☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Exact ~~name~~Name of ~~registrant~~Registrant as ~~specified~~Specified in its ~~charter)~~Charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting ~~company”~~company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November ~~12, 2020, there were 52,184,755~~8, 2021, the registrant had 10,308,350 shares of ~~the registrant’s~~ common stock, $0.001 par value per share, outstanding.

We are subject to various risks associated with our businesses and industries. These risks include the following:

The summary risk factors described above should be read together with the text of the full risk factors below, in the section entitled “Risk Factors” in Part II, Item 1A. and the other information set forth in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and the related notes, as well as in other documents that we file with the U.S. Securities and Exchange Commission (“SEC”). The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not precisely known to us, or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, results of operations and future growth prospects.

This Quarterly Report on Form 10-Q ~~or this report, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”~~ contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Statements that are not purely historical are forward-looking statements within the meaning of ~~Section 27A of~~ the U.S. Private Securities Litigation Reform Act ~~of 1933, as amended,~~ and Section 21E of the Securities Exchange Act of 1934, as ~~amended. These~~amended, that involve substantial risks and uncertainties. All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management, are forward-looking ~~statements are often identified by the~~statements. The words ~~“aim,”~~ “anticipate,” ~~“believes,~~“believe,” ~~“can,~~“contemplate,” “continue,” “could,” ~~“estimates,~~“estimate,” ~~“expects,~~“expect,” ~~“intends,~~“intend,” “may,” ~~“plans,~~“might,” “plan,” “potential,” ~~“predicts,~~“predict,” “project,~~” “seek,~~” “should,” “target,” “will,” ~~“would”~~“would,” or the negative of these ~~terms~~words or other ~~comparable terminology~~similar expressions are intended to identify forward-looking ~~statements. These~~statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report on Form 10-Q include, ~~but are not limited to,~~among other things, statements about:

We may not actually achieve the plans, intentions or ~~COVID-19, pandemic, including the expected duration of disruption~~expectations disclosed in our forward-looking statements, and ~~immediate and long-term impact and effect~~you should not place undue reliance on our ~~business~~forward-looking statements. Actual results or events could differ materially from the plans, intentions and ~~operations; and~~

~~You should refer to~~Quarterly Report on Form 10-Q, particularly in the “Risk Factors” ~~for a discussion of important factors~~section, that ~~may~~we believe could cause ~~our~~ actual results or events to differ materially from ~~those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that~~ the forward-looking statements that we make. Moreover, we operate in a competitive and rapidly changing environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures, or investments we may make or enter into.

You should read this Quarterly Report and the documents that we file with the Securities and Exchange Commission with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this ~~report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light~~Quarterly Report on Form 10-Q are made as of the ~~significant uncertainties in these forward-looking statements, you should~~date of this Quarterly Report on Form 10-Q, and we do not ~~regard these statements as a representation or warranty by us or~~assume any ~~other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no~~ obligation to ~~publicly~~ update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. ~~You should, therefore, not rely on these forward-looking statements as representing our views as~~

Any forward-looking statements in this report reflect our current views with respect to future events and with respect to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under Part II, Item 1A. Risk Factors and elsewhere in this report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This report contains estimates, projections and other information concerning our industry, the general business environment, and the markets for certain diseases, including estimates regarding the potential size of those markets and the estimated incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events, circumstances or numbers, including actual disease prevalence rates and market size, may differ materially from the information reflected in this report. Unless otherwise expressly stated, we obtained this industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may, in the future, not prove to have been accurate.

Item 1. ~~CONDENSED CONSOLIDATED~~ Financial ~~Statements~~ ~~(Unaudited)~~Statements.


	September 30,			December 31,			September 30,			December 31,
	2020			2019			2021			2020
Assets
Current assets:
Cash and cash equivalents	$	35,752		$	25,008		$	43,532		$	80,819
Short-term investments		5,000			44,459
Prepaids and other current assets		821			1,404
Marketable securities								2,899			4,498
Prepaid expenses and other current assets								1,725			2,264
Total current assets		41,573			70,871			48,156			87,581
Operating lease, right-of-use asset		11,682			12,631
Property and equipment, net		268			394			487			874
Operating lease right-of-use assets								19,864			23,678
Deposits								386			386
Restricted cash		828			828			928			2,066
Assets held-for-sale								—			250
Total assets	$	54,351		$	84,724		$	69,821		$	114,835
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	882		$	2,283		$	976		$	7,384
Accrued expenses		3,670			6,864
Accrued expenses and other current liabilities								5,412			7,851
Current portion of long-term debt								5,678			2,891
Operating lease liabilities		1,231			1,153			4,909			4,468
Short-term borrowings		369			—
Current portion of finance lease obligation								65			166
Deferred revenue								823			8,104
Total current liabilities		6,152			10,300			17,863			30,864
Derivative liability		3			3
Long-term debt, net of discount and current portion								8,742			13,237
Operating lease liabilities, net of current portion		11,109			12,043			10,738			14,479
Finance lease obligation, net of current portion								9			48
Total liabilities		17,264			22,346			37,352			58,628
Commitments and contingencies
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of September 30, 2020 and December 31, 2019		—			—
Common stock, $0.001 par value; 125,000,000 shares authorized; 52,180,380 and 52,116,629 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively		52			52
Common stock, $0.001 par value; 125,000,000 shares authorized; 10,308,350 and 10,193,831 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively								10			10
Additional paid-in capital		400,635			398,979			209,361			204,007
Accumulated other comprehensive income		—			7
Accumulated deficit		(363,600	)		(336,660	)		(176,902	)		(147,810	)
Total stockholders’ equity		37,087			62,378			32,469			56,207
Total liabilities and stockholders’ equity	$	54,351		$	84,724		$	69,821		$	114,835

The accompanying ~~unaudited~~ notes are an integral part of these condensed consolidated financial statements.

Three Months Ended September 30,

Nine Months Ended September 30,

2020

2019

2020

2019

Revenue

$
—

$
—

$
—

$
5,000

Operating expenses:

Research and development

1,240

10,145

12,342

43,217

General and administrative

4,536

3,154

12,489

10,781

Restructuring costs

2,401

—

2,401

—

Total operating expenses

8,177

13,299

27,232

53,998

Loss from operations

(8,177
)

(13,299
)

(27,232
)

(48,998
)
Interest income

8

224

269

879

Interest expense

(4
)

—

(13
)

—

Other income, net

4

242

36

850

Net loss

$
(8,169
)

$
(12,833
)

$
(26,940
)

$
(47,269
)
Net loss per share—basic and diluted

$
(0.16
)

$
(0.25
)

$
(0.52
)

$
(0.93
)
Weighted average common shares outstanding—basic
and diluted

52,177,557

51,099,307

52,157,355

51,058,339

Other comprehensive income:

Unrealized gain (loss) on investments

—

(17
)

(7
)

15

Comprehensive loss

$
(8,169
)

$
(12,850
)

$
(26,947
)

$
(47,254
)

The accompanying ~~unaudited~~ notes are an integral part of these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF ~~STOCKHOLDERS’ EQUITY~~COMPREHENSIVE LOSS

Common Stock

Additional
Paid-

Accumulated
Other
Comprehensive

Accumulated

Total
Stockholders’

Shares

Amount

in Capital

Income (Loss)

Deficit

Equity

Balances at June 30, 2020

52,147,656

$
52

$
400,315

$
—

$
(355,431
)

$
44,936

Stock-based compensation expense

—

—

287

—

—

287

Issuance of common stock pursuant
to employee stock purchase plan

28,205

—

33

—

—

33

Issuance of common stock for restricted stock units

4,519

—

—

—

—

—

Other comprehensive income (loss)

—

—

—

—

—

—

Net loss

—

—

—

—

(8,169
)

(8,169
)
Balances at September 30, 2020

52,180,380

$
52

$
400,635

$
—

$
(363,600
)

$
37,087

Common Stock

Additional
Paid-

Accumulated
Other
Comprehensive

Accumulated

Total
Stockholders’

Shares

Amount

in Capital

Income (Loss)

Deficit

Equity

Balances at December 31, 2019

52,116,629

$
52

$
398,979

$
7

$
(336,660
)

$
62,378

Stock-based compensation expense

—

—

1,598

—

—

1,598

Issuance of common stock pursuant
to employee stock purchase plan

59,232

—

58

—

—

58

Issuance of common stock for restricted stock units

4,519

—

—

—

—

—

Other comprehensive income (loss)

—

—

—

(7
)

—

(7
)
Net loss

—

—

—

—

(26,940
)

(26,940
)
Balances at September 30, 2020

52,180,380

$
52

$
400,635

$
—

$
(363,600
)

$
37,087

Common Stock

Additional
Paid-

Accumulated
Other
Comprehensive

Accumulated

Total
Stockholders’

Shares

Amount

in Capital

Income (Loss)

Deficit

Equity

Balances at June 30, 2019

51,099,307

$
51

$
393,872

$
33

$
(311,971
)

$
81,985

Stock-based compensation expense

—

—

961

—

—

961

Issuance of common stock for payment of
consulting services

29,669

—

25

—

—

25

Other comprehensive income (loss)

—

—

—

(17
)

—

(17
)
Net loss

—

—

—

—

(12,833
)

(12,833
)
Balances at September 30, 2019

51,128,976

$
51

$
394,858

$
16

$
(324,804
)

$
70,121

Common Stock

Additional
Paid-

Accumulated
Other
Comprehensive

Accumulated

Total
Stockholders’

Shares

Amount

in Capital

Income (Loss)

Deficit

Equity

Balances at December 31, 2018

50,808,422

$
51

$
391,825

$
1

$
(277,535
)

$
114,342

Exercise of stock options

2,543

—

3

—

—

3

Stock-based compensation expense

—

—

2,710

—

—

2,710

Issuance of common stock for payment of
consulting services

102,302

—

242

—

—

242

Issuance of common stock pursuant
to employee stock purchase plan

52,284

—

78

—

—

78

Vesting of restricted stock units

163,425

—

—

—

—

Other comprehensive income (loss)

—

—

—

15

—

15

Net loss

—

—

—

—

(47,269
)

(47,269
)
Balances at September 30, 2019

51,128,976

$
51

$
394,858

$
16

$
(324,804
)

$
70,121

The accompanying ~~unaudited~~ notes are an integral part of these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~PREFERRED UNITS AND STOCKHOLDERS’ EQUITY (DEFICIT)

Nine Months Ended September 30,

2020

2019

Cash flows from operating activities:

Net loss

$
(26,940
)

$
(47,269
)
Adjustments to reconcile net loss to cash used in operating activities:

Depreciation and amortization

126

150

Non-cash lease expense

949

909

Accretion of short-term investments

(38
)

(850
)
Stock-based compensation expense

1,598

2,710

Stock issued for consulting services

—

242

Changes in operating assets and liabilities:

Prepaids and other current assets

583

548

Other assets

—

(112
)
Accounts payable

(1,401
)

2,184

Accrued expenses

(3,194
)

716

Operating lease liabilities

(856
)

(783
)
Net cash used in operating activities

(29,173
)

(41,555
)
Cash flows from investing activities:

Purchases of short-term investments

(16,227
)

(63,040
)
Proceeds received from maturities of short-term investments

55,717

111,017

Purchases of property and equipment

—

(9
)
Net cash provided by investing activities

39,490

47,968

Cash flows from financing activities:

Proceeds from exercise of stock options

—

3

Proceeds from issuance of common stock pursuant to employee stock purchase plan

58

78

Proceeds from issuance of short-term borrowings

1,220

—

Repayment of short-term borrowings

(851
)

—

Net cash provided by financing activities

427

81

Net increase in cash, cash equivalents and restricted cash

10,744

6,494

Cash, cash equivalents and restricted cash at beginning of period

25,836

29,638

Cash, cash equivalents and restricted cash at end of period

$
36,580

$
36,132

The accompanying ~~unaudited~~ notes are an integral part of these condensed consolidated financial statements.

The accompanying notes are an integral part of these condensed consolidated financial statements.

1. Nature of Business and Basis of Presentation

1.	~~Nature of the Business~~

~~Proteostasis~~Yumanity Therapeutics, Inc. ~~(the~~(together with its wholly owned subsidiaries, the “Company” or “Yumanity”) ~~was incorporated in Delaware on December 13, 2006. The Company~~ is a clinical stage biopharmaceutical company ~~committed to~~engaged in the ~~discovery~~research and development of novel therapeutics to treat cystic fibrosis (“CF”) through theratyping, or the process of matching modulators to individual response to treatment regardless of cystic fibrosis transmembrane conductance regulator (“CFTR”) mutations. CF is a diseasetreatments for neurodegenerative diseases caused by ~~defects~~protein misfolding.

The Company is subject to risks similar to those of other early clinical stage companies in the ~~function or abundance~~biopharmaceutical industry, including dependence on key individuals, the need to develop commercially viable products, competition from other companies, many of ~~CFTR protein.~~

~~Since its inception,~~whom are larger and better capitalized, the ~~Company has devoted substantially all~~impact of the ongoing COVID-19 pandemic and the need to obtain adequate additional financing to fund the development of its ~~efforts to organizing and staffing~~product candidates. There can be no assurance that the ~~Company, business planning, raising capital, acquiring and developing product and technology rights, and conducting~~Company’s research and development ~~activities. It has funded its operations to date with proceeds~~will be successfully completed, that adequate protection for the Company’s intellectual property will be maintained, that any product candidates developed will obtain required regulatory approval or that any approved products will be commercially viable. Even if the Company’s development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from the sale of ~~preferred stock, the issuance of convertible promissory notes, proceeds from~~ its ~~initial public offering~~products.

Merger with Proteostasis Therapeutics, Inc.

On December 22, 2020, Proteostasis Therapeutics, Inc. (“Proteostasis” or “PTI”) completed its previously announced merger transaction with Yumanity, Inc. (formerly Yumanity Therapeutics, Inc.) in February 2016, proceeds from its follow-on public offerings, and payments received in connection with collaboration agreements and a research grant, as well as funds from the sale of stock under at-the-market offering programs.

~~In August 2020, the Company announced that after consideration of various financing and strategic alternatives for its CF portfolio,~~accordance with the ~~goal~~terms of maximizing stockholder value of these assets, it has decided to continue its operations while exploring business and strategic options related to its research and discovery platform and intellectual property portfolio.

~~On August 14, 2020,~~ the ~~Company formed Pangolin Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger Sub”).~~

~~After conducting a process of evaluating strategic alternatives for the Company, on August 22, 2020, the Company entered into an~~ Agreement and Plan of Merger and Reorganization, dated as of August 22, 2020, as amended on November 6, 2020 (the “Merger Agreement”) ~~with Yumanity Therapeutics,~~, by and among Pangolin Merger Sub, Inc., a ~~Delaware corporation~~wholly-owned subsidiary of Proteostasis (“~~Yumanity”~~Merger Sub”), Yumanity Holdings, LLC (“Holdings”) and Yumanity, Inc., pursuant to which Merger Sub merged with and into Yumanity, Inc., with Yumanity, Inc. surviving as a ~~Delaware limited liability company (“Holdings) and~~wholly owned subsidiary of Proteostasis (the “Merger”). Immediately prior to the effective time of the Merger, ~~Sub, which was subsequently amended on November 6, 2020. Upon~~Holdings merged with and into Yumanity, Inc. and Yumanity, Inc. continued to exist as the ~~terms~~surviving corporation. On December 22, 2020, in connection with, and ~~subject~~prior to the ~~satisfaction~~completion of, the ~~conditions described~~Merger, Proteostasis effected a 1-for-20 reverse stock split of its common stock (the “Reverse Stock Split”). Immediately following the Merger, Proteostasis changed its name to “Yumanity Therapeutics, Inc.”

At the effective time of the Merger (the “Effective Time”), each share of Yumanity Inc.’s common stock, par value $0.01 (the “Yumanity Common Stock”), outstanding immediately prior to the Effective Time was converted into the right to receive shares of PTI based on an exchange ratio set forth in the Merger ~~Agreement, including approval~~Agreement. At the Effective Time following the Reverse Stock Split, the exchange ratio was determined to be 0.2108 shares of PTI Common Stock for each share of Yumanity Common Stock (the “Exchange Ratio”). At the closing of the Merger on December 22, 2020, PTI issued an aggregate of 6,024,433 shares of its common stock to Yumanity, based on the Exchange Ratio. In addition, all options and warrants exercisable for shares of common stock of Yumanity, Inc. became options and warrants exercisable for shares of common stock of PTI equal to the Exchange Ratio multiplied by the number of shares of Yumanity Inc.’s common stock previously represented by such stock options and warrants, as applicable, with a proportionate adjustment in exercise price. No fractional shares were issued in connection with the Exchange Ratio.

The transaction was accounted for as a reverse merger and as an asset acquisition in accordance with 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 fact that, immediately following the Merger: (i) Yumanity’s equity holders owned a 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 hold all key positions in the senior management of the combined organization. Accordingly, for accounting purposes, (i) the Merger was treated as the equivalent of the Yumanity issuing stock to acquire the net assets of PTI, (ii) the net assets of PTI were allocated a portion of the transaction byprice and recorded based upon their relative fair values in the ~~Company’s stockholders and Yumanity’s stockholders and~~financial statements at the ~~consolidation~~time of closing, (iii) the reported historical operating results of the combined organization prior to the Merger will be those of Yumanity and (iv) for periods prior to the transaction, shareholders’ equity of the combined organization is presented based on the historical equity structure of Yumanity. As a result, as of the closing date of the Merger, the net assets of PTI were recorded at their acquisition-date fair values in the financial statements of Yumanity and the reported operating results prior to the Merger will be those of Yumanity. As used herein, the words “the Company” refer to, for periods following the Merger, Yumanity Therapeutics, Inc., together with its wholly owned subsidiaries, and for periods prior to the Merger, Holdings, and its wholly owned subsidiary, as applicable.

The Yumanity Reorganization

On December 22, 2020, immediately prior to the closing of the ~~transaction,~~ Merger, ~~Sub will be~~pursuant to the terms of the Merger Agreement, the Company completed the Yumanity Reorganization whereby Holdings, the sole stockholder and holding company parent of Yumanity,

Inc., merged with and into Yumanity, ~~(the “Merger”)~~Inc., with Yumanity, Inc. as the surviving corporation. In connection with the ~~Merger~~Yumanity Reorganization, each outstanding common unit of Holdings was exchanged for shares of common stock of Yumanity, Inc. based upon a ratio associated with the terms of each common unit, each outstanding preferred unit of Holdings was converted into shares of common stock of Yumanity, Inc. based upon the ratio associated with each individual series of preferred units, each outstanding option to purchase shares of common units of Holdings was converted into an outstanding option to purchase shares of common stock of Yumanity, Inc. on a 1-for-1 basis, with a corresponding adjustment to the exercise price, and each outstanding warrant to purchase preferred units or common units of Holdings was converted into a warrant to purchase shares of common stock of Yumanity, Inc. based upon the ratio associated with each individual series of preferred units or on a 1-for-1 basis, respectively, with a corresponding adjustment to the exercise price, as ~~a wholly-owned subsidiary~~applicable.

Basis of ~~the Company. If the Merger is completed, the business of the Company will become the business of Yumanity.~~presentation

The ~~Merger is expected to be treated by the Company as a reverse merger accounted for as an asset acquisition~~Company’s condensed consolidated financial statements have been prepared in ~~accordance~~conformity with accounting principles generally accepted in the United States of America (“GAAP”). ~~For accounting purposes, Yumanity~~Any reference in these notes to applicable guidance is ~~considered~~meant to ~~be acquiring~~refer to the ~~Company~~authoritative GAAP as found in the ~~Merger. In accordance with~~Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the ~~accounting guidance under~~Financial Accounting ~~Standard Updates (or “ASU”~~Standards Board (“FASB”) ~~2017-01,~~. The accompanying condensed consolidated financial statements include the ~~Merger is considered an asset acquisition. Accordingly, the assets and liabilities~~accounts of the Company ~~will be recorded as of~~and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise noted, all references to common stock/unit share and per share amounts have also been adjusted to reflect the closing date of the Merger at the purchase price of the accounting acquirer. The Merger is expected to close in the fourth quarter of 2020, subject to the approval by the Company’s stockholders at a special meeting of the Company’s stockholders to be held on December 16, 2020, as well as other customary conditions. Upon completion of the Merger, the combined company will be renamed Yumanity Therapeutics, Inc., and is expected to trade on the Nasdaq Capital Market under the ticker symbol “YMTX”.Exchange Ratio.

On August 22, 2020, due to the entry into of the Merger Agreement with Yumanity, the Company’s Board of Directors (the “Board”) committed to reducing its workforce by approximately 79% to a total of five full-time employees, who will remain with the Company until the closing of the Merger to assist with its day-to-day business operations, including the maintenance of the sale and disposition of the Company’s intellectual property and assets relating to its cystic fibrosis clinical program (the “CF Assets”), and those activities necessary to complete the proposed Merger. The Company has also retained its core intellectual property, licenses, collaborations with research institutions and universities, and proprietary equipment. The Company has incurred certain restructuring costs related to a reduction in its workforce, totaling $2.4 million through September 30, 2020. At September 30, 2020, the Company has have accrued one-time termination benefits of $1.6 million, of which the majority of this amount is anticipated to be incurred in the fourth quarter of 2020. In addition to restructuring costs, the Company has incurred approximately $1.6 million in other merger-related costs, which are included in the general and administrative costs on the Company’s statement of operations and consists primarily of professional fees.Going concern

Although the Company has entered into the Merger Agreement and intends to consummate the Merger, there is no assurance that it will be able to successfully consummate the Merger on a timely basis, or at all. If, for any reason, the Merger does not close, the Company’s Board may elect to, among other things, attempt to complete another strategic transaction like the Merger, attempt to sell or otherwise dispose of the Company’s various assets, resume the Company’s research and development activities and continue to operate the Company’s business or dissolve and liquidate its assets. If the Company decides to dissolve and liquidate its assets, it would be required to pay all of its debts and contractual obligations, and set aside certain reserves for potential future claims, and there can be no assurances as to the amount or timing of available cash left, if any, to distribute to the Company’s stockholders after paying its debts and other obligations and setting aside funds for reserves. If the Company were to continue its business, it would need to raise a substantial amount of cash to fund ongoing operations and future development activities for its existing product candidates.

The Company has not generated any commercial revenue since inception. As a result, the Company has incurred recurring losses and requires significant cash resources to execute its business plans. In accordance with ASC 205-40, ~~Going Concern~~ ~~(“ASC 205-40”), the~~ Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the original issuance date of the condensed consolidated financial ~~statements are issued~~.~~As of September 30, 2020,~~statements.

