The subsidiary was formed on April 23,
2021.
On April 13, 2021, the Term Loan was amended to reduce the additional final
payment fee from $0.3 million to $0.1 million and to extend the availability of
Tranche 2 from March 31, 2021 to June 30, 2021.
Borrowings under the Term Loan 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.

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Paycheck Protection Program Loan
In April 2020, prior to entering into the Merger Agreement with Proteostasis in
August 2020, we issued a Promissory Note to Silicon Valley Bank, pursuant to
which we received loan proceeds of $1.1 million (the "PPP Loan"), provided under
the PPP established under the CARES Act and guaranteed by the U.S. Small
Business Administration. The PPP Loan was unsecured, was scheduled to mature on
April 24, 2022, and had a fixed interest rate of 1.0% per annum. Equal monthly
payments of principal and interest were to begin commencing in August 2021 until
the maturity date. Interest would have accrued on the unpaid principal balance
from the inception date of the loan. Forgiveness of the PPP Loan was only
available for principal that is used for the limited purposes that expressly
qualify for forgiveness under U.S. Small Business Administration requirements.
On April 3, 2021, we were notified by Silicon Valley Bank that our forgiveness
application was accepted by the Small Business Association as of March 30, 2021.
Accordingly, we have recognized $1.1 million in income for debt extinguishment.
At-the-Market
Offering Program
In April 2021, we entered into a sales agreement with Jefferies 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 ended June 30, 2021 for gross proceeds of
$1.3 million. As of June 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;



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     •    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 December 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 of
August 12, 2021, the issuance date of the condensed consolidated financial
statements for the six months ended June 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 of June 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 the
SEC'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 of June 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.

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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 ended June 30, 2021
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

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