Since its inception, the Company ~~had an accumulated deficit of $363.6 million.~~has funded its operations primarily with equity and debt including proceeds from the Merger. The Company has incurred recurring losses and negative cash flows from operations since ~~its inception. During~~inception, including net losses of $10.0 million and $29.1 million for the three and nine months ended September 30, ~~2020,~~2021. In addition, as of September 30, 2021, the Company ~~incurred losses~~had an accumulated deficit of ~~$26.9 million and used $29.2 million of cash in operations.~~ $176.9 million. The Company e~~xpects that its~~expects to continue to generate operating losses ~~and negative cash flows will continue~~ for the foreseeable future.~~The~~

As of November 15, 2021, the date of issuance of these unaudited condensed consolidated financial statements, the Company ~~currently~~ expects that its cash, cash equivalents and ~~short-term investments~~marketable securitiesas of ~~$40.8 million~~ September 30, 2021, will be sufficient to fund its operating expenses, capital expenditure requirements and debt service payments into the third quarter of 2022. The Company plans to address this condition by raising additional capital ~~requirements, based upon~~to finance its ~~current operating plan,~~operations. The future viability of the Company is dependent on its ability to raise additional capital to finance its operations. Although the Company has been successful in raising capital in the past, there is no assurance that it will be successful in obtaining such additional financing on terms acceptable to the Company, if at all. Based on its recurring losses from operations incurred since inception, expectation of continuing losses for ~~at least 12 months~~the foreseeable future and need to raise additional capital to finance its future operations, the Company has concluded that there is substantial doubt about its ability to continue as a going concern for a period of one year from the date that these ~~consolidated~~ financial statements are issued.

If the Company is unable to obtain additional funding, the Company will be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations. The ~~novel coronavirus (“COVID-19”)~~accompanying financial statements do not include any adjustments that might result from this uncertainty.

Impact of the COVID-19 pandemic ~~continues to rapidly evolve~~

The COVID-19 pandemic, which began in December 2019 and has ~~already resulted~~spread worldwide, has caused many governments to implement measures to slow the spread of the outbreak. The outbreak and government measures taken in response have had a significant ~~disruption~~impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred, supply chains have been disrupted, and facilities and production have been suspended. The future progression of ~~global financial markets~~the pandemic and its effects on the Company’s business and operations are uncertain. The COVID-19 pandemic is ongoing and may affect the Company’s ~~operations~~ability to initiate and ~~those of third parties~~complete preclinical studies, delay its clinical trial or future clinical trials, disrupt regulatory activities, or have other adverse effects on ~~which~~its business and operations. The pandemic has already caused significant disruptions in the ~~Company relies. While the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic on the global~~ financial markets, and may ~~reduce~~continue to cause such disruptions, which could impact the Company’s ability to ~~access capital,~~raise additional funds to support its operations. Moreover, the pandemic has significantly impacted economies worldwide and could result in adverse effects on the Company’s business and operations.

Clinical trial sites in many countries, including those in which ~~could negatively~~the Company operates, have incurred delays due to COVID-19. Certain of the sites in the YTX-7739 Phase 1b clinical trial incurred delays due to COVID-19 that resulted in a delay in the results from that study. There continues to be a risk of additional delays to the Company’s clinical programs.

To date, the Company has not incurred impairment losses in the carrying values of its assets as a result of the pandemic and it is not aware of any specific related event or circumstance that would require it to revise its estimates reflected in these condensed consolidated financial statements. The extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s ~~short-term~~business, results of operations and ~~long-term liquidity~~financial condition, including current and future clinical trials and research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, the actions taken to contain or treat it, and the ~~Company’s~~duration and ~~Yumanity’s ability to complete the Merger on a timely basis or at all. The ultimate impact~~intensity of the ~~COVID-19 pandemic is highly uncertain~~related effects.

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 ~~subject~~sell, from time-to-time at our sole discretion, shares of our common stock, in an aggregate offering amount of up to ~~change. The Company does not yet know the full extent~~$60.0 million. Jefferies acts as our sales agent and will use commercially reasonable efforts to sell shares of potential delays or impacts on its business, financing or other activities or on healthcare systems or the global economy as a whole. However, these effects could have a material impact on the Company’s liquidity, capital resources, operations and business and thosecommon stock from time-to-time, based upon instruction us. We will pay Jefferies up to 3% of the ~~third parties~~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 nine months ended September 30, 2021 for gross proceeds of $1.3 million. As of September 30, 2021, approximately $58.7 million of common stock remained available for future issuance under the ATM program.

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 ~~which~~December 22, 2020. The aggregate gross proceeds for the ~~Company relies.~~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.

3. Fair Value Measurements and Marketable Securities

The following tables present the Company’s fair value hierarchy for its assets and liabilities, which are measured at fair value on a recurring basis (in thousands):

~~Recently Issued Accounting Pronouncements~~


	Fair Value Measurements at September 30, 2021 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	41,886			$	0	$	41,886
Marketable securities:
Commercial paper				2,899		0		2,899
	$	41,886	$	2,899	$	0	$	44,785

	Fair Value Measurements at December 31, 2020 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	77,129	$	0	$	0	$	77,129
Commercial paper		0		1,800		0		1,800
Marketable securities:
Commercial paper		0		4,498		0		4,498
	$	77,129	$	6,298	$	0	$	83,427

~~ASU No. 2016-13,~~ ~~Financial Instruments – Credit Losses (Topic 326): Measurement~~Marketable securities were valued by the Company using quoted prices in active markets for similar securities, which represent a Level 2 measurement within the fair value hierarchy.

Marketable securities by security type consisted of ~~Credit Losses on Financial Instruments~~the following (in thousands):


	September 30, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Commercial paper	$	2,899	$	0	$	0	$	2,899
	$	2,899	$	0	$	0	$	2,899

	December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Commercial paper	$	4,498	$	0	$	0	$	4,498
	$	4,498	$	0	$	0	$	4,498

The Company’s marketable securities are due within one year.

4. Collaboration Agreement

In June ~~2016,~~2020, the ~~FASB~~Company entered into an exclusive license and research collaboration agreement (the “Collaboration Agreement”) with Merck Sharp & Dohme Corp. (“Merck”) to support the research, development and commercialization of products for the treatment of amyotrophic lateral sclerosis (ALS) and frontotemporal lobar dementia (FTLD). Pursuant to the Collaboration Agreement, the Company granted Merck an exclusive, worldwide license with the right to grant and authorize sublicenses, under certain intellectual property rights related to two certain undisclosed targets in connection with the Company’s ALS and FTLD programs to make, have made, use, import, offer to sell and sell compounds and products covered by such intellectual property rights. In the event that the exploitation of such compound or product would infringe during the term of the Merck Collaboration Agreement a claim of an issued ~~ASU No. 2016-13,~~ ~~Financial Instruments - Credit Losses (Topic 326): Measurement~~patent controlled by Yumanity, Yumanity also granted Merck a non-exclusive, sublicensable, royalty-free license under such issued patent to exploit such compound and product.

Under the terms of ~~Credit Losses~~the Collaboration Agreement, the Company and Merck are each responsible to perform certain research activities in accordance with a mutually agreed upon research plan. Upon the completion of certain stages of the research plan, Merck will elect to either advance and make certain contractual option payments or terminate the applicable research program. If Merck elects not to advance a research program, such program terminates and the rights granted to Merck in the program revert to the Company. Following completion of the research program, Merck is responsible for the development and commercialization of the compounds developed pursuant to the research program and any product containing such compounds.

Under the terms of the Collaboration Agreement, the Company received an upfront payment totaling $15.0 million in July 2020 and is eligible to receive up to $280.0 million upon achievement of specified research and development milestones, and up to $250.0 million upon achievement of specified sales-based milestones as well as a tiered, mid-single digit royalty on ~~Financial Instruments~~ ~~(“ASU 2016-13”).~~net sales of licensed products, subject to customary reductions.

Unless terminated earlier, the Collaboration Agreement will continue in full force and effect until one or more products has received marketing authorization and, thereafter, until expiration of all royalty obligations under the Collaboration Agreement. The ~~FASB subsequently~~Company or Merck may terminate the Collaboration Agreement upon an uncured material breach by the other party or insolvency of the other party. Merck may also terminate the Merck Collaboration Agreement for any reason upon certain notice to the Company.

Merck also participated in the Company’s Class C preferred units financing in June 2020 with terms consistent with those of other investors that purchased Class C preferred units in June 2020. The Class C preferred units were issued ~~amendments~~at a price of $4.0008 per unit, which was determined to ~~ASU 2016-13, which have~~be fair value based on the same ~~effective date~~price paid by other investors that purchased Class C preferred units in the financing. The equity investment was considered to be distinct from the Collaboration Agreement.

The Company assessed the promised goods and ~~transition date of January 1, 2022,~~services to determine if they are distinct. Based on this assessment, the Company determined that Merck cannot benefit from the promised goods and services separately from the others as they are highly interrelated and therefore not distinct. Accordingly, the promised goods and services represent one combined performance obligation and the entire transaction price was allocated to that single combined performance obligation. The performance obligation is being satisfied over the research term as the Company performs the research and development activities through the first substantive option period, and participates in a Joint Steering Committee to oversee research and development activities. Accordingly, the upfront payment of $15.0 million was recorded as deferred revenue and will be recognized as revenue as the performance obligation is satisfied. The Company recognizes revenue using the cost-to-cost method, which it believes 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. Under this method, revenue is recorded as a ~~smaller reporting company. These standards require that credit losses be reported using an expected losses model rather than~~percentage of the ~~incurred losses model that is currently used, and establishes additional disclosures~~estimated transaction price based on the extent of progress towards completion. As of September 30, 2021, the aggregate amount of the transaction price related to ~~credit risks. For available-for-sale debt securities with unrealized losses, these standards now require allowances to be recorded instead of reducing~~ the ~~amortized cost~~unsatisfied portion of the ~~investment. These standards limit the amount of credit losses~~performance obligation is $0.8 million, which is expected to be recognized ~~for available-for-sale debt securities to~~as revenue within the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. Based on the composition of the Company’s investment portfolio and other financial assets, current market conditions and historical credit loss activity, the adoption of these standards is not expected to have a material impact on the Company’s condensed consolidated financial statements.

3.	~~Short-Term Investments~~

~~The following table summarizes the Company’s short-term investments as of September 30, 2020 and December 31, 2019 (in thousands):~~

September 30, 2020

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

U.S. treasury securities

$
5,000

$
—

$
—

$
5,000

$
5,000

$
—

$
—

$
5,000

December 31, 2019

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

U.S. government-sponsored enterprise
securities

$
20,456

$
2

$
(1
)

$
20,457

U.S. treasury securities

23,996

7

(1
)

24,002

$
44,452

$
9

$
(2
)

$
44,459

Short-term investments represent holdings of available-for-sale debt securities and are reported at fair value with unrealized gains and losses reported net of taxes, if material, in other comprehensive income. The Company did not have any realized gains or losses on its short-term investments fornext year. For the three and nine months ended September 30, 2021, the Company recorded $1.6 million and $7.3 million of collaboration revenue, respectively, related to the Collaboration Agreement. At contract inception, the potential milestone payments that the Company is eligible to receive were excluded from the transaction price as they were fully constrained. At the end of each reporting period, the Company reevaluates the transaction price and as uncertain events are resolved or other changes in circumstances occur, and if necessary, the Company will adjust its estimate of the transaction price. Any additions to the transaction price would be reflected in the period as a cumulative revenue catch-up. At the inception of the arrangement, the Company evaluated the options held by Merck to either advance or terminate the applicable research program to determine if they provided Merck with any material rights. The Company concluded that the options were not issued at a significant and incremental discount, and therefore do not provide Merck with a material right. As such, these options were excluded as performance obligations and will be accounted for if and when they occur.

The Company assessed the Collaboration Agreement to determine whether a significant financing component exists and concluded that a significant financing component does not exist.

6. Debt

Long-term debt consisted of the following (in thousands):


	September 30,			December 31,
	2021			2020
Principal amount of long-term debt	$	14,106		$	16,123
Less: Current portion of long-term debt		(5,678	)		(2,891	)
Long-term debt, net of current portion		8,428			13,232
Debt discount, net of accretion		(272	)		(348	)
Accrued end-of-term payment		586			353
Long-term debt, net of discount and current portion	$	8,742		$	13,237

We have outstanding principal borrowings of $14.1 million 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, 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 were repayable in monthly interest-only payments until August 1, 2021. The interest-only period is 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 Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and ~~2019, respectively~~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 the Company 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, the Company 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 Yumanity, Inc. as borrower and the Lender. Immediately prior to the Merger, Yumanity, Inc. 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 the Company’s guaranty of Yumanity Inc.’s obligations under the Loan Agreement and provides the Lender a security interest in all of Company’s 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 Yumanity’s outstanding Paycheck Protection Program loan amounts for which Yumanity has submitted a forgiveness application. The Loan Amendment also amends the definition of “Change in Control” to include the situations in which the Company no longer controls Yumanity, Inc. The remaining terms and conditions of the Loan Agreement generally continue in the form existing prior to the Loan Amendment.

As of September 30, 2021 and December 31, 2020, the interest rate applicable to borrowings under the Term Loan was 8.75%. For the nine months ended September 30, 2021, the weighted average effective interest rate on outstanding borrowings under the Term Loan was approximately 9.41%. 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 of $0.3 million to $0.1 million upon repayment of the loan.

Borrowings under the Term Loan are collateralized by substantially all of the Company’s personal property, other than its intellectual property. There were no ~~other-than-temporary impairments~~financial covenants associated with the Term Loan; however, the Company is subject to certain affirmative and negative covenants restricting the Company’s activities, including limitations on dispositions, mergers or acquisitions; encumbering its 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 in the Company’s 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.

In April 2020, prior to entering into the Merger Agreement with PTI in August 2020, the Company issued a Promissory Note to Silicon Valley Bank, pursuant to which it received loan proceeds of $1.1 million (the “Loan”) provided under the PPP established under the CARES Act and guaranteed by the U.S. Small Business Administration. On April 3, 2021, the Company was notified by Silicon Valley Bank that the Loan forgiveness application was accepted by the Small Business Association as of March 30, 2021. Accordingly, the Company has recognized $1.1 million in income for debt extinguishment.

As of September 30, 2021, future principal payments due are as follows (in thousands):


Year	Aggregate Minimum Payments
2021	$	1,374
2022		5,805
2023		6,341
2024		586
2025		0
	$	14,106

7. Stock/Equity-Based Compensation

Restricted Stock Units (RSUs)

On January 14, 2021, the Company’s compensation committee of the board approved payment to be made to Company employees through a grant of RSUs based on the February 1, 2021 closing share price of the Company’s common stock with a fair value of $2.2 million. The requisite service period for the awards ranges from one to four years (the vesting period). The Company recognized employee stock-based compensation expense for the RSU grant on a straight-line basis over the vesting period of the awards. As of September 30, 2021, 122,469 RSUs were granted and 87,052 were outstanding, and the Company recognized $0.2

million and $0.7 million of stock-based compensation expense during the three and nine months ended September 30, ~~2020 and~~ ~~2019, respectively~~.2021, respectively.

4.	~~Fair Value of Financial Assets and Liabilities~~

The following ~~tables present information about~~table summarizes the Company’s ~~financial assets and liabilities measured at fair value on a recurring basis and indicate~~RSU activity for the ~~level of the fair value hierarchy utilized to determine such fair values (in thousands):~~

Fair Value Measurements as of September 30, 2020 using:

Level 1

Level 2

Level 3

Total

Assets:

Cash equivalents:

Money market funds

$
27,820

$
—

$
—

$
27,820

U.S. treasury securities

—

5,999

—

5,999

U.S. government-sponsored enterprise
securities

—

1,000

—

1,000

Short-term investments:

U.S. treasury securities

—

5,000

—

5,000

$
27,820

$
11,999

$
—

$
39,819

Liabilities:

Derivative liability

$
—

$
—

$
3

$
3

Fair Value Measurements as of December 31, 2019 using:

Level 1

Level 2

Level 3

Total

Assets:

Cash equivalents:

Money market funds

$
23,906

$
—

$
—

$
23,906

Short-term investments:

U.S. government-sponsored enterprise
securities

—

20,457

—

20,457

U.S. treasury securities

—

24,002

—

24,002

$
23,906

$
44,459

$
—

$
68,365

Liabilities:

Derivative liability

$
—

$
—

$
3

$
3

~~During the periods~~nine months ended September 30, ~~2020 and December 31, 2019, there were no transfers between Level 1, Level 2, and Level 3.~~2021:

~~The derivative liability relates to a cash settlement option associated with the change~~


	Units			Weighted Average Grant Date Fair Value
Unvested balance at December 31, 2020		0		$	0
Issued		122,469		$	17.89
Vested		(23,146	)	$	17.89
Forfeited		(12,271	)	$	17.89
Unvested balance at September 30, 2021		87,052		$	17.89

Summary of ~~control provision in the Company’s Cystic Fibrosis Foundation, Inc. (“CFF”) agreement, which meets the definition of a derivative. The fair value~~plans

Upon completion of the derivative liability is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the derivative instrument was originally determined using the Monte-Carlo simulation analysis. In determining the fair value of the derivative liability, the inputs impacting fair value include the fair value of the Company’s common stock, expected term of the derivative instrument, expected volatility of the common stock price, risk-free interest rate, expected sales-based milestone payments, discount rate, probability of a change of control event, and the probability that the counterparty would elect to accept the alternative cash payment in lieu of its right to the future sales-based milestone payments.

~~The fair value of the derivative liability was not material at September 30, 2020 and December 31, 2019.~~

~~Prepaids and other current assets consisted of the following (in thousands):~~

~~As of September 30, 2020,~~Merger, the Company had short-term borrowings of $0.4 million consisting of a Commercial Insurance Premium Finance and Security Agreement (the “Finance and Security Agreement”) entered into on February 27, 2020. The Finance and Security Agreement has a ten-month repayment period with an annual interest rate of 2.59% and a maturity of December 11, 2020. Collateral under the Finance and Security Agreement includes the right, title, and interest in the underlying business insurance policies. As of September 30, 2020, the Company has paid less than $0.1 million in interest on short-term borrowings.

~~On February 3, 2016, the Company’s stockholders approved the~~assumed PTI’s 2016 Stock Option and Incentive Plan (the “2016 Plan”), and PTI’s 2016 Employee Stock Purchase Plan (the “2016 ESPP”).

On February 3, 2016, PTI’s stockholders approved the 2016 Plan, which became effective on February 9, 2016. The 2016 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards and other stock-based awards. The number of shares initially reserved for issuance under the 2016 Plan was ~~1,581,839~~79,092 shares. The number of shares of common stock that may be issued under the 2016 Plan will automatically increase each January 1, beginning January 1, 2017, by the lesser of 3%3% of the shares of the Company’s common stock outstanding on the immediately preceding December 31, or an amount determined by the Company’s board of directors or the compensation committee of the board of directors. The shares of common stock underlying any awards that are forfeited, canceled, repurchased, or are otherwise terminated by the Company under the 2016 Plan and the 2008 Equity Incentive Plan, as amended (the “2008 Plan”) will be added back to the shares of common stock available for issuance under the 2016 Plan. On January 1, ~~2020,~~2021, an additional ~~1,563,498~~303,495 shares were reserved for issuance under the 2016 ~~Plan.~~Plan in accordance with the provisions of the 2016 Plan described above. Options granted under the 2016 Plan with service-based vesting conditions generally vest over four years and expire after ten years. As of September 30, ~~2020,~~2021 the total number of shares of the Company’s common stock reserved for issuance under the 2016 Plan was ~~6,914,838,~~626,100, of which ~~2,749,403~~136,329 shares are available for future issuance under the 2016 Plan.

On February 3, 2016, ~~the Company’s~~PTI’s stockholders approved the 2016 ~~Employee Stock Purchase Plan (the “2016 ESPP”),~~ESPP, which became effective in connection with the completion of the ~~Company’s~~PTI’s initial public offering. A total of ~~138,757~~6,938 shares of common stock were initially reserved for issuance under the 2016 ESPP. In addition, the number of shares of common stock that may be issued under the 2016 ESPP will automatically increase each January 1, beginning January 1, 2017, by the lesser of (i) ~~138,757~~6,938 shares of common stock, (ii) 1%1% of the Company’s shares of common stock outstanding on the immediately preceding December 31, or (iii) an amount determined by the Company’s board of directors or the compensation committee of the board of directors.

~~During the nine months ended September 30, 2020, 59,232 shares of common stock were issued pursuant to the 2016 ESPP.~~ As of September 30, ~~2020,~~2021, the total number of shares reserved under the 2016 ESPP was ~~552,537~~41,626 shares. The ~~Company recognized less than $0.1 million~~number of ~~stock-based compensation during the three and nine months ended September 30, 2020 related to~~shares reserved for issuance under the 2016 ~~ESPP.~~ESPP was increased by 6,937 shares effective as of January 1, 2021 in accordance with the provisions of the 2016 ESPP described above.

~~Restricted~~Yumanity Therapeutics, Inc. Amended and Restated 2018 Stock ~~Units (RSUs)~~Option and Grant Plan

On ~~February~~December 4, ~~2020,~~2018, the Company’s ~~Board~~board of directors adopted the 2018 Unit Option and Grant Plan (the “2018 Plan”), which was approved ~~payment~~by the Company’s members on December 5, 2018. The 2018 Plan provided for the Company to ~~be made~~grant unit options, restricted unit awards and unrestricted unit awards to employees, directors and consultants of the Company. As part of the Yumanity Reorganization and the Merger, the 2018 Plan was amended and restated as the “Yumanity Therapeutics, Inc. Amended and Restated 2018 Stock Option and Grant Plan”. Each stock option outstanding under the 2018 Plan at the Effective Time of the Merger was automatically converted into a ~~nonemployee through a grant~~stock option exercisable for the same number of ~~RSUs~~shares of Yumanity common stock, and then assumed by the Company, based on the ~~February 4, 2020 closing~~Exchange Ratio and the exercise price per share of such outstanding stock option, as adjusted for the Exchange Ratio. The 2018 Plan is administered by the board of directors or, at the discretion of the board of directors, by a committee of the board of directors. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or its committee if so delegated.

Options granted under the 2018 Plan with service-based vesting conditions generally vest over four years and expire after ten years. The total number of common shares that may be issued under the 2018 Plan is 1,527,210 as of September 30, 2021. Shares that are forfeited, canceled, reacquired by the Company prior to vesting, satisfied without the issuance of shares or otherwise terminated (other than by exercise) and units that are withheld upon the exercise of an option or settlement of an award to cover exercise price or tax withholding shall be added back to units available under the 2018 Plan. As of September 30, 2021, 330,609 shares remain available for issuance under the 2018 Plan.

Under each plan, the exercise price per option granted is not less than the fair market value of common stock as of the date of grant.

On April 13, 2021 the Board of Directors approved the adoption of the Company’s 2021 Inducement Plan (the “2021 Plan”), which is used exclusively for the grant of equity awards to individuals who were not previously employees of the Company (or following a bona fide period of non-employment), as an inducement material to such individual’s entering into employment with the Company, pursuant to Rule 416 under the Securities Act of 1933. As of September 30, 2021, the total number of shares of the Company’s common ~~stock.~~ stock that may be issued under the 2021 Plan is 504,000 shares of which 233,600 shares are available for future issuance under the 2021 Plan. Shares that are expired, forfeited, canceled or otherwise terminated without having been fully exercised will be available for future grant under the 2021 Plan.

The ~~requisite service period for~~fair value of option grants is estimated using the ~~awards~~Black-Scholes option-pricing model. Prior to the Merger, the Company was ~~from February 4, 2020 to August 4, 2020 (the vesting period).~~a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock/unit volatility based on the historical volatility of a publicly traded set of peer companies. The ~~Company recognized employee stock-based compensation expense for the RSU grant on a straight-line basis over the vesting period~~expected term of the ~~awards. As~~Company’s options has been determined utilizing a midpoint convention estimate. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of ~~September 30, 2020, 4,519 RSUs have vested and the Company recognized less than $0.1 million of stock-based compensation expense during the three and nine months ended September 30, 2020.~~

~~On June 29, 2020, the Company’s Board approved the~~ grant of ~~RSU awards with an aggregate fair market value~~the award for time periods approximately equal to the ~~RSU value~~expected term of ~~$1.2 million (each, an “Award”) to two consultants (each, a “Grantee”) in consideration for services. Each Award shall vest in full immediately prior to, but subject to~~ the ~~occurrence of, a specific strategic event (the “Vesting Date”), so long as~~award. Expected dividend yield is based on the ~~respective Grantee remains in service to~~fact that the Company ~~through the Vesting Date. If the Awards vest as provided for above, the Company shall issue a number of shares of stock equal~~has never paid cash dividends and does not expect to the RSU value, divided by the volume-weighted average price per share of the Company’s stock for the 10-day period ending on the Vesting Date. The Company also has the option to issue each Grantee the respectivepay any cash equivalent of the Award in part or in full satisfaction of the delivery of the stock in connection with the vesting of each Award. The Company believes equity classification of the RSUs is appropriate as the Company, not the Grantee, has the ability to determine whether to settle the Awards in cash or shares as of the reporting date and it reasonably expects to deliver the share equivalent of the Awards at the settlement date. As of September 30, 2020, the Company did not recognize compensation costs associated with the Awards as the occurrence of such strategic event is outside of the Company’s control and therefore, cannot be considered probable.

~~Stock-based compensation expense, including shares issued to consultants for services, was classified~~dividends in the ~~statements of operations as follows (in thousands):~~foreseeable future.

The following table summarizes the Company’s ~~stock~~ option activity ~~for the~~during nine months ended September 30, ~~2020 (in thousands except share~~2021:

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and ~~per share amounts):~~the fair value of the Company’s common stock/units for those stock/unit options that had exercise prices lower than the fair value of the Company’s common stock/units.

The grant date fair value of options granted during the period was ~~$1.8~~$13.7 million, or ~~$1.09~~$13.89 per share on a weighted-average basis and will be recognized as compensation expense over the requisite service period ranging from one to four years.

As of September 30, ~~2020, there was $1.6 million of~~2021, total unrecognized compensation cost related to ~~employee~~unvested options and ~~nonemployee unvested~~restricted common stock ~~options granted under the 2016 Plan,~~was $12.5 million, which is expected to be recognized over a ~~weighted-average remaining service~~weighted average period of ~~2.1~~2.65 years. ~~Stock compensation costs have not been capitalized by the Company.~~

Prior to 2013, the Company issued options to purchase 203,964 shares of common stock to nonemployees, primarily members of the Company’s scientific advisory board, that vest upon the achievement of specified development and clinical milestones. As of September 30, 2020, options for the purchase of 83,250 shares held by nonemployees remained unvested, pending achievement of the specified milestones.

On August 22, 2020, due to the entry into the Merger Agreement with Yumanity, the Company’s Board committed to reducing its workforce by approximately 79% to a total of five full-time employees, who will remain with the Company until the closing of the proposed Merger to assist with its day-to-day business operations, including the maintenance of the rights of all or any part of the Company’s intellectual property portfolio relating to its cystic fibrosis clinical programs (the “CF Assets”), and those activities necessary to complete the proposed Merger. All employees affected by the workforce reduction are eligible to receive, among other things, severance payments based on the applicable employee’s level and years of service with the Company and the continuation of group health insurance coverage for a specified time period post-termination. In addition, certain affected employees are eligible for an extension of the post-termination exercise period for their outstanding stock options. Each affected employee’s eligibility for the severance benefits was contingent upon such employee’s execution of a separation agreement, which includes a general release of claims against the Company.

~~The following table represents activity related to the Company’s restructuring costs liability for nine months ended September 30, 2020 (in thousands):~~

As a result of the workforce reduction, the Company has recorded restructuring costs, primarily related to severance-related payments, in the amount of $2.4 million. The Company expects to incur total restructuring costs between $4.2 million to $4.7 million related to the Company’s restructuring plan.

In December 2018, the Company entered into a Technology Transfer and License Agreement (the “Genentech Agreement”) with Genentech, Inc. (“Genentech”) under which the Company granted Genentech an exclusive worldwide license for technology and materials relating to potential therapeutic small molecule modulators of an undisclosed target within the proteostasis network. The rights do not include CFTR modulators and are unrelated to the Company’s investigational medicines or other ongoing research programs in cystic fibrosis. In connection with the terms of the Genentech Agreement, the Company was entitled to a nonrefundable cash payment of $5.0 million following the successful completion of the technology and materials transfer to Genentech and future milestone payments in the aggregate of approximately $96.0 million upon the achievement of specified development, regulatory, and commercial milestones. In addition, Genentech is obligated to pay the Company tiered royalties in the low single-digits based on net sales of products covered by the licenses granted under the Genentech Agreement. There are no cancellation, termination, or refund provisions in the Genentech Agreement that contain material financial consequences to the Company. Unless earlier terminated, the Genentech Agreement continues in full force and effect until the passing or expiration of all royalty payment obligations. Reciprocal termination rights under the agreement include termination for breach and termination for bankruptcy. Genentech may terminate the Genentech Agreement in its entirety, for convenience, upon thirty days’ notice to the Company.

~~The Company evaluated the Genentech Agreement in accordance with the provisions of Accounting Standards Codification Topic 606,~~ ~~Revenue from Contracts with Customers~~ (“ASC 606”). The Company’s obligations under the Genentech Agreement are the following promises: (i) exclusive license to certain intellectual property associated with a specific target, and (ii) technology and materials transfer related to the intellectual property underlying the licensed technology. The Company determined that the exclusive license is not distinct from the associated technology and materials transfer because the customer cannot benefit from, or utilize, the license without the technology and materials transfer. Specifically, the Company concluded that the exclusive license is not capable of being distinct from the associated technology and materials transfer because Genentech does not have the knowledge or expertise to fully exploit potential product candidates without the accompanying technology and materials provided pursuant to the transfer, and no other third party can perform the transfer due to the Company’s proprietary knowledge and specialized expertise with respect to the licensed intellectual property. Accordingly, the Company concluded that these promises should be combined into a single performance obligation (the “License and Transfer Performance Obligation”).

The Company measured the transaction price solely in reference to the $5.0 million payment due upon receipt of notice from Genentech regarding the satisfactory completion of the technology and materials transfer. None of the variable consideration payable under the arrangement has been included in the transaction price. As of September 30, 2020, the Company has not achieved any research, development, regulatory, or commercial milestones, or earned any royalties under the Genentech Agreement. The Company utilizes “the most likely” amount method to estimate the amount of research, development, and regulatory milestone payments to be received. As part of the evaluation for the research and development milestone payments, the Company considers several factors including the stage of research and development of the compounds included in the arrangement, the risk associated with the remaining research and development work required to achieve the milestone, and the Company’s level of involvement in the research and development activities.

Regulatory milestone payments are triggered upon the first commercial sale following receipt of regulatory approval from the FDA or other global regulatory authorities; therefore, such amounts will be excluded from the transaction price until the associated regulatory approval is received. The commercial milestone payments and royalties are subject to the royalty recognition constraint whereby such amounts will be recognized as revenue upon the later of: (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the payment has been allocated has been satisfied, or partially satisfied, because the exclusive license is deemed to be the sole or predominant item to which the payments relate. As all performance obligations are satisfied, the Company will recognize royalty revenue at the date the sales occur. The Company did not adjust the promised amount of consideration for the effects of a significant financing component because the Company expects that the period between when the promised goods and services are transferred and when the customer pays for those goods and services will be one year or less. There were no changes in the transaction price for the nine months ended September 30, 2020.

The transaction price of $5.0 million allocated to the combined performance obligation was recognized as revenue in February 2019 at the point in time that Genentech provided notice regarding the satisfactory completion of the technology and materials transfer. Upon that successful execution of the technology and materials transfer, control was deemed to be transferred for both the exclusive license and the technology and materials transfer promises, therefore the risks and rewards of ownership had been conveyed. As of September 30, 2020, the Company did not have any receivables or deferred revenue related to the Genentech Agreement because no payments under the arrangement became due, nor had the underlying performance obligation been satisfied.

The Company did not record a federal or state income tax benefit for its losses for the three and nine months ended September 30, 2020 and 2019, respectively, due to the conclusion that a full valuation allowance is required against the Company’s deferred tax assets. All the Company’s losses before income taxes were generated in the United States.

Basic and diluted net loss per share was calculated as follows (in thousands, except share and per share amounts):

The following common stock equivalents presented based on amounts outstanding at each period end, have been excluded from the ~~computation~~calculation of diluted ~~weighted-average shares outstanding,~~net loss per share because ~~such securities~~including them would have had an ~~antidilutive impact~~:anti-dilutive impact:

9. Leases

September 30,

2020

2019

Options to purchase common stock

4,165,435

4,545,064

Restricted stock units ⁽¹⁾

—

—

4,165,435

4,545,064

⁽¹⁾

~~Certain restricted stock units are excluded from the table as the number of shares of stock to be issued will be determined based on a computation at the vesting date, as described in Note 8.~~

~~13.~~

~~Leases~~

The Company ~~has~~leased office and laboratory facilities in Cambridge, Massachusetts (the “Old Premises”) from an investor in the Company under a noncancelable operating lease that began in April 2015 and expired in March 2020. In February 2020, the Company amended the lease for the Old Premises to extend the lease expiration to April 30, 2020. The amendment was accounted for as a lease reassessment and the right-of-use asset and lease liability were remeasured at the reassessment date of February 2020 resulting in an increase of $0.1 million to the right-of-use asset for prepaid rent and a reduction of $0.1 million to the lease liability. In May 2020, the Company amended the lease for the Old Premises to extend the lease expiration to May 23, 2020 and recognized the final rent payment of less than $0.1 million in expense.

In February 2020, the Company entered into a license agreement with a third party for the use of office and laboratory space in Boston, Massachusetts, commencing in May 2020 (the “New Premises”). The Company determined that this license agreement qualified as a lease under ASC 842, Leases (“ASC 842”). The initial term of the license agreement is three years with the option to extend for ~~its corporate headquarters~~a total of three one-year periods at fair-market rent at the time of each extension. In addition to use of office and laboratory space, the license fee includes various laboratory, office, and operational support services to be provided by the licensor. The initial monthly license fee escalates 3% annually and totals approximately $12.0 million for the three-year term. Additionally, the licensee agreement for the New Premises requires the Company to pay for a non-exclusive, irrevocable license to use forty-two unreserved parking spaces adjacent to the New Premises at the prevailing monthly parking rate. On May 1, 2020, the lease commencement date was met and the Company recorded an operating lease asset of $10.6 million and a corresponding lease liability of $10.2 million.

On December 22, 2020, as part of the Merger, the Company acquired a lease for approximately 30,000 square feet of office and laboratory space (the “Merger Premises”) in Boston, Massachusetts. The lease commenced in January 2018 ~~and~~with rent payments ~~began~~commencing in April 2018. ~~This lease has a ten-year~~The initial term of the lease was ten yearswith anthe option to extend for an additional seven ~~additional years.~~

~~The Company has~~years at fair-market rent at the ~~right to terminate the lease in the event~~time of the ~~inability~~extension. In addition to use ~~the~~of office and laboratory space, ~~due to substantial damage while the lessor has the right to terminate the lease if~~ the Company ~~defaults on the lease financial obligations. Per the terms~~is responsible for paying its allocable portion of the lease agreement, the Company does not have any residual value guarantees. In calculating the present value of the lease payments, the Company utilized its incremental borrowing rate, which is based on rates that would be incurred to borrow on a collateralized basis over a term equal to the lease payments in a similar economic environment. The Company has allocated all the contract considerations to the one lease component. This may result in the initialbuilding and subsequent measurement of the balances of the right-of-use asset and lease liability for leases being greater than if the policy election was not applied. The Company’s real estate lease in Boston is considered a net lease, as the non-lease components (i.e., common area maintenance) are paidlaboratory operating expenses separately from rent, based on actual costs incurred. ~~Therefore,~~Remaining fixed lease payments at the ~~variable non-lease components~~time of the Merger were ~~not included in~~approximately $14.2 million. On December 22, 2020, the ~~right-of-use~~Company recorded an operating lease asset and corresponding lease liability of $10.2 million associated with this lease. The operating lease asset was increased by the value attributable to the below-market lease of $3.1 million and ~~are reflected as~~ an ~~expense in~~allocated portion of the ~~period incurred.~~excess purchase price for the Merger of $1.9 million.

16On January 7, 2021 the Company entered into a sublease agreement (the “Sublease”) with Moma Therapeutics, Inc. (the “Subtenant”), whereby the Company subleased the entire Merger Premises to the Subtenant. The initial term of the Sublease commences on the date the Company receives consent to the Sublease from the landlord and shall continue until 18 months from the commencement date. The Sublease provides for the first monthly installment of rent to be paid by the Subtenant on the date of the Sublease.

The Sublease provides for an initial annual base rent of $1,939,340, which increases annually up to a maximum annual base rent of $1,997,520. The Subtenant also is responsible for paying to the Company operating costs, annual tax costs and all utility costs attributable to the Premises during the term of the Sublease. Expense arising from the Merger Premises of $0.5 million and $1.5 million for the three and nine months ended September 30, ~~2020,~~2021, respectively, and ~~December 31, 2019, assets under operating~~ lease ~~were $11.7~~income from the Sublease of $0.5 million and ~~$12.6~~$1.3 million ~~respectively.~~ for the three and nine months ended September 30, 2021, respectively, are classified in operating expense on a net basis.

The ~~elements~~Company also leases property and equipment under agreements that are accounted for as finance leases.

The components of lease ~~expense~~cost were as follows (in thousands):


	Nine Months Ended September 30,
	2021		2020
Operating lease cost	$	4,721	$	2,085
Short-term lease cost		—		—
Variable lease cost		458		244
Finance lease cost:
Amortization of lease assets		133		280
Interest on lease liabilities		6		16
Total finance lease cost	$	139	$	296

For the Three Months Ended September 30,

2020

2019

Lease cost

Operating lease cost

$
462

$
462

Variable lease cost ⁽¹⁾

158

182

Total lease cost

$
620

$
644

For the Nine Months Ended September 30,

2020

2019

Lease cost

Operating lease cost

$
1,387

$
1,387

Variable lease cost ⁽¹⁾

420

494

Total lease cost

$
1,807

$
1,881

Other information

Operating cash flows used for operating leases

$
1,296

$
1,261

Weighted-average remaining lease term

7.59 years

8.59 years

Weighted-average discount rate

4.50
%

4.50
%

Supplemental disclosure of cash flow information related to leases was as follows (in thousands):


	Nine Months Ended September 30,
	2021		2020
Cash paid for amounts included in the measurement of operating lease liabilities (operating cash flows)	$	4,484	$	1,428
Cash paid for amounts included in the measurement of finance lease liabilities (operating cash flows)	$	6	$	16
Cash paid for amounts included in the measurement of finance lease liabilities (financing cash flows)	$	140	$	264
Operating lease liabilities arising from obtaining right-of-use assets	$	0	$	10,219
Finance lease liabilities arising from obtaining right- of-use assets	$	0	$	0

⁽²⁾

~~The variable lease costs for the three and nine months ended September 30, 2020 and~~ ~~2019~~ ~~include common area maintenance charges.~~

The weighted-average remaining lease term and discount rate were as follows:


	As of September 30,
	2021			2020
Weighted-average remaining lease term (in years) used for:
Operating leases		5.47			2.58
Finance leases		0.99			0.83
Weighted-average discount rate used for:
Operating leases		9.10	%		8.80	%
Finance leases		5.59	%		6.90	%

~~Future~~Because the interest rates implicit in the license agreement and lease agreement assumed from PTI were not readily determinable, the Company’s incremental borrowing rate was used to calculate the present value of each. The present value of the Company’s finance leases was calculated using the rate implicit in the lease.

As of September 30, 2021, future annual lease payments under no~~ncancelable~~the Company’s real estate operating leases and equipment finance leases were as follows (in thousands):


Year	Operating Leases			Finance Leases
2021	$	1,514		$	26
2022		6,173			50
2023		2,977			0
2024		1,931			0
2025		1,985			0
Thereafter		4,840			0
Total future lease payments		19,420			76
Less: Imputed interest		(3,773	)		(2	)
Total lease liabilities	$	15,647		$	74

The following table presents lease assets and liabilities and their classification on the condensed consolidated balance sheet (in thousands):


Leases	Condensed Consolidated Balance Sheet Classification	Amount
Assets:
Operating lease assets	Operating lease right-of- use assets	$	19,864
Finance lease assets	Property and equipment, net		66
Total leased assets		$	19,930
Liabilities:
Current:
Operating lease liabilities	Operating lease liabilities	$	4,909
Finance lease liabilities	Current portion of finance lease obligation		65
Non-current:
Operating lease liabilities	Operating lease liabilities, net of current portion		10,738
Finance lease liabilities	Finance lease obligation, net of current portion		9
Total lease liabilities		$	15,721

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, contract research organizations, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and its executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. The Company has not incurred any material costs as a result of such indemnifications and is not currently aware of any indemnification claims.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and ~~the~~ results of operations should be read in conjunction with our consolidated financial statements and related notes ~~thereto included~~appearing elsewhere in this Quarterly Report on Form 10-Q ~~or Quarterly Report,~~ and our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 filed with ~~the Securities and Exchange Commission, or~~ the SEC on March ~~10, 2020, or the Annual Report.~~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~~forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section ~~in our Annual Report and in~~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. ~~Such factors may be amplified by the COVID-19 pandemic and its potential impact on our business and the global economy.~~

We are a clinical stage biopharmaceutical company ~~committed to~~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 ~~therapeutics~~disease-modifying therapies to treat ~~cystic fibrosis,~~devastating conditions, either with large or ~~CF,~~orphan disease markets, including Parkinson’s disease, dementia with Lewy bodies, multiple system atrophy, amyotrophic lateral sclerosis, or ALS (also known as Lou Gehrig’s disease), frontotemporal lobar degeneration, or FTLD, and Alzheimer’s disease.

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

On November 10, 2021, we announced the results of a Phase 1b clinical trial of YTX-7739 in patients with mild-to-moderate Parkinson’s disease, which assessed the safety, tolerability and pharmacokinetics and pharmacodynamics of YTX-7739. These results support further clinical development for YTX-7739, and we expect to initiate a Phase 2 clinical trial of YTX-7739 in patients with Parkinson’s disease in 2022, with interim results expected in the second half of 2023. Based on recent promising preclinical data and potential further preclinical validation, we will explore a window-of-opportunity clinical study of YTX-7739 in glioblastoma multiforme patients, with data from such study expected in the second half of 2022. We also intend to explore additional indications for YTX-7739 through ~~theratyping,~~preclinical studies in additional diseases where targeting SCD has been implicated as a potential therapeutic opportunity, with multiple readouts expected in 2022. To date, none of our product candidates have advanced into late-stage development or a pivotal clinical trial.

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 will need substantial additional funding to continue to advance product candidates through clinical trials.

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 $10.0 million and $29.1 million, respectively, for the three and nine months ended September 30, 2021. As of September 30, 2021, we had an accumulated deficit of $176.9 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:

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 ~~treatment regardless~~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 ~~cystic fibrosis transmembrane conductance regulator,~~equity offerings, debt financings or ~~CFTR, mutations. CF~~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.

Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. Typically, it takes many years to develop one new product from the time it is discovered to when it is available for treating patients, and development may cease for a number of reasons. Because of the numerous risks and uncertainties associated with product development, including any impact from the ongoing COVID-19 pandemic, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we

may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of September 30, 2021, we had cash, cash equivalents and marketable securities of $46.4 million. We believe that our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditure requirements 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.

On November 10, 2021, we announced data from our Phase 1b clinical trial of YTX-7739 in patients with mild-to-moderate Parkinson’s disease. The Phase 1b clinical trial was a randomized, placebo-controlled, double-blind multi dose study to investigate the safety, tolerability, pharmacokinetics and pharmacodynamics of YTX-7739. Data were reported from 20 patients with mild-to-moderate Parkinson’s disease. Patients received once-daily oral doses of YTX-7739 (20 mg or placebo) for 28 days.

YTX-7739 was shown to inhibit its primary target, SCD, an enzyme whose inhibition has been closely linked to neuronal survival and improved motor function in a Parkinson’s disease ~~caused~~model. After 28 days of treatment, the 20 mg dose given once-daily reduced the fatty acid desaturation index (FA-DI), a biomarker of SCD inhibition, by ~~defects~~approximately 20%-40%, the range expected to be clinically relevant based on preclinical studies. Target engagement in the ~~function~~cerebrospinal fluid suggested that YTX-7739 effectively crossed the blood-brain barrier. Additionally, the PK/PD profile of YTX-7739 was consistent with previous studies and we believe informs dose selection for future studies.

YTX-7739 was generally well tolerated with all treatment emergent adverse events being mild to moderate in severity. There were no serious adverse events. Moderate adverse events (AEs) in the active treatment group consisted of 2 patients with increased Parkinson’s symptoms, 2 patients with lower back pain, 1 patient with headache, 1 patient with myalgia, 1 patient with insomnia, 1 patient with ligament strain, and 1 patient with vaccination complication. One patient on placebo had moderate worsening of tremors and Parkinsonism, which led to discontinuation. AEs occurring at a higher percentage in 2 or ~~abundance~~more patients administered YTX-7739 compared to placebo were procedural pain, myalgia, dry eye, hyperbilirubinemia, hypesthesia, lower back pain, and constipation. AEs occurring at a higher percentage with placebo included orthostatic hypotension, headache, tremor, fatigue and dizziness.

As expected, after only 28 days of ~~CFTR protein.~~dosing, there were no statistically significant differences in clinical assessments (Unified Parkinson's Disease Rating Scale Part III (UPDRS III), Montreal Cognitive Assessment (MoCA)) or most exploratory biomarkers. Quantitative electroencephalogram (qEEG) assessments of the effect of YTX-7739 on brain activity were completed in a subset of 8 patients and demonstrated a statistically significant change compared to baseline, suggestive of a potential improvement in synaptic function. We plan to further validate the role of this diagnostic marker in future clinical studies.

~~Since~~These results support further clinical development for YTX-7739, and we expect to initiate a Phase 2 clinical trial of YTX-7739 in patients with Parkinson’s disease in 2022, with interim results expected in the second half of 2023. Based on recent promising preclinical data and potential further preclinical validation, we will explore a window-of-opportunity clinical study of YTX-7739 in glioblastoma multiforme patients, with data from such study expected in the second half of 2022. We also intend to explore additional indications for YTX-7739 through preclinical studies in additional diseases where targeting SCD has been implicated as a potential therapeutic opportunity, with multiple readouts expected in 2022.

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 ~~inception in 2006,~~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 ~~have devoted substantially all~~continue to conduct our ~~resources to organizing and staffing our company, business planning, raising capital, acquiring and developing product and technology rights, and conducting~~ 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 ~~product candidates.~~ 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 ~~do not~~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, ~~any products approved~~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.

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.

On December 14, 2020, we entered into a subscription agreement with certain accredited investors for the sale ~~and have not generated any revenue from product sales.~~by us in a private placement of 1,460,861 shares of our common stock for a price of $23.00 per share. We ~~have funded our operations~~refer to ~~date with~~this sale herein as the Private Placement. The Private Placement closed on December 22, 2020. The aggregate gross proceeds ~~received from equity offerings,~~for the issuance and sale of ~~convertible promissory notes~~the common stock were $33.6 million and, ~~to a lesser extent, payments~~after deducting certain of our expenses, the net proceeds we received in ~~connection with collaboration agreements and a research grant.~~the Private Placement were $31.6 million.

In ~~addition,~~April 2021, we ~~have~~ entered into a sales agreement with ~~H.C. Wainwright & Co.,~~Jefferies LLC ~~or HCW,~~(“Jefferies”) with respect to an at-the-market ~~or ATM,~~(“ATM”) offering program ~~or the ATM program. As of December 31, 2019,~~under which we ~~have sold 987,653~~may issue and sell, from time-to-time at our sole discretion, shares of our common stock, ~~for total net proceeds~~in an aggregate offering amount of ~~approximately $3.5 million under the ATM program. We did not~~up to $60.0 million. Jefferies acts as our sales agent and will use commercially reasonable efforts to sell ~~any~~ shares of ~~our~~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 nine months ended September 30, ~~2020.~~

~~To date, we have not generated significant revenue and have incurred significant operating losses. Our net losses were $8.2 million and $26.9 million~~2021 for ~~the three and nine months ended September 30, 2020, respectively.~~gross proceeds of $1.3 million. As of September 30, 2020, we had an accumulated deficit of $363.6 million. We require additional funding to fund our CF-focused pipeline and namely, our CHOICES program, and to advance our proprietary combination therapy candidates posenacaftor, dirocaftor, and nesolicaftor, through regulatory approval and into commercialization, if approved.

In August 2020, we announced that after consideration of various financing and strategic alternatives for our CF portfolio, with the goal of maximizing stockholder value of these assets, we have decided to continue our operations while exploring business and strategic options related to our research and discovery platform and intellectual property portfolio.

After conducting a diligent and extensive process of evaluating our strategic alternatives and careful evaluation and consideration of those proposals, and following extensive negotiation, on August 22, 2020, we entered into an Agreement and Plan of Merger and Reorganization, or the Merger Agreement, with Yumanity Therapeutics, Inc., a Delaware corporation, or Yumanity, Yumanity Holdings, LLC, a Delaware limited liability company, or Holdings, and Pangolin Merger Sub, Inc., a Delaware corporation and our wholly-owned subsidiary, or the Merger Sub. Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, including approval of the transaction by our stockholders and Yumanity’s stockholders and the consolidation of Yumanity and Holdings prior to the closing of the Merger, Merger Sub will be merged with and into Yumanity, or the Merger, with Yumanity surviving the Merger as our wholly-owned subsidiary and the surviving corporation of the Merger. If the Merger is completed, our business will become the business of Yumanity.

~~On August 22, 2020, due to the entry into of the Merger Agreement with Yumanity, our Board of Directors, or the Board, committed to reducing our workforce by~~2021, approximately 79% to a total of five full-time employees, who will remain with us until the closing of the Merger to assist with our day-to-day business operations, including the maintenance of the sale and disposition of intellectual property and assets relating to our cystic fibrosis clinical program, or the CF Assets, and those activities necessary to complete the proposed Merger. We have retained our core intellectual property, licenses, collaborations with research institutions and universities, and proprietary equipment. We have incurred certain restructuring charges related to a reduction in our workforce, totaling $2.4 million through September 30, 2020. At September 30, 2020 we have accrued one-time termination benefits of $1.7$58.7 million of ~~which~~common stock remained available for future issuance under the majority are anticipated to be incurred in the fourth quarter of 2020. We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated stand-alone operating expenses and capital expenditures for the foreseeableATM program.

future; however, there can be no assurances as to the amount or timing of available cash, if any, left to distribute to our stockholders after paying the debts and our other obligations and setting aside funds for potential future claims.

We and Yumanity believe that the Merger will result in a clinical-stage biopharmaceutical company focused on discovering and developing disease-modifying treatments for neurodegenerative diseases based on Yumanity’s discovery engine and pipeline of novel targets and product candidates.Financial Operations Overview

We may not be successful in completing the Merger. If, for any reason, the Merger does not close and the Merger Agreement is terminated, the Board may elect to, among other things, attempt to complete another strategic transaction including a transaction similar to the Merger, continue to operate our business or to dissolve and liquidate our assets. If we decides to dissolve and liquidate our assets, we would be required to pay all of our debts and contractual obligations, and to set aside certain reserves for potential future claims. As of September 30, 2020, we had cash and cash equivalents and short-term investments totaling approximately $40.8 million.Revenue

~~The~~ ~~novel coronavirus, or COVID-19,~~ pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets and may affect our operations and those of third parties on which we rely. While the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic on the global financial markets may reduce our ability to access capital, which could negatively impact our short-term and long-term liquidity and our ability and Yumanity’s ability to complete the Merger on a timely basis or at all. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, financing or other activities or on healthcare systems or the global economy as a whole. However, these effects could have a material impact on our liquidity, capital resources, operations and business and those of the third parties on which we rely.

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products infor 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 ~~did not recognize~~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 $1.6 million and $7.3 million of collaboration revenue for the three and nine months ended September 30, 2021, respectively, related to the Collaboration Agreement. We recorded $3.3 million of collaboration revenue during the three and nine months ended September 30, 2020.~~All our revenue during the nine months ended September 30, 2019 was derived from our Genentech Agreement.~~

Research and development expenses ~~which include costs of research services incurred in connection with our collaboration agreements and research grant, have historically consisted~~consist primarily of costs incurred in connection with the discovery, preclinical and clinical development and manufacture of our product candidates, ~~which~~and include:

We expense research and development costs as ~~incurred. We~~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 ~~on a program-by-program basis~~by product candidate and consist primarily of ~~external~~ costs ~~such as~~that include fees and other expenses paid to outside consultants, ~~central~~CROs, CDMOs and research laboratories ~~contractors, CROs, and CMOs~~ in connection with our ~~clinical trials and~~ 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, ~~facility expenses,~~early stage discovery efforts, laboratory supplies and facilities, including depreciation or other indirect costs, to specific product ~~development programs~~candidates because these costs are deployed across multiple ~~product development~~ programs and our platform and, as such, are not separately classified. ~~We use internal resources to manage our preclinical~~

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 ~~perform data analysis~~duration of later-stage clinical trials. As a result, we expect research and development costs to increase significantly for ~~such activities. These employees work across multiple~~the foreseeable future as we continue the development of YTX-7739 and any other 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 any other product candidates we may develop in the future is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:

~~In August 2020, after consideration~~Any changes in the outcome of ~~various financing and strategic alternatives for our CF portfolio, with the goal of maximizing stockholder value~~any of these ~~assets, our Board approved our entry into~~variables with respect to the ~~proposed Merger. As a result of this decision, we stopped further research and~~ development of our product ~~pipeline~~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 ~~pre-clinical programs, including the Unfolded Protein Response,~~planned start of clinical trials or ~~UPR, program,~~require us to ~~reduce operating expenses. As a result,~~conduct clinical trials or other testing beyond those that we currently expect, or if we experience significant delays in enrollment in any of our ~~research~~planned clinical trials, we could be required to expend significant additional financial resources and time to complete clinical development ~~expenses~~of that product candidate. We may never obtain regulatory approval for ~~the fiscal year ending December 31, 2020~~any of our product candidates. Drug commercialization will ~~decrease as compared to the fiscal year ended December 31, 2019.~~take several years and millions of dollars in development costs.

General and administrative expenses consist primarily of personnel-related expenses, including salaries, benefits, and ~~related benefits, travel, and stock-based~~stock/equity-based compensation expenses for personnel in executive, finance, accounting, human resources and other administrative functions. ~~General~~Other significant general and administrative expenses ~~also~~ 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, ~~and maintenance of facilities, depreciation,~~ insurance and ~~supplies, as well as professional fees for legal, consulting, accounting, and audit services.~~other operating costs.

We anticipate that our general and administrative expenses will increase in the ~~fiscal year ending December 31, 2020~~future as our business expands to support our continued research and development activities, including our future clinical programs. These increases will ~~decrease from~~likely include increased costs related to the ~~fiscal year ended December 31, 2019,~~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 ~~exception~~rules and regulations of ~~severance payments,~~the SEC listing standards applicable to companies listed on a national securities exchange, director and officer insurance premiums and investor relations costs.

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 ~~we continue~~a component of other income (expense) in our statement of operations.

Immediately prior to ~~focus~~the Merger, all of our ~~efforts~~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 consists of interest charged on ~~preserving cash while we seek to maximize stockholder value. Over the longer term, however, these expenses could increase due to professional fees~~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 ~~proposed Merger with Yumanity.~~maturity or the repayment in full of all obligations under such loans. Interest expense also consists of interest related to finance leases.

~~Restructuring costs consist primarily of severance-related costs associated with the reduction in force in connection with the proposed Merger with Yumanity.~~

Interest income consists of interest earned on our invested cash ~~equivalents and short-term investments held by us during the reporting periods.~~

~~Interest expense consists of interest paid on our short-term borrowings during the reporting periods.~~

balances. Other income (expense), net ~~primarily consists~~includes a gain on the extinguishment of debt upon forgiveness of the ~~amortization~~PPP loan (see Paycheck Protection Loan section of ~~premiums~~the Description of Indebtedness below).

Prior to the Yumanity Reorganization, Holdings was treated as a partnership for federal income tax purposes and, ~~discounts on our short-term investments~~therefore, its owners, and ~~the gains~~not Holdings, were subject to U.S. federal or ~~losses associated with the changes in the fair values of our derivative liability.~~

~~Critical Accounting Policies~~state income taxation. Holdings’ directly held subsidiary was treated as a corporation for U.S. federal income tax purposes and ~~Significant Judgments and Estimates~~

~~Our financial statements are prepared in accordance with generally accepted accounting principles~~subject to taxation in the United ~~States, or GAAP. The preparation~~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 financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, thesubsidiary’s results of ~~which form the basis for making judgments about the carrying values of assets and liabilities that are~~operations. Since our inception, we have not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements, and notes thereto, which are contained in the Company’s Annual Report on Form 10-Krecorded any income tax benefits for the net losses we incurred in each year ~~ended December 31, 2019, filed with the SEC on March 10, 2020.~~

~~During the nine months ended September 30, 2020, there were no material changes to~~or for our critical accounting policies. Our critical accounting policies are described under the heading, “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Significant Judgments and Estimates,” in our Annual Report on Form 10-K for the year ended December 31, 2019 and the notes to the financial statements appearing elsewhere in this Quarterly Report. We believe that of our critical accounting policies, the following accounting policies involve the most judgment and complexity:

~~Accordingly,~~tax credits, as we believe, based upon the ~~policies set forth above are critical~~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 ~~fully understanding~~a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, and ~~evaluating~~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 financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.net deferred tax assets at each balance sheet date.

Comparison of the Three Months Ended September 30, ~~2020~~2021 and ~~2019~~2020

The following table summarizes our results of operations for the three months ended September 30, 2021 and 2020:

Collaboration revenue recognized during the three months ended September 30, 2021 of $1.6 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 ~~2019 (in thousands):~~is being recognized as revenue under the cost-to-cost method as research and development is being performed.

Three Months Ended September 30,

Increase

2020

2019

(Decrease)

Revenue

$
—

$
-

$
-

Operating expenses:

Research and development

1,240

10,145

(8,905
)
General and administrative

4,536

3,154

1,382

Restructuring costs

2,401

-

2,401

Total operating expenses

8,177

13,299

(5,122
)
Loss from operations

(8,177
)

(13,299
)

(5,122
)
Interest income

8

224

(216
)
Interest expense

(4
)

—

(4
)
Other income, net

4

242

(238
)
Net loss

$
(8,169
)

$
(12,833
)

$
(4,664
)

~~There was no revenue~~Research and development expenses were $6.6 million for the three months ended September 30, 2021, an increase of $1.1 million from $5.5 million for the three months ended September 30, 2020. Direct expenses of our YTX-7739 program increased by $0.9 million in the three months ended September 30, 2021, compared to the three months ended September 30, 2020. The change was due primarily to an increase in certain costs as YTX-7739 progressed from a SAD study in 2020 ~~or 2019.~~

~~Research and development~~to MAD clinical studies during the first quarter of 2021. Direct expenses of our YTX-9184 program decreased ~~to $1.2~~by less than $0.1 million from $0.6 million for the three months ended September 30, 2020 ~~compared~~ to ~~$10.1~~$0.5 million for the three months ended September 30, ~~2019~~2021. The change was primarily due to ~~our strategic shift in strategy related to our pursuit of~~preclinical and drug product manufacturing costs as the ~~Merger with Yumanity. The decrease of $8.9~~program progresses towards clinical studies. Platform and other early-stage research external costs decreased by less than $0.1 million ~~was related to a decrease of approximately $5.4~~from $0.8 million in ~~clinical-related research activities as we wind down our CF programs, $2.7~~the three months ended September 30, 2020 to $0.7 million in ~~employee-related expenses as we reduced our workforce,~~the three months ended September 30, 2021. This change was primarily due to increased laboratory activities in the three months ended September 30, 2020 after the move to new office and laboratory space in the second quarter of 2020. Personnel related costs increased by $0.7 million primarily due to the impact of a $0.5 million R&D tax credit that was recorded as a reduction of personnel expense in ~~professional fees, and $0.3 million in facility expenses.~~the third quarter of 2020. Personnel costs were not affected by any R&D tax credit during the three months ended September 30, 2021.

General and administrative expenses were $4.5 million for the three months ended September 30, ~~2020, compared to $3.2~~2021, an increase of $0.8 million from $3.7 million for the three months ended September 30, ~~2019.~~2020. The increase of ~~$1.3~~$0.7 million in ~~general and administrative expenses~~personnel related costs was primarily due to ~~an increase of $1.5~~$0.4 million in ~~professional fees primarily related~~stock/equity-based compensation and $0.3 million due to ~~our proposed Merger with Yumanity, $0.2 million~~additional hiring in ~~facility expenses,~~the general and ~~$0.2 million in insurance expenses, offset by a decrease~~administrative function. Personnel-related costs for each of ~~$0.6 million in employee-related expenses.~~

~~Restructuring costs were $2.4 million for~~ the three months ended September 30, 2021 and 2020 ~~consisting~~included stock/equity-based compensation of $1.0 million and $0.5 million, respectively. Professional and consultant fees decreased by $0.9 million primarily due to higher audit expenses and legal fees in the third quarter of ~~severance-related~~2020 while working towards the Merger. Facility and other related costs ~~associated with a reduction~~increased by $1.0 million primarily due to incremental public company insurance premiums of $0.6 million and $0.3 million of lease expense in ~~force in connection with the proposed Merger with Yumanity. There were no restructuring costs for~~excess of sublease income.

Other income (expense), remained relatively flat from the three months ended September 30, ~~2019.~~

Interest income was less than $0.1 million for the three months ended September 30, 2020, compared to $0.2 million for the three months ended September 30, 2019. The decrease of $0.2 million in interest earned on cash equivalents and short-term investments is due to a decrease in average balance of invested cash held during the three months ended September 30, 2020, compared2021 to the three months ended September 30, ~~2019.~~2020.

Interest expense was less than $0.1 million for the three months ended September 30, 2020 and consisted of interest paid on short-term borrowings. There was no interest expense for the three months ended September 30, 2019.

Other income was less than $0.1 million and $0.2 million for the three months ended September 30, 2020 and 2019, respectively. The decrease of $0.1 million in other income is primarily due to a decrease in net accretion of discounts on short-term securities in the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

The following table summarizes our results of operations for the nine months ended September 30, ~~2020~~2021 and ~~2019 (in thousands):~~ 2020:

	Nine Months Ended September 30,						Increase
	2020			2019			(Decrease)			Nine Months Ended September 30,
Revenue	$	-		$	5,000		$	(5,000	)
										2021			2020			Change
										(in thousands)
Collaboration revenue										$	7,282		$	3,308		$	3,974
Operating expenses:
Research and development		12,342			43,217			(30,875	)		20,729			14,457			6,272
General and administrative		12,489			10,781			1,708			15,277			8,356			6,921
Restructuring costs		2,401			-			2,401
Total operating expenses		27,232			53,998			(26,766	)		36,006			22,813			13,193
Loss from operations		(27,232	)		(48,998	)		(21,766	)		(28,724	)		(19,505	)		(9,219	)
Interest income		269			879			(610	)
Other income (expense):
Change in fair value of preferred unit warrant liability											—			72			(72	)
Interest expense		(13	)		—			(13	)		(1,407	)		(1,410	)		3
Other income, net		36			850			(814	)
Interest income and other income (expense), net											(95	)		21			(116	)
Loss on debt extinguishment											1,134			—			1,134
Total other expense, net											(368	)		(1,317	)		949
Net loss	$	(26,940	)	$	(47,269	)	$	(20,329	)	$	(29,092	)	$	(20,822	)	$	(8,270	)

Collaboration revenue ~~for~~recognized during the nine months ended September 30, ~~2020, as compared to revenue~~2021 of ~~$5.0~~$7.3 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 ~~Genentech Agreement recognized in the nine months ended September 30, 2019.~~cost-to-cost method as research and development is being performed.

Research and development expenses ~~decreased to $12.3~~were $20.7 million for the nine months ended September 30, ~~2020, compared to $43.2~~2021, an increase of $6.3 million from $14.5 million for the nine months ended September 30, ~~2019 due to~~2020. Direct expenses of our ~~strategic shift in strategy related to our pursuit of the Merger with Yumanity. The decrease of $30.9 million was due to a decrease of approximately $24.8~~YTX-7739 program increased by $3.4 million in ~~clinical-related research~~

~~activities as we wind down our CF programs, $3.8 million in employee-related expenses as we reduced our workforce, $1.7 million in professional fees, and $0.6 million in facility expenses.~~

~~General and administrative expenses were $12.5 million for~~ the nine months ended September 30, 2020, compared to $10.8 million for the nine months ended September 30, 2019. The increase of $1.7 million in general and administrative expenses was due to an increase of $1.3 million in professional fees primarily related to our proposed Merger with Yumanity, an increase of $0.5 million in facility expenses, and $0.5 million in insurance expenses, partially offset by a decrease of $0.5 million in employee-related expenses.

Restructuring costs were $2.4 million for the nine months ended September 30, 2020, consisting primarily of severance-related costs associated with a reduction in force in connection with the proposed Merger with Yumanity. There were no restructuring costs for the nine months ended September 30, 2019.

Interest income was $0.3 million for the nine months ended September 30, 2020, compared to $0.9 million for the nine months ended September 30, 2019. The decrease of $0.6 million in interest earned on cash equivalents and short-term investments is due to a decrease in average balance of invested cash held during the nine months ended September 30, 2020,2021, compared to the nine months ended September 30, ~~2019.~~

~~Interest expense~~2020. The change was ~~less than $0.1~~due primarily to an increase in clinical 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 ~~for the nine months ended September 30, 2020 and consisted of interest paid on short-term borrowings. There was no interest expense for the nine months ended September 30, 2019.~~

~~Other income was less than $0.1 million and~~from $0.9 million for the nine months ended September 30, 2020 ~~and 2019, respectively.~~to $1.7 million for the nine months ended September 30, 2021. The ~~decrease of $0.8 million in other income is~~change was primarily due to ~~a decrease in net accretion of discounts on short-term securities~~preclinical and consulting costs as the program progresses towards clinical studies. Platform and other early-stage research external costs increased by $0.9 million from $1.6 million in the nine months ended September 30, 2020 ~~compared~~to $2.5 million in the nine months ended September 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 $0.7 million primarily due to recording a R&D tax credit in the third quarter of 2021 but also due to hiring in the research and development function during the fourth quarter of 2020 which continued to be reflected in the nine months ended September 30, 2021.

General and administrative expenses were $15.3 million for the nine months ended September 30, 2021, an increase of $6.9 million from $8.4 million for the nine months ended September 30, 2020. The increase of $2.7 million in personnel related costs was primarily due to $1.7 million in stock/equity-based compensation and $1.1 million due to additional hiring in the general and administrative function. Personnel-related costs for each of the nine months ended September 30, 2021 and 2020 included stock/equity-based compensation of $2.9 million and $1.2 million, respectively. Professional and consultant fees increased by $0.8 million primarily due to higher audit expenses and legal fees related to operating as a public company. Facility and other related costs increased by $3.4 million primarily due to incremental public company insurance premiums of $1.6 million, $1.1 million of lease expense in excess of sublease income, and $0.2 million paid in settlement of litigation.

Other income (expense), net increased by $0.9 million from the nine months ended September 30, 2020 to the nine months ended September 30, ~~2019.~~2021 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.

Since our inception, we have not generated revenue from product sales and have incurred significant operating ~~losses. We have generated limited revenue to date~~losses and negative cash flows from our collaboration agreements and research grant. We have not yet commercialized any of our product candidates, which are in various phases of preclinical development and clinical trials and we do not expect to generate revenue from sales of any product for several years, if at all.operations. We have funded our operations to date primarily with proceeds ~~received~~ from ~~equity offerings, the issuance~~sales of ~~convertible promissory notes~~preferred units and ~~to a lesser extent, payments~~an upfront payment from our collaboration agreement with Merck received in ~~connection with collaboration agreements and a research grant. We also received an aggregate of approximately $3.5 million under our ATM program.~~

~~As of September 30,~~July 2020. In December 2020, we ~~had~~completed the Merger with Proteostasis and acquired its $35.9 million of cash, cash equivalents and ~~short-term investments~~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 ~~$40.8 million~~$31.6 million. We have also funded operations using borrowings under loan and ~~an accumulated deficit of $363.6 million. During the nine months ended September 30, 2020, we incurred a loss of $26.9 million and used $29.2 million of cash in operations.~~security agreements.

The following table summarizes our sources and uses of cash for ~~each~~the nine months ended September 30, 2021 and 2020:

During the nine months ended September 30, 2021, operating activities used $40.2 million of cash, resulting from our net loss of $29.1 million, primarily due to net cash changes in our working capital of $18.8 million and the add back of the ~~periods presented (in thousands):~~

$1.1 million gain on extinguishment included in our net loss for the period. Those changes were offset by non-cash charges of $8.8 million, including $3.8 million of non-cash lease expense and $4.0 million of stock/equity-based compensation expense. Net cash ~~used~~provided by changes in our operating assets and liabilities for the nine months ended September 30, 2021 consisted of a $7.3 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 $8.8 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 $3.3 million in operating ~~activities was $29.2 million during~~lease liabilities resulting from lease payments.

During the nine months ended September 30, 2020, ~~primarily driven by~~operating activities used $6.4 million of cash, resulting from our net loss of ~~$26.9~~$20.8 million and net cash used by changes in our operating assets and liabilities of ~~$4.9~~,$10.1 million, partially offset by non-cash charges of ~~$2.6~~$4.3 million. ~~Our net loss was primarily attributed to~~Net cash used by changes in our ~~research and development activities associated with our clinical trials and preclinical studies.Changes in~~ operating assets and liabilities were primarily related to a decrease of $3.2 million in accrued expenses, a decrease of $1.4 million in accounts payable, a decrease of $0.9 million in operating lease liabilities, and an increase in prepaid and other current assets of $0.6 million. ~~Non-cash charges include $1.6 million of stock-based compensation and $0.9 million of non-cash lease expense~~.

~~Net cash used in operating activities was $41.6 million during~~for the nine months ended September 30, ~~2019, primarily driven by our net loss~~2020 consisted of ~~$47.3~~a $11.7 million ~~offset by non-cash charges of $3.2~~increase in deferred revenue, a $1.0 million and changes in operating assets and liabilities of $2.6 million. Our net loss was primarily attributed to our research and development activities associated with our preclinical studies and clinical trials. Non-cash charges include $2.7 million of stock-based compensation, $1.1 million of depreciation and amortization and non-cash lease expense, $0.2 million of stock issued for consulting services, partially offset by $0.8 million of accretion of short-term investments. Changes in operating assets and liabilities were primarily related to an increase ~~of $2.2 million~~ in accounts payable and ~~an increase of $0.7 million in~~ accrued expenses and other current liabilities, a $0.9 million decrease in operating lease liabilities, a $1.4 million decrease 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 ~~$0.5~~vendor invoicing and payments.

During the nine months ended September 30, 2021, net cash provided by investing activities was $1.5 million, ~~partially~~primarily related to net cash of $1.6 million provided by net sales of marketable securities offset by ~~a decrease~~$0.1 million of ~~$0.8 million in operating lease liabilities.~~purchases of property and equipment.

During the nine months ended September 30, 2020, net cash ~~provided by~~used in investing activities was ~~$39.5~~$2.4 million, ~~consisting~~primarily related to $2.2 million of ~~proceeds received from~~cash used the net sales and maturities of ~~short-term investments~~marketable securities and by $0.2 million of ~~$55.7 million, partially offset by~~ purchases of ~~our short-term investments of $16.2 million.~~property and equipment.

Net cash provided by financing activities for the nine months ended September 30, ~~2019, net~~2021 was $0.3 million, consisting primarily of proceeds from issuance of common stock of $1.3 million, offset by payments of debt principal of $0.9 million, debt issuance costs of $0.1 million and payments of finance lease obligations of $0.1 million.

Net cash provided by ~~investing~~financing activities ~~was $48.0 million, consisting of proceeds received from maturities of short-term investments of $111.0 million, partially offset by purchases of short-term investments of $63.0 million.~~

~~During~~for the nine months ended September 30, 2020 ~~net cash provided by financing activities~~ was ~~$0.4~~$22.0 million, consisting primarily ~~related to~~of $21.2 million of net proceeds from the issuance of ~~short-term borrowings~~Class C preferred units and $1.1 million of ~~$1.2 million,~~proceeds from a government loan (Paycheck Protection Program (“PPP”) loan), offset by payments ~~made on short-term~~of finance lease obligations of $0.3 million.

We have outstanding principal borrowings of ~~$0.9~~$14.1 million 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, 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 were 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.

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.

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.

~~During~~ 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 nine months ended September 30, ~~2019, net cash provided by financing activities was less than $0.1~~2021 for gross proceeds of $1.3 million. As of September 30, 2021, approximately $58.7 million ~~resulting from the issuance~~ of common stock ~~pursuant to our employee stock purchase plan as well as stock option exercises.~~remained available for future issuance under the ATM program.

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 as of September 30, 2020~~marketable securities will enable us to fund our operating expenses and capital expenditure requirements ~~based upon our current operating plan, for at least 12 months~~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:

~~If, for any reason,~~The Merger and a concurrent private placement were completed in December 2020, which provided us with $35.1 million incremental cash from the Merger ~~does not close~~ and net proceeds of $31.6 million from the ~~Merger Agreement is terminated, the Board may elect to, among other~~ things, attempt to complete another strategic transaction including a transaction similar to the Merger, continue to operate our business or to dissolve and liquidate our assets, including the CF Assets. In addition, if our Board were to approve and recommend, and our stockholders were to approve, a dissolution and liquidation of our Company, we would be required under Delaware corporate law to pay our outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to our stockholders. As a result of this requirement, a portion of our remaining cash assets may need to be reserved pending the resolution of such obligations. In addition, we may be subject to litigation or other claims related to a dissolution and liquidation of our Company. If a dissolution and liquidation were pursued, our Board, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. concurrent private placement. As of November 15, 2021, the issuance date of the condensed consolidated financial statements for the nine months ended September 30, ~~2020,~~2021, we ~~had~~expect that our existing cash, ~~and~~ cash equivalents and ~~short-term investments totaling approximately $40.8~~ ~~million. However, there can be no assurances as to the amount or timing of available cash, if any, left to distribute to~~marketable securities will fund our ~~stockholders after paying the debts and our other obligations and setting aside funds for potential future claims.~~

~~In the event we are unable to complete the Merger, we continue will to pursue cost saving initiatives to reduce~~ operating expenses, ~~but~~capital expenditure requirements and debt service payments into the third quarter of 2022. We have based this estimate on assumptions that may prove to be wrong, and we ~~will also need~~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 ~~raise additional funds to pursue~~finance our ~~business strategy and explore sources of equity or debt financing. We may seek to raise such capital~~cash needs through a combination of equity offerings, debt financings, collaborations, ~~strategic alliances~~ and marketing, distribution or licensing ~~arrangements. We do not currently~~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 ~~any committed external source of funds and additional funding~~to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be ~~available~~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.

As discussed in Note 1 of the Notes to the Unaudited Condensed Consolidated Financial Statements, we have the responsibility to evaluate whether conditions or events raise substantial doubt about our ability to meet our future financial obligations as they become due within one year after the date the financial statements are issued. Since we currently anticipate that our existing capital resources will enable us to meet our planned operational expenses and capital expenditures, based on ~~favorable terms~~our current operating plans, only into the third quarter of 2022, we have determined that this cash runway of less than 12 months along with our accumulated deficit, history of losses, and future expected losses, raises substantial doubt with respect to our ability to continue as a going concern within one year of the issuance date of these unaudited condensed consolidated financial statements. We plan to mitigate this risk by exploring opportunities to secure additional funding through equity or ~~at all.~~

~~Under various agreements,~~debt financings and/or through collaborations, licensing transactions or other sources. However, there can be no assurance that we will be ~~required~~able to ~~make milestone payments~~complete any such transaction on acceptable terms or otherwise.

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

~~We enter into contracts in the normal course of business with CROs for clinical trials, preclinical research studies, testing~~Item 3. Quantitative and other services, and products for operating purposes. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.Qualitative Disclosures About Market Risk.

In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

~~We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.~~

We are a smaller reporting company, as defined byin Rule 12b-2 ofunder the Securities Exchange Act of 1934, as amended, for this reporting period and are not required to provide the information required under this item.

~~We maintain~~Our management, with the participation of our President and Chief Executive Officer and our Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of September 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 ~~we file~~it files or ~~submit~~submits under the ~~Securities~~ Exchange Act ~~of 1934~~ is ~~(1)~~ recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and ~~forms~~forms. Disclosure controls and ~~(2)~~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 ~~our~~the company’s management, including ~~our President and Chief Executive Officer, who is our~~its principal executive ~~officer~~

and ~~our interim~~ principal financial ~~officer,~~officers, as appropriate to allow timely decisions regarding required disclosure.

As of September 30, 2020, our management, with the participation of our principal executive officer, who is also our interim principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Our management 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. ~~Our principal executive officer, who is also our interim principal financial officer, has concluded based upon~~Based on the evaluation ~~described above that,~~of our disclosure controls and procedures as of September 30, ~~2020,~~2021, our President and Chief Executive Officer and our Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

~~There were no changes~~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 September 30, ~~2020~~2021 that ~~have~~has materially affected, or ~~are~~is reasonably likely to materially affect, our internal control over financial reporting.

InFrom time to time, we may be subject to legal proceedings and claims in the ordinary course of ~~business,~~business. Although the results of litigation and claims cannot be predicted with certainty, as of September 30, 2021, we are ~~from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements, employment and other matters.~~

Between October 14 and October 28, 2020, one putative class action lawsuit (captioned Aniello v. Proteostasis Therapeutics, Inc., et al., No. 1:20-cv-08578 (S.D.N.Y. filed Oct. 14, 2020)), and five individual lawsuits (captioned Culver v. Proteostasis Therapeutics, Inc., et al, 1:20-cv-08595 (S.D.N.Y. filed Oct. 15, 2020); Donolo v. Proteostasis Therapeutics, Inc. et al, 1:20-cv-01400 (D. Del. filed Oct. 16, 2020); Straube v. Proteostasis Therapeutics, Inc., et al, 1:20-cv-08653 (S.D.N.Y. filed Oct. 16, 2020); Beck v. Proteostasis Therapeutics, Inc., et al, 1:20-cv-08783 (S.D.N.Y. filed Oct. 21, 2020); Dreyer v. Proteostasis Therapeutics, Inc., et al, 1:20-cv-05193 (E.D.N.Y. filed Oct. 28, 2020)) were filed in federal court by alleged Proteostasis stockholders challenging the Merger. The complaints name us and our board of directors as defendants. The Aniello complaint names Yumanity as an additional defendant. The Donolo complaint names Yumanity and Pangolin Merger Sub, Inc., a wholly owned subsidiary of Proteostasis, as additional defendants. The complaints assert violations of Section 14(a) of the Securities Exchange Act of 1934, or the Exchange Act, and Rule 14a-9 promulgated thereunder against us and the individual defendants, and assert violations of Section 20(a) of the Exchange Act against the individual defendants. The Donolo complaint asserts an additional violation of Section 20(a) of the Exchange Act, against Yumanity. The Aniello complaint asserts additional claims for breach of fiduciary duty against the individual defendants and aiding and abetting against us and Yumanity. The plaintiffs contend that the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on September 23, 2020 omitted or misrepresented material information regarding the Merger. The complaints seek injunctive relief, rescission, or rescissory damages, dissemination of a registration statement that discloses certain information requested by the plaintiff, and an award of plaintiffs’ costs, including attorneys’ fees and expenses. We are not ~~party~~presently subject to any ~~other material~~pending or threatened litigation ~~in any court.~~

~~There can be no assurance~~ that we ~~or any defendant will be successful. At present, we are unable~~believe, if determined adversely to ~~estimate potential losses, if any, related to these lawsuits.~~

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019. With the exception of the risk factors below, there have been no material changes inus, would individually or additions to the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020.

~~Failure to complete the Merger may result in us paying a termination fee or reimbursing expenses and could harm our common stock price and future business and operations.~~

In addition, if the Merger Agreement is terminated and our board of directors determines to seek another business combination, there can be no assurance that either we will be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided by each party in the Merger on a timely basis, or at all. Our collaborators and other business partners and investors in general may also view the failure to complete the Merger as a poor reflection on its business or prospects, which could adversely affect their respective businesses.

~~The Merger may be completed even though material adverse changes may result from the announcement of the Merger, industry-wide changes and other causes.~~

In general, either we can refuse to complete the Merger if there is a material adverse change affecting the other party between August 22, 2020, the date of the Merger Agreement, and the Closing. However, certain types of changes do not permit either party to refuse to complete the Merger, even if such change could be saidreasonably expected to have a material adverse effect on ~~us, including:~~

~~If adverse changes occur and we and Yumanity still complete the Merger, the combined organization stock price may suffer. This~~Investing in ~~turn may reduce the value of the Merger to~~ our ~~stockholders.~~

Some of our and Yumanity’s officers and directors have interests in the Merger that are different from yours and that may influence them to support or approve the Merger without regard to your interests.

Certain of our and Yumanity’s officers and directors participate in arrangements that provide them with interests in the Merger that are different from yours, including, among others, the continued service as an officer or director of the combined organization, severance benefits, the acceleration of stock option vesting, continued indemnification and the potential ability to sell an increased number of shares of common stock involves a high degree of risk. You should carefully consider the ~~combined organization~~following risks and uncertainties, together with all other information in ~~accordance~~this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as our other filings with ~~Rule 144 under~~ the Securities ~~Act of 1933, as amended (the “Securities Act”). For example, we have entered into post-employment compensation arrangements with its named executive officers.~~

~~Based on the terms of their respective employment agreements~~ and ~~the retention program, our executive officers will be entitled to receive a total value of approximately $1.7 million (collectively, not individually)~~Exchange Commission (“SEC”), before investing in ~~connection with the consummation of the Merger and the associated termination of their employment, not including the value associated with the acceleration of their outstanding equity awards.~~

~~Additionally, our directors and officers are parties to the support agreements and lock-up agreements with us and Yumanity.~~

~~Our board of directors was aware of these interests and considered them, among other matters, in the decision to approve the Merger Agreement.~~

~~The market price of the combined organization’s common stock following the Merger may decline as a result of the Merger.~~

~~The market price of our~~ ~~common~~ ~~stock may decline as a result of the Merger for a number of reasons including if:~~

~~Our stockholders may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection with the Merger.~~

If the combined organization is unable to realize the full strategic and financial benefits currently anticipated from the Merger, our stockholders will have experienced substantial dilution of their ownership interests in their respective companies without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined organization is able to realize only part of the strategic and financial benefits currently anticipated from the Merger.

During the pendency of the Merger, we may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses.

Covenants in the Merger Agreement impede our ability to make acquisitions or dispositions or complete other transactions that are not in the ordinary course of business, subject to certain exceptions, pending completion of the Merger. As a result, if the Merger is not completed, the parties may be at a disadvantage to their competitors during that period. In addition, while the Merger Agreement is in effect, each party is generally prohibited from, among other things, soliciting, initiating, knowingly encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination outside the ordinary course of business, with any third party. Any such transactions could be favorable to such party’s stockholders.

Certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.

The terms of the Merger Agreement prohibit us from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when, among other things, such party’s board of directors determines in good faith that an unsolicited acquisition proposal constitutes or would reasonably be expected to result in, a superior offer and that failure to cooperate with the proponent of the proposal would reasonably be expected to be inconsistent with the fiduciary duties of the Board of Directors of such party under applicable law. In addition, if we or Yumanity terminate the Merger Agreement under certain circumstances, including terminating because of a decision of a board of directors to recommend a superior proposal, we or Yumanity would be required to pay to the other party a termination fee equal to $2,100,000, in the case of us, or $4,380,000, in the case of Yumanity. This termination fee may discourage third parties from submitting alternative takeover proposals to us or Yumanity or their stockholders, and may cause the respective boards of directors to be less inclined to recommend an alternative proposal.

~~Our stockholders may not receive any payment on the contingent value rights, or CVRs, and the CVRs may otherwise expire valueless.~~

The right of our stockholders to receive any future payment for or derive any value from the CVRs will be contingent solely upon our (or the combined organization’s) ability to monetize all or any part of the CF Assets, as defined in the Merger Agreement, specified in the CVR Agreement, as defined in the Merger Agreement, and the consideration received being greater than the amounts permitted to be reimbursed to us under the CVR Agreement. If we are unable to monetize the CF Assets within the time periods specified in the CVR Agreement or the consideration received is not greater than the amounts permitted to be reimbursed to us, no payments will be made under the CVR Agreement, and the CVRs will expire valueless.

Following the effective time of the merger, Yumanity (as successor in interest to us) will have sole authority over whether and how to pursue the continued development of the CF Assets (if at all), and Yumanity’s only obligations will be to reasonably cooperate with the requests of the CVR Holders’ Representative to carry out the intent and purpose of the CVR Agreement and not to terminate or intentionally negatively impact the CF Assets during the nine-month period following the effective time of the merger.

Furthermore, the CVRs will be unsecured obligations of the combined organization and all payments under the CVRs, all other obligations under the CVR Agreement and the CVRs and any rights or claims relating thereto will be subordinated in right of payment to the prior payment in full of all current or future senior obligations of the combined organization.

~~We intend to treat the issuance of the CVRs to the persons who prior to completion of the merger were our stockholders as a distribution of property with respect to~~ our common stock. However, there is no authority directly on point addressing the U.S. federal income tax treatment of contingent value rights with characteristics similar to the CVRs. Therefore, it is possible that the issuanceAny of the CVRs may be treated as a distribution of equity with respect to our stock, as an “open transaction,” or as a “debt instrument” for U.S. federal income tax purposes, and such questions are inherently factual in nature.

~~Our stockholders may not receive any separate consideration for the CF Assets.~~

~~In its instructions for preparation of its opinion regarding the fairness of the Exchange Ratio, as defined in the Merger Agreement,~~risk factors we instructed MTS not to assign any value to the CF Assets in light of our ongoing negotiations with potential purchasers of the CF Assets. Additionally, we believe the CVR Agreement would appropriately capture the value of the CF Assets for a CF Asset Monetization. As discussions for the disposition of the CF Assets remain ongoing, and no agreement for the sale of the CF Assets has been reached currently, there can be no guarantee that any such arrangement will be reached, either prior to consummation of the Merger or after, or even if at all. The CF Assets also may or may not be commercially viable and we may not find a purchaser for the CF Assets prior to the consummation of the Merger. The relative valuations of the parties used in arriving at the Exchange Ratio do not attribute any additional incremental value to us for the CF Assets as such assets were intended to be disposed of prior to the Merger, or covered by the CVR Agreement post-Merger. If there is no disposition of the CF Assets prior to consummation of the Merger or during the time periods specified in the CVR Agreement, we may not receive any separate consideration for the CF Assets.

Even if the Merger is approved by our stockholders and Yumanity’s stockholders, specified conditions must be satisfied or waived to complete the Merger. These conditions are set forth in the Merger Agreement. We cannot assure you that all of the conditions will be satisfied. If the conditions are not satisfied or waived, the Merger will not occur or will be delayed, and we may lose some or all of the intended benefits of the Merger.

~~Certain stockholders could attempt to influence changes which could adversely affect our operations, financial condition and the value of our common stock.~~

Our stockholders may from time-to-time seek to acquire a controlling stake in us, engage in proxy solicitations, advance stockholder proposals or otherwise attempt to effect changes. Campaigns by stockholders to effect changes at publicly-traded companies are sometimes led by investors seeking to increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or sales of assets or the entire company. Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, and could disrupt our operations and divert the attention of our board of directors and senior management from the pursuit of the Merger. These actions could adversely affect our operations, financial condition, ability to consummate the merger and our common stock value.

We and Yumanity are involved in litigation in connection with the Merger, which could divert the attention of our management and harm the combined organization’s business, and insurance coverage may not be sufficient to cover all related costs and damages.

Stockholder litigation frequently follows the announcement of certain significant business transactions, such as a business combination transaction. Between October 14 and October 28, 2020, one putative class action lawsuit (captioned ~~Aniello v. Proteostasis~~ ~~Therapeutics, Inc., et al., No. 1:20-cv-08578 (S.D.N.Y. filed Oct. 14, 2020)), and five individual lawsuits (captioned~~ ~~Culver v.~~ ~~Proteostasis~~ ~~Therapeutics, Inc., et al, 1:20-cv-08595 (S.D.N.Y. filed Oct. 15, 2020);~~ ~~Donolo v. Proteostasis Therapeutics, Inc. et al, 1:20-cv-01400 (D. Del. filed Oct. 16, 2020);~~ ~~Straube v. Proteostasis Therapeutics, Inc., et al, 1:20-cv-08653 (S.D.N.Y. filed Oct. 16, 2020);~~ ~~Beck v.Proteostasis Therapeutics, Inc., et al, 1:20-cv-08783 (S.D.N.Y. filed Oct. 21, 2020);~~ ~~Dreyer v. Proteostasis Therapeutics, Inc., et al, 1:20-cv-05193 (E.D.N.Y. filed Oct. 28, 2020)) were filed in federal court by alleged our stockholders challenging the Merger. The complaints name us and our board of directors as defendants. The~~ ~~Aniello~~ ~~complaint names Yumanity as an additional defendant. The~~ ~~Donolo~~ complaint names Yumanity and Pangolin Merger Sub, Inc., a wholly owned subsidiary of Protestasis, as additional defendants. The complaints assert violations of Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14a-9 promulgated thereunder against us and the individual defendants, and assert violations of Section 20(a) of the Exchange Act against the individual defendants. The ~~Donolo~~ ~~complaint asserts an additional violation of Section 20(a) of the Exchange Act against Yumanity. The~~ ~~Aniello~~ complaint asserts additional claims for breach of fiduciary duty against the individual defendants and aiding and abetting against us and Yumanity. The plaintiffs contend that the Registration Statement on Form S-4, filed with the SEC on September 23, 2020 omitted or misrepresented material information regarding the Merger. The complaints seek injunctive relief, rescission, or rescissory damages, dissemination of a registration statement that discloses certain information requested by the plaintiff, and an award of plaintiffs’ costs, including attorneys’ fees and expenses. There can be no assurance, however, that we will be successful.

We may become involved in additional matters in connection with the Merger, and the combined organization may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, whichdescribe below could adversely affect our business, ~~and the combined organization. At present, we are unable to estimate potential losses, if any, related to the lawsuit.~~

~~Risks~~ ~~Related to our Capital Requirements, Finances and Operations if the Merger is Not Completed~~

~~There is no assurance that the proposed Merger between we and Yumanity will be completed in a timely manner~~financial condition or ~~at all. If the Merger with Yumanity is not consummated, our business could suffer materially, and our stock price could decline.~~

~~The consummation~~results of ~~the Merger between us and Yumanity is subject to a number of closing conditions, including approval by our and Yumanity’s respective stockholders and other customary closing conditions.~~operations. The parties are targeting a Closing of the transaction in the fourth calendar quarter of 2020, however, there can be no assurance that the Merger will be consummated within this desired timeframe, or at all.

~~If the Merger between us and Yumanity is not consummated, we may be subject to a number of material risks, and its business and stock price could be adversely affected, as follows:~~

~~If the Merger is not completed, we may be unsuccessful in completing an alternative strategic transaction on terms~~stock. Additional risks that are currently unknown to us or that we currently believe to be immaterial may also impair our business. Certain statements below are forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q.

Risks Related to Our Business, Financial Position, and Need for Additional Capital

We are a clinical stage biopharmaceutical company with a very limited operating history and no products approved for commercial sale, which may make it difficult to evaluate our current business and predict our future success and viability.

We are a clinical stage biopharmaceutical company with a limited operating history, focused on developing therapeutics for neurodegenerative diseases. We were initially formed as ~~favorable as the terms of the proposed transaction with Yumanity, or at all,~~a limited liability company in 2014 and converted into a corporation in 2015, we have no products approved for commercial sale, and we ~~may be unable~~have not generated any revenue from product sales to ~~reestablish a viable operating business.~~

date. We ~~have generated limited revenue to date from its collaboration agreements and research grant,~~began human clinical trials for YTX-7739 at the end of 2019 and have not ~~generated revenue from~~initiated clinical trials for any of our other current product candidates. Our operations to date have been limited primarily to organizing and staffing, raising capital, and conducting research and development activities for our product candidates.

To date, we have not initiated or completed a pivotal clinical trial, obtained marketing approval for any product ~~sales.~~candidates, manufactured a commercial scale product, or arranged for a third party to do so on our behalf, or conducted sales and marketing activities necessary for successful product commercialization. Our ~~assets currently consist primarily~~short operating history as a company makes any assessment of our future success and viability subject to significant uncertainty. We will encounter risks and difficulties frequently experienced by early-stage biopharmaceutical companies in rapidly evolving fields, and we have not yet demonstrated an ability to successfully overcome such risks and difficulties. If we do not address these risks and difficulties successfully, our business will suffer.

Our historical operating results indicate substantial doubt exists related to our ability to continue as a going concern. Our financial statements have been prepared assuming that we will continue as a going concern.

We have incurred net losses and used significant cash in operating activities since inception, and we expect to continue to generate operating losses for the foreseeable future. As of September 30, 2021, we have an accumulated deficit of $176.9 million and cash, cash equivalents and ~~short-term investments,~~marketable securities of $46.4 million. These factors raise substantial doubt about our ~~intellectual property portfolio, license~~ability to continue as a

going concern and ~~collaboration agreements,~~to satisfy our ~~remaining assets, our listing on The Nasdaq Stock Market and~~estimated liquidity needs for 12 months from the ~~Merger Agreement with Yumanity. While we have entered into the Merger Agreement with Yumanity, the consummation~~issuance of the ~~Merger with Yumanity~~condensed consolidated financial statements.

If we continue to experience operating losses, and we are not able to generate additional liquidity through a capital raise or other cash infusion, we might need to secure additional sources of funds, which may ~~be delayed~~ or may not ~~occur at all.~~be available to us. If ~~the Merger is not completed, our board of directors may elect~~we are unable to pursue an alternative strategic transaction similar to the proposed Merger with Yumanity. Attempting to complete an alternative transaction will be costly and time consuming. If the Merger with Yumanity is not completed and our board of directors determines to pursue an alternative transaction, theraise additional capital in sufficient amounts or on terms ~~of any such alternative transaction may not be as favorable~~acceptable to us, ~~and our stockholders as the terms of the Merger with Yumanity, and~~ we ~~can make no assurances that such an alternative transaction would occur at all. Further, if the Merger with Yumanity is not completed, given the level of investment and time that would be required~~may have to ~~redesign our products~~significantly delay, scale back or ~~pursue~~discontinue the development of ~~products~~our product candidates or other research and ~~services pursuant~~development initiatives.

We have incurred significant operating losses since our inception and anticipate we will incur continued losses for the foreseeable future.

We have funded our operations to ~~its collaboration agreements, it is unlikely that~~date through proceeds from collaborations and sales of preferred units. From our inception through September 30, 2021, we ~~would be able to obtain the funding required to recommence its product development activities on terms favorable to~~have received gross proceeds of $125.5 million from such transactions. As of September 30, 2021, our ~~stockholders, or at all.~~cash, cash equivalents and marketable securities were $46.4 million. We have incurred net losses in each year since our inception, and we have an accumulated deficit of $176.9 million as of September 30, 2021.

~~If the Merger is not completed, our board of directors may decide to pursue a dissolution and liquidation~~Substantially all of our ~~company. In such an event, the amount of cash available for distribution to~~operating losses have resulted from costs incurred in connection with general and administrative costs associated with our ~~stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments~~operations, and ~~contingent liabilities.~~

There can be no assurance that the Merger will be completed. If the Merger is not completed, our board of directors may decide to pursue a dissolution and liquidation of our company. In such an event, the amount of cash available for distribution to its stockholders will depend heavily on the timing of such decision, as with the passage of time the amount of cash available for distribution will be reduced as we continue to fund its operations. In addition, if our board of directors were to approve and recommend, and our stockholders were to approve, a dissolution and liquidation of our company, we would be required under Delaware corporate law to pay its outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to its stockholders. As a result of this requirement, a portion of our remaining cash assets may need to be reserved pending the resolution of such obligations. In addition, we may be subject to litigation or other claims related to a dissolution and liquidation of our company. If a dissolution and liquidation were pursued, our board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of our common stock could lose all or a significant portion of their investment in the event of our liquidation, dissolution or winding up.

~~If we were to continue to advance~~ our research and development ~~activities~~programs, including for our preclinical and ~~pursue development of any of~~clinical product candidates and our pipeline products, it would require substantial additional funding. Raising additional capital would cause dilution to its existing stockholders, and may restrict its operations or require it to relinquish rights to its technologies or to a product candidate.

discovery engine platform. We ~~currently do not have any committed external source of funds and does not~~ expect ~~to generate any commercial revenue in the foreseeable future. We believe~~ that our existing cash, cash equivalents and marketable securities will fund our operating expenses, capital expenditure requirements and ~~interest thereon~~debt service payments into the third quarter of 2022. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ deficit and working capital. In any particular quarter or quarters, our operating results could be ~~sufficient~~below the expectations of securities analysts or investors, which could cause our stock price to ~~fund its projected operating requirements under its current operating plan.~~ decline.

We ~~have based~~expect our estimates on assumptions that may prove to be wrong, and it may use its available capital resources sooner than it currently expects if its operating plans change. If the Merger is not completed and our current operating plans change and we determines to pursue further research and development ~~activities,~~expenses to significantly increase in connection with our clinical trials of our product candidates. In addition, if we obtain marketing approval for our product candidates, we will ~~require~~incur significant sales and marketing, legal, and outsourced-manufacturing expenses. As a public company, we expect to continue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are also unable to predict the extent of any future losses or when we will become profitable, if at all. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.

Drug development is a highly uncertain undertaking and involves a substantial degree of risk. We have never generated any revenue from product sales, and we may never generate revenue or be profitable.

Our ability to become profitable depends upon the ability of our product candidates to generate revenue. To date, we have not generated any revenue from our product candidates and we do not know when, or if, we will do so. We do not anticipate generating any revenue from product sales until after we have successfully completed clinical development and received regulatory approval for the commercial sale of a product candidate, if ever. Our ability to generate revenue depends on a number of factors, including, but not limited to:

Because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of our expenses, or when we will be able to generate any meaningful revenue or achieve or maintain profitability, if ever. In addition, our expenses could increase beyond our current expectations if we are required by the U.S. Food and Drug Administration (the “FDA”), or foreign regulatory agencies, to perform studies in addition to those that we currently anticipate, or if there are any delays in any of our current or future collaborators’ clinical trials or the development of any of our product candidates. Even if one or more of our product candidates is approved for commercial sale, absent our entering into a collaboration or partnership agreement, we anticipate incurring significant costs associated with commercializing any approved product candidate and ongoing compliance efforts.

Even if we are able to generate revenue from the sale of any approved products, we may not become profitable and may need to obtain additional funding to ~~operate,~~continue operations. Revenue from the sale of any product candidate for which regulatory approval is obtained will be dependent, in part, upon the size of the markets in the territories for which we gain regulatory approval, the accepted price for the product, the ability to get reimbursement at any price, and whether we own the commercial rights for that territory. The precise number of people with Parkinson’s disease, Alzheimer’s disease, and amyotrophic lateral sclerosis (“ALS”) is unknown. Our projections of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, are based on estimates. If the number of addressable patients is not as significant as we anticipate, the indication approved by regulatory authorities is narrower than we expect, or the reasonably accepted population for treatment is narrowed by competition, physician choice, or treatment guidelines, we may not generate significant revenue from sales of our product candidates, even if approved. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

Our failure to become and remain profitable would decrease our value and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product candidates, or continue our operations and cause a decline in the value of our common stock, all or any of which may adversely affect our viability.

Due to the significant resources required for the development of our programs, and depending on our ability to access capital, we must prioritize development of certain product candidates. Moreover, we may fail to expend our limited resources on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

We are prioritizing our lead product candidate, YTX-7739, which is in Phase 1 clinical development for the treatment of Parkinson's disease. We seek to maintain a process of prioritization and resource allocation to maintain an optimal balance between aggressively advancing product candidates, such as YTX-7739, and ensuring replenishment of our portfolio.

Due to the significant resources required for the development of our product candidates, we must focus on specific diseases and disease pathways and decide which product candidates to pursue and advance and the amount of resources to allocate to each. For example, we plan to evaluate YTX-7739 in additional preclinical studies instead of advancing our other product candidate, YTX-9184, as we believe this approach will provide an opportunity to assess results in patients sooner, given the studies and clinical trials done to date of YTX-7739. Our decisions concerning the allocation of research, development, collaboration, management, and financial resources toward particular product candidates or therapeutic areas may not lead to the development of any viable commercial product and may divert resources away from better opportunities. If we make incorrect determinations regarding the viability or market potential of any of our product candidates, including our decision to focus on YTX-7739, or misread trends in the biopharmaceutical industry, in particular for neurodegenerative diseases, our business, financial condition, and results of operations could be materially adversely affected. As a result, we may fail to capitalize on viable commercial products or profitable market opportunities, be required to forego or delay pursuit of opportunities with other product candidates or other diseases and disease pathways that may later prove to have greater commercial potential than those we choose to pursue, or relinquish valuable rights to such product candidates through collaboration, licensing, or other royalty arrangements in cases in which it would have been advantageous for us to invest additional resources to retain sole development and commercialization rights.

We will need additional funding to advance YTX-7739 through clinical development, which funding may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit, or terminate our product development efforts or other operations.

As of September 30, 2021, our cash, cash equivalents and marketable securities were $46.4 million. We will require additional funding to advance clinical trials of YTX-7739 and other planned early development of other programs generated by our discovery engine platform. Our ability to secure this additional funding may be adversely impacted by negative or ambiguous results in future clinical trials for YTX-7739. Developing small-molecule products is expensive, and we expect our discovery, research, and development expenses to ~~finance these cash needs~~increase substantially in connection with our ongoing activities, particularly as we advance our product candidates in clinical trials. We may also need additional funds sooner if we choose to pursue additional indications and/or geographies for our product candidates or otherwise expand more rapidly than we presently anticipate.

In addition, we have identified conditions and events that raise substantial doubt about our ability to continue as a going concern.

Our operating plan may also change as a result of many factors currently unknown, and we may need to seek additional funds sooner than planned, through ~~a combination of~~public or private equity ~~offerings,~~or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements, or ~~collaboration arrangements.~~

Toa combination of these approaches. In any event, we will require additional capital to obtain regulatory approval for, and, if approved, to commercialize our product candidates. Raising funds in the ~~extent~~current economic environment may present additional challenges. Even if we believe that we ~~raise~~have sufficient funds for our current or future operating plans, we may seek additional capital ~~through the sale of equity~~if market conditions are favorable or ~~convertible debt, the ownership interests of~~if we have specific strategic considerations.

Any additional fundraising efforts may divert our ~~stockholders~~management from their day-to-day activities, which may adversely affect our ability to develop and, if approved, commercialize our product candidates. In addition, we cannot guarantee that future financing will be ~~diluted. In addition,~~available in sufficient amounts or on terms acceptable to it, if at all. Moreover, the terms of any ~~equity or convertible debt we agree to issue~~financing may ~~include liquidation or other preferences that~~ adversely affect the holdings or the rights of our ~~stockholders.~~

~~Convertible~~stockholders and the issuance of additional securities, whether equity or debt, ~~financing, if available,~~by us, or the possibility of such issuance, may ~~involve agreements that include~~cause the market price of our shares to decline. The sale of additional equity or convertible securities would dilute all of our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and we may be required to agree to certain restrictive covenants, ~~limiting or restricting~~such as limitations on our ability to ~~take specific actions, such as incurring~~incur additional debt, ~~making capital expenditures, and declaring dividends, and may impose~~ limitations on our ability to acquire, sell or license intellectual property rights, and other operating restrictions that could adversely impact our ability to conduct ~~its~~our business. We could also be required to seek funds through arrangements with collaborative partners or otherwise at an earlier stage than otherwise would be desirable and we may be required to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results, and prospects.

~~Additional funds~~If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay, or discontinue one or more of our research or development programs or the commercialization of any approved product candidate or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition, and results of operations.

We are at an early stage of development of the product candidates currently in our pipeline and are continuing to discover additional potential product candidates leveraging our discovery engine platform. To date, we have devoted substantially all of our efforts and financial resources to identify, secure intellectual property for, and develop our discovery engine platform and our product candidates, including conducting multiple preclinical studies, and providing general and administrative support for these operations. Our business depends heavily on the successful clinical development, regulatory approval, and commercialization of our lead product candidate, YTX-7739 which is in clinical development. None of our product candidates have advanced into late-stage development or a pivotal clinical study and it may be years before any such study is initiated, if at all. YTX-7739 will require substantial additional clinical development, testing, and regulatory approval before we are permitted to commence our commercialization. Further, we cannot be certain that any of our product candidates will be successful in clinical trials or obtain regulatory approval.

Our future success is dependent on our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize our product candidates, and we may fail to do so for many reasons, including the following:

If any of these events occur, we may be forced to abandon our development efforts for a product candidate or candidates, which would have a material adverse effect on our business and could potentially cause us to cease operations. For instance, if we observe harmful side effects or other characteristics that indicate one product candidate is unlikely to be effective or otherwise does not meet applicable regulatory criteria, these findings may implicate the discovery engine platform as a whole.

We may not be successful in our efforts to further develop our discovery engine platform technology and current product candidates. We are not permitted to market or promote any of our product candidates before we receive regulatory approval from the FDA or comparable foreign regulatory authorities, and we may never receive such regulatory approval for any of our product candidates. Each of our product candidates are in the early stages of development and will require significant additional clinical development, management of preclinical, clinical, and manufacturing activities, regulatory approval, adequate manufacturing supply, a commercial organization, and significant marketing efforts before we could generate any revenue from product sales, if at all.

The preclinical and clinical product candidates and current clinical trials are, and the future clinical trials and the manufacturing and marketing of our product candidates will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United States, and in other countries where we intend to test and, if approved, market any product candidate. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must, among other requirements, demonstrate through preclinical studies and clinical trials that the product candidate is safe and effective for use in each target indication. Drug development is a long, expensive, and uncertain process, and delay or failure can occur at any stage of any of our clinical trials. This process can take many years and may include post-marketing studies and surveillance, which will require the expenditure of substantial resources. Of the large number of drugs in development in the United States, only a small percentage will successfully complete the FDA regulatory approval process and will be commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development and preclinical studies and clinical trials, we cannot assure you that any of our product candidates will be successfully developed or commercialized.

If any of our product candidates successfully complete clinical trials, we generally plan to seek regulatory approval to market our product candidates in the United States, the European Union (“EU”), and in additional foreign countries where we believe there is a viable commercial opportunity and significant patient need. We have never commenced, compiled, or submitted an application seeking regulatory approval to market any product candidate. We may never receive regulatory approval to market any product candidates even if such product candidates successfully complete clinical trials, which would adversely affect our viability. To obtain regulatory approval in countries outside the United States, we must comply with numerous and varying regulatory requirements of such other countries regarding safety, efficacy, chemistry, manufacturing and controls, clinical trials, commercial sales, pricing, and distribution of our product candidates. We may also rely on collaborators or partners to conduct the required activities to support an application for regulatory approval, and to seek approval, for one or more of our product candidates. We cannot be sure that any collaborators or partners will conduct these activities or do so within the timeframe we desire. Even if we (or any collaborators or partners) are successful in obtaining approval in one jurisdiction, we cannot ensure that we (or any collaborators or partners) will obtain approval in any other jurisdictions. If we are unable to obtain approval for our product candidates in multiple jurisdictions, our revenue and results of operations could be negatively affected.

Even if we receive regulatory approval to market any of our product candidates, we cannot assure you that any such product candidate will be successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives.

Investment in biopharmaceutical product development involves significant risk that any product candidate will fail to demonstrate adequate efficacy or an acceptable safety profile, gain regulatory approval, and become commercially viable. We cannot provide any assurance that we will be able to successfully advance any of our product candidates through the development process or, if approved, successfully commercialize any of our product candidates.

We may not be successful in our efforts to continue to create a pipeline of product candidates or to develop commercially successful products. If we fail to successfully identify and develop additional product candidates, our commercial opportunity may be limited.

One of our strategies is to identify and pursue clinical development of additional product candidates. Our portfolio currently consists of four programs, one of which is in clinical development and the rest of which are in research, discovery and preclinical stages of development. Identifying, developing, obtaining regulatory approval, and commercializing additional product candidates for the treatment of neurodegenerative diseases will require substantial additional funding and is prone to the risks of failure inherent in drug development. We cannot provide you any assurance that we will be able to successfully identify or acquire additional product candidates, advance any of these additional product candidates through the development process, successfully commercialize any such additional product candidates, if approved, or assemble sufficient resources to identify, acquire, develop or, if approved, commercialize additional product candidates. If we are unable to successfully identify, acquire, develop, and commercialize additional product candidates, our commercial opportunity may be limited.

We may not be able to conduct, or contract others to conduct, animal testing in the future, which could harm our research and development activities.

Certain laws and regulations relating to drug development require us to test our product candidates on animals before initiating clinical trials involving humans. Animal testing activities have been the subject of controversy and adverse publicity. Animal rights groups and other organizations and individuals have attempted to stop animal testing activities by pressing for legislation and regulation in these areas and by disrupting these activities through protests and other means. To the extent the activities of these groups are successful, our research and development activities may be interrupted or delayed.

We have concentrated our research and development efforts on the treatment of neurodegenerative diseases, a field that has seen limited success in drug development. Further, our product candidates are based on new approaches and novel technology, which makes it difficult to predict the time and cost of product candidate development and subsequently obtaining regulatory approval.

We have focused our research and development efforts on addressing neurodegenerative diseases, including Parkinson’s disease, ALS and Alzheimer’s disease. Efforts by biopharmaceutical companies in the field of neurodegenerative diseases have seen limited successes in drug development. There are few effective therapeutic options available for patients with Parkinson’s disease, ALS or Alzheimer’s disease. Our future success is highly dependent on the successful development of our discovery engine platform technology and our product candidates for treating neurodegenerative diseases. Developing and, if approved, commercializing our product candidates for treatment of neurodegenerative diseases subjects us to a number of challenges, including engineering product candidates and obtaining regulatory approval from the FDA and other regulatory authorities who have only a limited set of precedents to rely on.

Our approach is centered on the key insight that human protein misfolding, a phenomenon at the root of virtually all neurodegenerative diseases, can be modeled effectively in yeast cells. Discoveries from the yeast system are then translated to diseased human cell lines created by adult stem cells using induced pluripotent stem cell technology (“iPSC”). This strategy may not prove to be successful. We cannot be sure that our approach will yield satisfactory therapeutic products that are safe and effective, scalable, or profitable.

Moreover, public perception of drug safety issues, including adoption of new therapeutics or novel approaches to treatment, may adversely influence the willingness of subjects to participate in clinical trials, or if approved, of physicians to prescribe our products.

We may encounter difficulties in enrolling subjects in our clinical trials, thereby delaying or preventing development of our product candidates.

There is no precise method of establishing the actual number of people with neurodegenerative diseases in any geography over any time period. It is estimated that more than 60 million people worldwide suffer from neurodegenerative diseases. If the actual number of people with neurodegenerative diseases is lower than we believe, we may experience difficulty in enrolling subjects in our clinical

trials, thereby delaying development of our product candidates. Furthermore, we may experience difficulties in subject enrollment in our clinical trials for a variety of other reasons, including:

Our clinical trials may fail to demonstrate adequate safety and efficacy of our product candidates, which would prevent, delay, or limit the scope of regulatory approval and commercialization.

Before obtaining regulatory approvals for the commercial sale of any of our product candidates, we must, among other requirements, demonstrate through lengthy, complex, and expensive preclinical studies and clinical trials that our product candidates are both safe and effective for use in each target indication. Each product candidate must demonstrate an adequate risk versus benefit profile in our intended patient population and for our intended use.

Clinical testing is expensive and can take many years to complete, and our outcome is inherently uncertain. Failure can occur at any time during the clinical study process. The results of preclinical studies of our product candidates may not be predictive of the results of early-stage or later-stage clinical trials, and results of early-stage clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. The results of clinical trials in one set of subjects or disease indications may not be predictive of those obtained in another. In some instances, there can be significant variability in safety or efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in study procedures set forth in protocols, differences in the size and type of the patient populations, changes in and lack of adherence to the dosing regimen or the expected delivery formulation of YTX-7739 or any of our other product candidates and other clinical study protocols, and the rate of dropout among clinical study participants. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy profile despite having progressed through preclinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in later-stage clinical trials due to lack of efficacy or safety issues, notwithstanding promising results in early-stage studies. This is particularly true in neurodegenerative diseases, where failure rates historically have been higher than in other disease areas. Most product candidates that begin clinical trials are never approved by regulatory authorities for commercialization.

We have limited experience in designing clinical trials and may be unable to design and execute a clinical study to support marketing approval. We cannot be certain that our current clinical trials or any other future clinical trials will be successful. Additionally, any safety concerns observed in any one of our clinical trials in our targeted indications could limit the prospects for regulatory approval of our product candidates in those, and other indications, which could have a material adverse effect on our business, financial condition, and results of operations.

In addition, even if such clinical trials are successfully completed, we cannot guarantee that the FDA or foreign regulatory authorities will interpret the results as we do, and more studies could be required before we submit our product candidates for approval. To the

extent that the results of the studies are not satisfactory to the FDA or foreign regulatory authorities for support of a marketing application, we may be required to expend significant resources, which may not be available to us, to conduct additional studies in support of potential approval of our product candidates. Even if regulatory approval is secured for any of our product candidates, the terms of such approval may limit the scope and use of our product candidates, which may also limit their commercial potential.

We may not be able to file IND applications or related amendments or similar applications and amendments outside the United States to commence additional clinical trials on the timelines expected, and even if we are able to, regulatory authorities may not permit us to proceed.

We may not be able to file future IND applications or similar applications outside the Unites States for our product candidates on the timelines we expect. For example, we may experience manufacturing delays or other delays with preclinical studies. Moreover, we cannot be sure that submission of an IND or similar application outside the United States will result in the FDA or respective regulatory authority allowing clinical trials to begin, or that, once begun, issues will not arise that suspend or terminate clinical trials. Additionally, even if such regulatory authorities agree with the design and implementation of the clinical trials set forth in IND or similar application, we cannot guarantee that such regulatory authorities will not change their requirements in the future. These considerations also apply to new clinical trials we may submit as amendments to existing IND or similar applications or to a new application. Any failure to file IND or similar applications on the timelines we expect or to obtain regulatory authorizations for our trials may prevent us from completing our clinical trials or commercializing our products on a timely basis, if at all.

Interim, “topline,” and preliminary data from our clinical trials that are announced or published from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, we may publicly disclose preliminary or topline data from our clinical trials, which are based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular trial. We also make assumptions, estimations, calculations and conclusions as part of its analyses of data, and we may not have received or had the opportunity to fully evaluate all data. As a result, the topline or preliminary results that we report may differ from future results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Topline data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, topline data should be viewed with caution until the final data are available. From time to time, we may also disclose interim data from our clinical trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available or as patients from our clinical trials continue other treatments for their disease. Adverse differences between preliminary or interim data and final data could significantly harm our business prospects.

In addition, the information we choose to publicly disclose regarding a particular clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine is material or otherwise appropriate information to include in our disclosure.

If the interim, topline, or preliminary data that we report differs from actual or final results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and commercialize, our product candidates may be harmed, which could harm our business, operating results, prospects or financial condition.

Our product candidates may cause serious adverse events or other undesirable side effects that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

Serious adverse events or other undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay, or halt clinical trials, and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities.

Further, clinical trials by their nature utilize a sample of the potential patient population for a limited duration of exposure. Rare and severe side effects of a product candidate may only be uncovered with a significantly larger number of patients exposed to the product candidate. If our product candidates receive marketing approval and we or others identify undesirable side effects caused by such product candidates (or any other similar products) after such approval, a number of potentially significant negative consequences could result, including:

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidates, could substantially increase the costs of commercializing our product candidates, and could significantly impact our ability to successfully commercialize our product candidates and generate revenues.

Failures or delays in the commencement or completion of, or ambiguous or negative results from, our clinical trials of our product candidates could result in increased costs to us and could delay, prevent, or limit our ability to generate revenue and continue our business.

We do not know whether any of our clinical trials will begin or be completed on schedule, if at all, as the commencement and completion of clinical trials can be delayed or prevented for a number of reasons, including, among others:

Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical study may be suspended or terminated by us, the FDA, the IRBs or ethics committees at the sites in which such clinical studies are being conducted, a data and safety monitoring board (“DSMB”) overseeing the clinical study at issue or other regulatory authorities due to a number of factors, including, among others:

We may in the future seek orphan drug designation or exclusivity for certain of our product candidates. If our competitors are able to obtain orphan drug exclusivity for products that constitute the same drug and treat the same indications as our product candidates, we may not be able to have competing products approved by the applicable regulatory authority for a significant period of time.

We may in the future seek orphan drug designation or exclusivity for certain of our product candidates. Regulatory authorities in some jurisdictions, including the United States and the European Union, may designate drugs and biologics intended to treat relatively small patient populations as orphan drugs. Under the Orphan Drug Act of 1983, FDA may designate a product candidate as an orphan drug if it is intended to treat a rare disease or condition, which is defined as a disease or condition having a patient population of fewer than 200,000 individuals in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. In the European Union, the European Commission after recommendation from the EMA’s Committee for Orphan Medicinal Products grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting not more than 5 in 10,000 persons in the European Union. Additionally, orphan designation is granted for products intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessary investment in developing the drug or biologic product.

If we request orphan drug designation for our product candidates, there can be no assurances that FDA or the European Commission will grant any of our product candidates such designation. Additionally, orphan drug designation does not guarantee that any regulatory authority will accelerate regulatory review of, or ultimately approve, the product candidate, nor does it limit the ability of any regulatory authority to grant orphan drug designation to product candidates of other companies that treat the same indications.

Generally, if a product candidate with an orphan drug designation receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes FDA or the European Commission from approving another marketing application for a product that constitutes the same drug treating the same indication for that marketing exclusivity period, except in limited circumstances. If another sponsor receives such approval before we do (regardless of our orphan drug designation), we will be precluded from receiving marketing approval for our product for the applicable exclusivity period. The applicable period is seven years in the United States and 10 years in the European Union. The exclusivity period in the European Union can be reduced to six years if a product no longer meets the criteria for orphan drug designation or if the product is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be revoked if any regulatory authority determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the product to meet the needs of patients with the rare disease or condition.

Even if we obtain orphan drug exclusivity for a product candidate, that exclusivity may not effectively protect the product candidate from competition because different drugs can be approved for the same condition. In the United States, even after an orphan drug is approved, FDA may subsequently approve another drug for the same condition if FDA concludes that the latter drug is not the same drug or is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care.

We are currently, and may in the future, conduct clinical trials for our product candidates outside the United States, and the FDA and similar foreign regulatory authorities may not accept data from such trials.

We are currently, and may in the future, conduct additional clinical trials outside the United States, including in Europe or other foreign jurisdictions. The acceptance of trial data from clinical trials conducted outside the United States by the FDA may be subject to certain conditions. In cases where data from clinical trials conducted outside the United States are intended to serve as the sole basis for marketing approval in the United States, the FDA will generally not approve the application on the basis of foreign data alone unless (i) the data are applicable to the United States population and United States medical practice; (ii) the trials were performed by clinical investigators of recognized competence; and (iii) the data may be considered valid without the need ~~them~~for an on-site inspection by the FDA or, if the FDA considers such an inspection to be necessary, the FDA is able to validate the data through an on-site inspection or other appropriate means. Additionally, the FDA’s clinical trial requirements, including sufficient size of patient populations and statistical powering, must be met. Many foreign regulatory bodies have similar approval requirements. In addition, such foreign trials would be subject to the applicable local laws of the foreign jurisdictions where the trials are conducted. There can be no assurance that the FDA or any similar foreign regulatory authority will accept data from trials conducted outside of the United States or the applicable jurisdiction. If the FDA or any similar foreign regulatory authority does not accept such data, it would result in the need for additional trials, which would be costly and time-consuming and delay aspects of our business plan, and which may result in our product candidates not receiving approval for commercialization in the applicable jurisdiction.

Changes in regulatory requirements, FDA guidance, or unanticipated events during our preclinical studies and clinical trials of our product candidates may occur, which may result in changes to preclinical or clinical study protocols or additional preclinical or clinical study requirements, which could result in increased costs to us and could delay our development timeline.

Changes in regulatory requirements, FDA guidance, or unanticipated events during our preclinical studies and clinical trials may force us to amend preclinical studies and clinical trial protocols or the FDA may impose additional preclinical studies and clinical trial requirements. Amendments or changes to our clinical study protocols would require resubmission to the FDA and IRBs for review and approval, which may adversely impact the cost, timing, or successful completion of clinical trials. Similarly, amendments to our preclinical studies may adversely impact the cost, timing, or successful completion of those preclinical studies. If we experiences delays completing, or if we terminate, any of our preclinical studies or clinical trials, or if we are required to conduct additional preclinical studies or clinical trials, the commercial prospects for our product candidates may be harmed and our ability to generate product revenue will be delayed.

If, in the future, we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market any product candidates we may develop, we may not be successful in commercializing those product candidates if and when they are approved.

We do not currently have an infrastructure for the sales, marketing, and distribution of pharmaceutical products. In order to market our product candidates, if approved by the FDA or any other regulatory body, we must build our sales, marketing, managerial, and other non-technical capabilities, or make arrangements with third parties to perform these services. There are risks involved with both establishing our own commercial capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force or reimbursement specialists is expensive and time-consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing and other commercialization capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our commercialization personnel.

If we enter into arrangements with third parties to perform sales, marketing, commercial support, and distribution services, our product revenue or the profitability of product revenue may be lower than if we were to market and sell any products we may develop ourselves. In addition, we may not be successful in entering into arrangements with third parties to commercialize our product candidates or may be unable to do so on terms that are ~~acceptable~~favorable to us. We may have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we does not establish commercialization capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates if approved.

If we are unable to establish adequate sales, marketing, and distribution capabilities, whether independently or with third parties, or if we are unable to do so on commercially reasonable terms, our business, results of operations, financial condition, and prospects will be materially adversely affected.

Even if we receive marketing approval for our product candidates, our product candidates may not achieve broad market acceptance by physicians, patients, healthcare payors, or others in the medical community, which would limit the revenue that we generate from their sales.

The commercial success of our product candidates, if approved by the FDA or other applicable regulatory authorities, will depend upon the awareness and acceptance of our product candidates among the medical community, including physicians, patients, and healthcare payors. If any of our product candidates are approved but do not achieve an adequate level of acceptance by physicians, patients, healthcare payors, and others in the medical community, we may not generate sufficient revenue to become or remain profitable. Market acceptance of our product candidates, if approved, will depend on a number of factors, including, among others:

If our product candidates are approved but do not achieve an adequate level of acceptance by patients, physicians, and payors, we may not generate sufficient revenue from our approved product candidates to become or remain profitable. Before granting reimbursement approval, healthcare payors may require us to demonstrate that our product candidates, in addition to treating these target indications, also provide incremental health benefits to patients. Our efforts to educate the medical community and third-party payors about the benefits of our product candidates may require significant resources and may never be successful.

We face significant competition in an environment of rapid technological and scientific change, and there is a possibility that our competitors may achieve regulatory approval before we do or develop therapies that are safer, more advanced, or more effective, which may negatively impact our ability to successfully market or commercialize any product candidates we may develop and ultimately harm our financial condition.

The development and commercialization of new drug products is highly competitive. Moreover, the neurodegenerative field is characterized by strong and increasing competition, with a strong emphasis on intellectual property. We may face competition with respect to any product candidates that we seek to develop or commercialize in the future from major pharmaceutical companies, specialty pharmaceutical companies, and biotechnology companies worldwide. Potential competitors also include academic institutions, government agencies, and other public and private research organizations that conduct research, seek patent protection, and establish collaborative arrangements for research, development, manufacturing, and commercialization.

There are a number of large pharmaceutical and biotechnology companies that are currently pursuing the development of products for the treatment of the neurodegenerative disease indications for which we have research programs, including Parkinson’s disease, ALS and Alzheimer’s disease. Companies that we are aware of are developing therapeutics in the neurodegenerative disease area include large companies with significant financial resources, such as AbbVie, AstraZeneca, Biogen, Bristol-Myers Squibb, Lilly, GlaxoSmithKline, Johnson & Johnson, Novartis, Roche, Sanofi, and Takeda. In addition to competition from other companies targeting neurodegenerative indications, any products we may develop may also face competition from other types of therapies, such as gene-editing therapies.

Many of our current or potential competitors, either alone or with their strategic partners, have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals, and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical study sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient, or are less expensive than any products that we may develop. Furthermore, currently approved products could be discovered to have application for treatment of neurodegenerative disease indications, which could give such products significant regulatory and market timing advantages over any of our product candidates. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for our product candidates and may obtain orphan product exclusivity from the FDA for indications our product candidates are targeting, which could result in our competitors establishing a strong market position before we are able to enter the

market. Additionally, products or technologies developed by our competitors may render our potential product candidates uneconomical or obsolete, and we may not be successful in marketing any product candidates we may develop against competitors.

In addition, we could face litigation or other proceedings with respect to the scope, ownership, validity and/or enforceability of our patents relating to our competitors’ products and our competitors may allege that our products infringe, misappropriate, or otherwise violate their intellectual property. The availability of our competitors’ products could limit the demand, and the price we are able to charge, for any products that we may develop and commercialize. See “Risks Related to Our Intellectual Property Rights.”

The current pandemic of COVID-19 and the future outbreak of other highly infectious or contagious diseases could seriously harm our research, development and potential future commercialization efforts, increase our costs and expenses and have a material adverse effect on our business, financial condition and results of operations.

Broad-based business or economic disruptions could adversely affect our ongoing or planned research and development activities. For example, in December 2019, an outbreak of a novel strain of coronavirus originated in Wuhan, China, and has since spread to a number of other countries, including the United States. To date, the COVID-19 pandemic has caused significant disruptions to the U.S. and global economy and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak is continually evolving and, as additional cases and new variants of the virus are identified, many countries, including the U.S., have reacted by instituting quarantines, restrictions on travel and mandatory closures of businesses. Certain states and cities, including where we or the third parties with whom we engage operate, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate, and/or restrictions on the types of construction projects that may continue.

The extent to which COVID-19 may impact our preclinical studies or clinical trial operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, the identification of new variants of the virus, the severity of COVID-19, or the effectiveness of actions to contain and treat COVID-19. The continued spread of COVID-19 globally could adversely impact our preclinical studies or clinical trial operations, including our ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19 if an outbreak occurs in their geography. COVID-19 may also affect employees of third-party CROs located in affected geographies that we rely upon to carry out our clinical trials. Any negative impact COVID-19 has to patient enrollment or treatment or the execution of our current product candidates and any future product candidates could cause costly delays to clinical trial activities, which could adversely affect our ability to obtain regulatory approval for and to commercialize our current product candidate and any future product candidates, increase our operating expenses, and have a material adverse effect on our financial results.

Further, the COVID-19 outbreak caused delays in our Phase 1 single ascending dose trial of YTX-7739, and certain of the sites in the YTX-7739 Phase 1b clinical trial incurred delays due to COVID-19, resulting in a delay in the expected timing of early results from that trial. COVID-19 may cause delays in our other clinical trials, including delays in enrollment, due to diversion or prioritization of trial site resources away from the conduct of clinical trials and toward the COVID-19 pandemic. Key clinical trial activities, such as site monitoring, may be interrupted due to restrictions in travel, and some patients may be unwilling to enroll in our trials or be unable to comply with clinical trial protocols if quarantines or travel restrictions impede patient movement or interrupt healthcare services, which would delay our ability to conduct clinical trials or release clinical trial results. The spread of COVID-19, or another infectious disease, could also negatively affect the operations at our third-party manufacturers and suppliers, which could result in delays or disruptions in the supply of our current product candidates and any future product candidates. In addition, we may take temporary precautionary measures intended to help minimize the risk of the virus to our employees, including temporarily requiring all employees to work remotely, suspending all non-essential travel worldwide for our employees, and discouraging employee attendance at industry events and in-person work-related meetings, which could negatively affect our business.

We cannot presently predict the scope and severity of any potential business shutdowns or disruptions. If we or any of the third parties with whom we engage, however, were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and negatively affected, which could have a material adverse impact on our business and our results of operation and financial condition.

The regulatory approval processes of the FDA and comparable foreign regulatory authorities are lengthy, time-consuming, and inherently unpredictable. If we are ultimately unable to obtain regulatory approval for our product candidates, we will be unable to generate product revenue and our business will be substantially harmed.

The time required to obtain approval by the FDA and comparable foreign regulatory authorities is unpredictable, typically takes many years following the commencement of clinical trials, and depends upon numerous factors, including the type, complexity, and novelty of the product candidates involved. In addition, approval policies, regulations, or the type and amount of clinical data necessary to

gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions, which may cause delays in the approval or the decision not to approve an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. We have not submitted for, or obtained regulatory approval for any product candidate, and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval.

Applications for our product candidates could be delayed in receiving or fail to receive regulatory approval for many reasons, including but not limited to the following:

This lengthy approval process, as well as the unpredictability of the results of clinical trials, may result in our failing to obtain regulatory approval to market any of our product candidates, which would significantly harm our business, results of operations, and prospects.

Even if we obtain regulatory approval for our product candidates, our products will remain subject to extensive regulatory scrutiny.

Even if we receive marketing approval for our product candidates, regulatory authorities may still impose significant restrictions on our product candidates, indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies. If any of our product candidates are approved, they will be subject to ongoing regulatory requirements, including for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies, and submission of safety, efficacy, and other post-marketing information, including both federal and state requirements in the United States and requirements of comparable foreign regulatory authorities.

Manufacturers and manufacturers’ facilities are required to comply with extensive requirements imposed by the FDA and comparable foreign regulatory authorities, including, for example, ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practice (“cGMP”) regulations and applicable product tracking and tracing requirements. As such, we and our contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any new drug application (“NDA”) or comparable marketing approval. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control.

The FDA has significant post-marketing authority, including, for example, the authority to require labeling changes based on new safety information and to require post-marketing studies or clinical trials to evaluate serious safety risks related to the use of a drug. The FDA also has the authority to require, as part of an NDA or post-approval, the submission of a REMS. Any REMS required by the FDA may lead to increased costs to assure compliance with new post-approval regulatory requirements and potential requirements or restrictions on the sale of approved products, all of which could lead to lower sales volume and revenue.

Any regulatory approvals that we receive for our product candidates will be subject to limitations on the approved indicated uses for which the product may be marketed and promoted or to the conditions of approval (including the requirement to implement a REMS), or contain requirements for potentially costly post-marketing testing. We will be required to report certain adverse reactions and production problems, if any, to the FDA and comparable foreign regulatory authorities. Any new legislation addressing drug safety issues could result in delays in product development or commercialization, or increased costs to assure compliance. The FDA and other agencies, including the U.S. Department of Justice, closely regulate and monitor the post-approval marketing and promotion of products to ensure that they are manufactured, marketed, and distributed only for the approved indications and in accordance with the provisions of the approved labeling. We will have to comply with requirements concerning advertising and promotion for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved label. As such, we may not promote our products for indications or uses for which they do not have approval. The holder of an approved NDA or comparable marketing approval must submit new or supplemental applications and obtain approval for certain changes to the approved product, product labeling, or manufacturing process. We could also be asked to conduct post-marketing studies or clinical trials to verify the safety and efficacy of our products in general or in specific patient subsets.

If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, such regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may, among other things:

Any government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenue from our products, if approved. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of the company and our operating results will be adversely affected.

We are subject to healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, and diminished profits and future earnings.

Although we do not currently have any products on the market, if we obtain FDA approval for any of our product candidates and begins commercializing our products, we may be subject to additional healthcare statutory and regulatory requirements and enforcement by the federal government and the states and foreign governments in which we conduct our business. Healthcare providers, physicians, third-party payors, and others play a primary role in the recommendation and prescription of our product candidates, if approved. Our future arrangements with third-party payors will expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell, and distribute our product candidates, if we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:

In the event we decide to conduct clinical trials or continue to enroll subjects in our ongoing or future clinical trials, we may be subject to additional privacy requirements. The collection, use, storage, disclosure, transfer, or other processing of personal data regarding individuals in the EU, including personal health data, for example, is subject to the EU General Data Protection Regulation (“GDPR”). The GDPR is wide-ranging in scope and imposes numerous requirements on companies that process personal data, including requirements relating to processing health and other sensitive data, obtaining consent of the individuals to whom the personal data relates, providing information to individuals regarding data processing activities, implementing safeguards to protect the security and confidentiality of personal data, providing notification of data breaches, and taking certain measures when engaging third-party processors. The GDPR also imposes strict rules on the transfer of personal data to countries outside the EU, including the United States, and permits data protection authorities to impose large penalties for violations of the GDPR, including potential fines of up to €20 million or 4% of annual global revenues, whichever is greater. The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR. The GDPR may increase our responsibility and liability in relation to personal data that we process where such processing is subject to the GDPR, and we may be required to put in place additional mechanisms to ensure compliance with the GDPR, including as implemented by individual countries. Compliance with the GDPR is a rigorous and time-intensive process that may increase our cost of doing business or require us to change our business practices, and despite those efforts, there is a risk that we may be subject to fines and penalties, litigation, and reputational harm in connection with our European activities. Further to the United Kingdom’s (UK) exit from the EU, the UK GDPR and the UK Data Protection Act 2018 set out the UK’s data protection regime, which is independent from but aligned to the EU’s data protection regime. Non-compliance with the UK GDPR may result in monetary penalties of up to £17.5 million or 4% of worldwide revenue, whichever is higher. Although the EU Commission recently adopted adequacy decisions for the United Kingdom to facilitate data transfers between the EU and the United Kingdom, the respective provisions and enforcement of the GDPR and UK GDPR may diverge in the future and create additional regulatory challenges and uncertainties.

Additionally, other countries outside of Europe have enacted or are considering enacting similar privacy and data protection laws, which could increase the cost and complexity of delivering our services and operating our business. For example, Brazil enacted the General Data Protection Law, New Zealand enacted the New Zealand Privacy Act, China released a second draft of the Personal Information Protection Law, and Canada introduced the Digital Charter Implementation Act.

California recently enacted the California Consumer Privacy Act, or CCPA, which creates new individual privacy rights for California consumers (as defined in the law) and places increased privacy and security obligations on entities handling personal data of consumers or households. The CCPA requires covered businesses to provide certain disclosures to consumers about their data collection, use and sharing practices, and to provide affected California residents with ways to opt-out of certain sales or transfers of personal information, as well as the right to request, modify, and delete personal information. The CCPA went into effect on January 1, 2020, and the California State Attorney General submitted final regulations for review on June 2, 2020, which were finalized and are now effective. The California State Attorney General has commenced enforcement actions against violators as of July 1, 2020. Further, a new California privacy law, the California Privacy Rights Act, or CPRA, was passed by California voters on November 3, 2020. The CPRA will create additional obligations with respect to processing and storing personal information that are scheduled to take effect on January 1, 2023 (with certain provisions having retroactive effect to January 1, 2022). Other U.S. states also are considering omnibus privacy legislation and industry organizations regularly adopt and advocate for new standards in these areas. For example, Virginia recently enacted the Consumer Data Protection Act that will become effective on January 1, 2023, and is similar to the CCPA and CPRA, and Colorado recently enacted the Colorado Privacy Act, which will become effective on July 1, 2023, and which is similar to the CCPA and Virginia law. While the CCPA and CPRA provide exceptions for certain activities involving data collected in the context of clinical trials, health data governed by California’s Confidentiality of Medical Information Act, and PHI governed by HIPAA, and other state laws may contain similar exceptions, we cannot yet determine the impact the CCPA, CPRA, or other such existing or future laws, regulations and standards may have on our business.

Pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of promotional and marketing activities, such as: providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label promotion; and submitting inflated best price information to the Medicaid Rebate Program to reduce liability for Medicaid rebates. Ensuring that our internal operations and future business arrangements with third parties comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations, or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations, including anticipated activities to be conducted by our sales team, were found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal, and administrative penalties, damages, fines, and exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations, any of which could substantially disrupt our operations. If any of the physicians or other providers or entities with whom we expect to do business is found not to be in compliance with applicable

laws, they may be subject to criminal, civil, or administrative sanctions, including exclusions from government funded healthcare programs.

If any of our product candidates obtain regulatory approval, additional competitors could enter the market with generic or other versions of such drugs, which may result in a material decline in sales of affected products.

Under the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”) a pharmaceutical manufacturer may file an abbreviated new drug application (“ANDA”) seeking approval of a generic copy of an approved, small-molecule innovator product. Under the Hatch-Waxman Act, a manufacturer may also submit an NDA under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act that references the FDA’s prior approval of the small-molecule innovator product. A 505(b)(2) NDA product may be for a new or improved version of the original innovator product. The Hatch-Waxman Act also provides for certain periods of regulatory exclusivity, which preclude FDA approval (or in some circumstances, FDA filing and reviewing) of an ANDA or 505(b)(2) NDA. For example, a drug that is granted regulatory approval may be eligible for five years of marketing exclusivity in the United States following regulatory approval if that drug is classified as a new chemical entity (“NCE”). A drug can be classified as a NCE if the FDA has not previously approved any other drug containing the same active moiety.

In addition to the benefits of regulatory exclusivity, an innovator NDA holder may have patents claiming the active ingredient, product formulation or an approved use of the drug, which would be listed with the product in the FDA publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,” known as the “Orange Book.” If there are patents listed in the Orange Book, a generic or 505(b)(2) applicant that seeks to market our product before expiration of the patents must include in the ANDA or 505(b)(2) NDA a “Paragraph IV certification,” challenging the validity or enforceability of, or claiming non-infringement of, the listed patent or patents. Appropriate notice of the certification must be given to the innovator, too, and if within 45 days of receiving such notice the innovator sues to protect our patents, approval of the ANDA or 505(b)(2) is stayed for 30 months, or as lengthened or shortened by the court.

Accordingly, if any of our product candidates are approved, competitors could file ANDAs for generic versions of our small-molecule drug products or 505(b)(2) NDAs that reference our small-molecule drug products, respectively. If there are patents listed for our small-molecule drug products in the Orange Book, those ANDAs and 505(b)(2) NDAs would be required to include a certification as to each listed patent indicating whether the ANDA or 505(b)(2) NDA applicant does or does not intend to challenge the patent. We cannot predict which, if any, patents in our current portfolio or patents we may obtain in the future will be eligible for listing in the Orange Book, how any generic competitor would address such patents, whether we would sue on any such patents, or the outcome of any such suit.

We may not be successful in securing or maintaining proprietary patent protection for products and technologies we develop or license. Moreover, if any of our owned or in-licensed patents that are listed in the Orange Book are successfully challenged by way of a Paragraph IV certification and subsequent litigation, the affected product could immediately face generic competition and our sales would likely decline rapidly and materially. See “Risks Related to Our Intellectual Property Rights.”

The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. If we are found to have improperly promoted off-label uses, we may become subject to significant liability.

The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. For example, if we receive marketing approval for YTX-7739 as a treatment for Parkinson’s disease, physicians may nevertheless prescribe YTX-7739 to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. If we cannot successfully manage the promotion of our product candidates, if approved, we could become subject to significant liability, which would materially adversely affect our business and financial condition.

Even if approved, reimbursement policies could limit our ability to sell our product candidates.

In the United States and markets in other countries, patients generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Sales of our drugs will depend, in part, on the extent to which our drugs will be covered by third-party payors, such as government health programs, commercial insurance, and managed healthcare organizations. Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we may obtain regulatory approval.

Market acceptance and sales of our product candidates will depend on reimbursement policies and may be affected by healthcare reform measures. Coverage and adequate reimbursement from governmental healthcare programs, such as Medicare and Medicaid in the United States, and commercial payors are critical to new product acceptance. Third-party payors decide which drugs they will pay for and establish reimbursement levels. In the United States, the principal decisions about reimbursement for new medicines are typically made by CMS. CMS decides whether and to what extent our products will be covered and reimbursed under Medicare and private payors tend to follow CMS to a substantial degree. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a therapeutic is:

Government authorities and other third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels for those medications. Cost containment is a primary concern in the U.S. healthcare industry and elsewhere. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that reimbursement will be available for our product candidates and, if reimbursement is available, the level of such reimbursement. Reimbursement may impact the demand for, or the price of, our product candidates. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize our product candidates. Limited coverage and less than adequate reimbursement may reduce the demand for, or the price of, any product for which we obtain regulatory approval.

In some foreign countries, particularly in Canada and European countries, the pricing of prescription pharmaceuticals is subject to strict governmental control. In these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt of regulatory approval and product launch. To obtain favorable reimbursement for the indications sought or pricing approval in some countries, we may be required to conduct a clinical study that compares the cost-effectiveness of our product candidates with other available therapies. If reimbursement for our product candidates is unavailable in any country in which we seek reimbursement, if it is limited in scope or amount, if it is conditioned upon our completion of additional clinical trials, or if pricing is set at unsatisfactory levels, our operating results could be materially adversely affected.

Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain.

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay regulatory approval of our product candidates, restrict or regulate post-approval activities, and affect our ability to profitably sell any product candidates for which we obtain marketing approval.

Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality, and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. In March 2010, President Obama signed into law the ACA, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry, and impose additional health policy reforms.

Among the provisions of the ACA of importance to our product candidates are the following:

Some of the provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to reform through legislation and Executive Orders by the previous U.S. presidential administration and to judicial challenges. In 2012, the U.S. Supreme Court heard challenges to the constitutionality of the individual mandate and the viability of certain provisions of the ACA. The Supreme Court's decision upheld most of the ACA and determined that requiring individuals to maintain "minimum essential" health insurance coverage or pay a penalty to the Internal Revenue Service was within Congress's constitutional taxing authority. However, as a result of tax reform legislation enacted into law in late December 2017, the individual mandate has been eliminated, effective January 1, 2019. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is a critical and inseverable feature of the ACA, and therefore, because it was repealed as part of the 2017 Tax Reform Act, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the Fifth Circuit U.S. Court of Appeals held that the individual mandate is unconstitutional. On March 2, 2020, the United States Supreme Court granted the petitions for writs of certiorari to review this case, and held oral arguments on November 10, 2020. On June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA brought by several states without specifically ruling on the constitutionality of the ACA. Prior to the Supreme Court's decision, President Biden issued an executive order to initiate a special enrollment period from February 15, 2021 through August 15, 2021 for the purpose of obtaining health insurance coverage through the ACA marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. It is unclear how other healthcare reform measures of the Biden administration or other efforts, if any, to challenge, repeal or replace the ACA will impact our business. In addition, other legislative changes have been proposed and adopted since the ACA was enacted. These changes included aggregate reductions to Medicare payments to providers of 2% per fiscal year through 2030. However, pursuant to the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, these Medicare sequester reductions will be suspended from May 1, 2020 through December 31, 2021 due to the COVID-19 pandemic. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our products.

At the federal level, President Biden signed an Executive Order on July 9, 2021 affirming the administration’s policy to (i) support legislative reforms that would lower the prices of prescription drug and biologics, including by allowing Medicare to negotiate drug prices, by imposing inflation caps, and, by supporting the development and market entry of lower-cost generic drugs and biosimilars; and (ii) support the enactment of a public health insurance option. Among other things, the Executive Order also directs the U.S. Department of Health and Human Services (“HHS”) to provide a report on actions to combat excessive pricing of prescription drugs, enhance the domestic drug supply chain, reduce the price that the Federal government pays for drugs, and address price gouging in the industry; and directs the FDA to work with states and Indian Tribes that propose to develop section 804 Importation Programs in accordance with the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and the FDA’s implementing

regulations. The FDA released such implementing regulations on September 24, 2020, which went into effect on November 30, 2020, providing guidance for states to build and submit importation plans for drugs from Canada. On September 25, 2020, CMS stated drugs imported by states under this rule will not be eligible for federal rebates under Section 1927 of the Social Security Act and manufacturers would not report these drugs for “best price” or Average Manufacturer Price purposes. Since these drugs are not considered covered outpatient drugs, CMS further stated it will not publish a National Average Drug Acquisition Cost for these drugs. If implemented, importation of drugs from Canada may materially and adversely affect the price we receive for any of our product candidates. Authorities in Canada have passed rules designed to safeguard the Canadian drug supply from shortages. If implemented, importation of drugs from Canada may materially and adversely affect the price we receive for any of our product candidates. Additionally, on November 20, 2020 CMS issued an Interim Final Rule implementing the Most Favored Nation, or MFN, Model under which Medicare Part B reimbursement rates will be calculated for certain drugs and biologicals based on the lowest price drug manufacturers receive in Organization for Economic Cooperation and Development countries with a similar gross domestic product per capita. The MFN Model regulations mandate participation by identified Part B providers and would have applied to all U.S. states and territories for a seven-year period beginning January 1, 2021, and ending December 31, 2027. However, on August 6, 2021 CMS announced a proposed rule to rescind the Most Favored Nations rule. Additionally, on November 30,2020, HHS published a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers. Pursuant to court order, the removal and addition of the aforementioned safe harbors have been delayed until January 1, 2023. Further, implementation of this change and new safe harbors for point-of-sale reductions in price for prescription pharmaceutical products and pharmacy benefit manager service fees are currently under review by the Biden administration and may be amended or repealed. Although a number of these and other proposed measures may require authorization through additional legislation to become effective, and the Biden administration may reverse or otherwise change these measures, both the Biden administration and Congress have indicated that it will continue to seek new legislative measures to control drug costs.

We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent labeling and post-marketing testing and other requirements.

At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

It is likely that federal and state legislatures within the United States and foreign governments will continue to consider changes to existing healthcare legislation. We cannot predict the reform initiatives that may be adopted in the future or whether initiatives that have been adopted will be repealed or modified. The continuing efforts of the government, insurance companies, managed care organizations, and other healthcare payors of to contain or reduce costs of healthcare may adversely affect the demand for any product candidates for which we may obtain regulatory approval, our ability to set a price that we believe is fair for our products, our ability to obtain coverage and reimbursement approval for a product, our ability to generate revenue and achieve or maintain profitability; and the level of taxes that we are required to pay.

Our future growth may depend, in part, on our ability to commercialize our product candidates in foreign markets, where we would be subject to additional regulatory burdens and other risks and uncertainties.

Our future profitability may depend, in part, on our ability to commercialize our product candidates in foreign markets for which we may rely on collaboration with third parties. If we commercialize our product candidates in foreign markets, we would be subject to additional risks and uncertainties, including:

Foreign sales of our product candidates could also be adversely affected by the imposition of governmental controls, political and economic instability, trade restrictions, and changes in tariffs.

Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not mean that we will be successful in obtaining regulatory approval of our product candidates in other jurisdictions.

In order to market any product outside of the United States, however, we must establish and comply with the numerous and varying safety, efficacy, and other regulatory requirements of other countries. Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory approval in any other jurisdiction, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For example, even if the FDA or other comparable foreign regulatory authority grants marketing approval of a product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing, and promotion of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from those in the United States, including additional preclinical studies or clinical trials as clinical trials conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. The marketing approval processes in other countries may implicate all of the risks detailed above regarding FDA approval in the United States, as well as other risks. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.

Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties, and costs for we and could delay or prevent the introduction of our products in certain countries. Failure to obtain marketing approval in other countries or any delay or other setback in obtaining such approval would impair our ability to market our product candidates in such foreign markets. Any such impairment would reduce the size of our potential market, which could have a material adverse impact on our business, results of operations, and prospects.

Our employees, independent contractors, consultants, commercial partners, and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

We are exposed to the risk of fraud, misconduct, or other illegal activity by our employees, independent contractors, consultants, commercial partners, and vendors. Misconduct by these parties could include intentional, reckless, and negligent conduct that fails to: comply with the laws of the FDA and other comparable foreign regulatory authorities; provide true, complete and accurate information to the FDA and other comparable foreign regulatory authorities; comply with manufacturing standards we have established; comply with healthcare fraud and abuse laws in the United States and similar foreign fraudulent misconduct laws; or report financial information or data accurately or to disclose unauthorized activities to us. If we obtain FDA approval of any of our product candidates and begins commercializing those products in the United States, our potential exposure under such laws will increase significantly, and our costs associated with compliance with such laws are also likely to increase. In particular, sales, marketing, and other business arrangements in the healthcare industry are subject to extensive laws designed to prevent fraud, kickbacks, self-dealing, and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales and commission, certain customer incentive programs, and other business arrangements generally. Activities subject to these laws also involve the improper use of information obtained in the course of patient recruitment for clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a code of business conduct and ethics, but it is not always possible to identify and deter misconduct by employees and third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such

laws. If any such actions are instituted against us, and we are not successful in defending itself or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

If we or any contract manufacturers and suppliers we engage fail to comply with environmental, health, and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

We and any contract manufacturers and suppliers we engage are subject to numerous federal, state, and local environmental, health, and safety laws, regulations, and permitting requirements, including those governing laboratory procedures; the generation, handling, use, storage, treatment, and disposal of hazardous and regulated materials and wastes; the emission and discharge of hazardous materials into the ground, air, and water; and employee health and safety. Under certain environmental laws, we could be held responsible for costs relating to any contamination at our current or past facilities and at third-party facilities. We also could incur significant costs associated with civil or criminal fines and penalties.

We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other worldwide anti-bribery laws.

Our business activities may be subject to the FCPA and similar anti-bribery or anti-corruption laws, regulations or rules of other countries in which we operate, including the U.K. Bribery Act. The FCPA generally prohibits offering, promising, giving, or authorizing others to give anything of value, either directly or indirectly, to a non-U.S. government official in order to influence official action, or otherwise obtain or retain business. The FCPA also requires public companies to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. Our business is heavily regulated and therefore involves significant interaction with public officials, including officials of non-U.S. governments. Additionally, in many other countries, the healthcare providers who prescribe pharmaceuticals are employed by their government, and the purchasers of pharmaceuticals are government entities; therefore, our dealings with these prescribers and purchasers are subject to regulation under the FCPA. Recently the SEC and Department of Justice have increased their FCPA enforcement activities with respect to biotechnology and pharmaceutical companies. There is no certainty that all of our employees, agents, contractors, or collaborators, or those of our affiliates, will comply with all applicable laws and regulations, particularly given the high level of complexity of these laws. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers, or our employees, the closing down of our facilities, requirements to obtain export licenses, cessation of business activities in sanctioned countries, implementation of compliance programs, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our products in one or more countries and could materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, and our business, prospects, operating results, and financial condition.

We depend on our collaboration with Merck and may in the future depend on other collaborations with third parties for the research, development and commercialization of certain of the product candidates we may develop. If any such collaborations are not successful, we may not be able to realize the market potential of those product candidates.

We have entered into a collaboration agreement with Merck and may seek other third-party collaborators for the research, development, and commercialization of certain of the product candidates we may develop. Our likely collaborators for any other collaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies, biotechnology companies and academic institutions. Under our collaboration with Merck, we have, and if we enter into any such arrangements with any other third parties, we will likely have, shared or limited control over the amount and timing of resources that our collaborators dedicate to the development or potential commercialization of any product candidates we may seek to develop with them. Our ability to generate revenue from these arrangements with commercial entities will depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements. We cannot predict the success of any collaboration that we enter into.

Collaborations involving our research programs, or any product candidates we may develop, pose the following risks to we:

We may face significant competition in seeking appropriate collaborations. Recent business combinations among biotechnology and pharmaceutical companies have resulted in a ~~significant disruption~~reduced number of ~~global financial markets. If~~potential collaborators. In addition, the ~~disruption persists~~negotiation process is time-consuming and ~~deepens,~~complex, and we ~~could experience an inability~~may not be able to ~~access additional capital, when and if needed. If adequate funds are not available to us~~negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of the product candidate for which we are seeking to collaborate, reduce or delay our development program or one or more of our other development programs, delay our potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to it on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop product candidates or bring them to market and generate product revenue.

Under our collaboration with Merck, and if we enter into other collaborations to develop and potentially commercialize any product candidates, we may not be able to realize the benefit of such transactions if us or our collaborator elects not to exercise the rights granted under the agreement or if us or our collaborator are unable to successfully integrate a product candidate into existing operations and company culture. In addition, if our agreement with any of our collaborators terminates, our access to technology and

intellectual property licensed to us by that collaborator may be restricted or terminate entirely, which may delay our continued development of our product candidates utilizing the collaborator’s technology or intellectual property or require us to stop development of those product candidates completely. We may also find it more difficult to find a suitable replacement collaborator or attract new collaborators, and our development programs may be delayed or the perception of our in the business and financial communities could be adversely affected. Many of the risks relating to product development, regulatory approval, and commercialization described in this “Risk Factors” section also applies to the activities of our collaborators and any negative impact on our collaborators may adversely affect us.

Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. For some of our product candidates, we may decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of those product candidates, such as those that may result from our collaboration with Merck.

Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical studies, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge, and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. The terms of any collaborations or other arrangements that we may establish may not be favorable to it.

In addition, our collaboration with Merck and any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations. Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in the development process or commercializing the applicable product candidate and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision-making authority. Collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party. Termination of our collaboration with Merck or any such termination or expiration of future collaborations would adversely affect us financially and could harm our business reputation.

We rely, and expect to continue to rely, on third parties to conduct any preclinical studies and clinical trials for our product candidates. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.

We do not have the ability to independently conduct preclinical studies and clinical trials. We rely on medical institutions, clinical investigators, contract laboratories, and other third parties, such as CROs, to conduct preclinical studies and clinical trials on our product candidates. We enter into agreements with third-party CROs to provide monitors for and to manage data for our clinical trials. We will rely heavily on these parties for execution of clinical trials for our product candidates and control only certain aspects of their activities. As a result, we will have less direct control over the conduct, timing, and completion of these clinical trials and the management of data developed through clinical trials than would be the case if we were relying entirely upon our own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties may:

These factors may materially adversely affect the willingness or ability of third parties to conduct our clinical trials and may subject us to unexpected cost increases that are beyond our control. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal, regulatory, and scientific requirements and standards, and our reliance on CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with regulations and guidelines, including Good Clinical Practices (“GCPs”) for conducting, monitoring, recording, and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the study patients are adequately informed of

the potential risks of participating in clinical trials. These regulations are enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA enforces GCP regulations through periodic inspections of clinical study sponsors, principal investigators and study sites. If we or our CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with GCPs. In addition, our clinical trials must be conducted with product candidates produced under cGMP regulations and will require a large number of test patients. Our failure or the failure of our CROs to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject it to enforcement action up to and including civil and criminal penalties.

Although we design our clinical trials for our product candidates, CROs conduct all of the clinical trials. As a result, many important aspects of the clinical trials are outside of our direct control. In addition, the CROs may not perform all of their obligations under arrangements with us or in compliance with regulatory requirements, but we remain responsible and are subject to enforcement action that may include civil penalties and criminal prosecution for any violations of FDA laws and regulations during the conduct of our clinical trials. If the CROs do not perform clinical trials in a satisfactory manner, breach their obligations to us, or fail to comply with regulatory requirements, the development and commercialization of our product candidates may be delayed or our development program materially and irreversibly harmed. We cannot control the amount and timing of resources these CROs devote to our program or our clinical products. If we are unable to rely on clinical data collected by our CROs, we could be required to repeat, extend the duration of, or increase the size of our clinical trials and this could significantly delay commercialization and require significantly greater expenditures.

If any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs. For example, the sponsored research agreement with Northwestern may be terminated by either party upon 60 days’ written notice to the other party. If our collaboration is delayed or terminated or our ability to continue to use the current research space is terminated as a result of conflicts of interest, we may not be able to continue our planned research projects and related clinical trials on the expected timeline and may need to spend significant time and efforts to secure alternative lab facilities and equipment. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, any clinical trials such CROs are associated with may be extended, delayed, or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, we believe that our financial results and the commercial prospects for our product candidates in the subject indication would be harmed, our costs could increase and our ability to generate revenue could be delayed.

The manufacture of our product candidates, particularly those that utilize our discovery engine platform, is complex and we may encounter difficulties in production. If we or any of our third-party manufacturers encounter such difficulties, or fail to meet rigorously enforced regulatory standards, our ability to provide supply of our product candidates for preclinical studies and clinical trials or our products for patients, if approved, could be delayed or stopped, or we may be unable to maintain a commercially viable cost structure.

The processes involved in manufacturing our drug product candidates, particularly those that utilize our discovery engine platform, are complex, expensive, highly-regulated, and subject to multiple risks. Further, as product candidates are developed through preclinical studies to late-stage clinical trials towards approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods, are altered along the way in an effort to optimize processes and results. Such changes carry the risk that they will not achieve these intended objectives, and any of these changes could cause our product candidates to perform differently and affect the results of planned clinical trials or other future clinical trials.

In addition, the manufacturing process for any products that we may develop is subject to FDA and other comparable foreign regulatory authority approval processes and continuous oversight, and we will need to contract with manufacturers who can meet all applicable FDA and foreign regulatory authority requirements, including, for example, complying with cGMPs, on an ongoing basis. If we or our third-party manufacturers are unable to reliably produce products to specifications acceptable to the FDA or other regulatory authorities, we may not obtain or maintain the approvals we need to commercialize such products. Even if we obtain regulatory approval for any of our product candidates, there is no assurance that either we or our contract manufacturers will be able to manufacture the approved product to specifications acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product, or to meet potential future demand. Any of these challenges could delay completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical study costs, delay approval of our product candidate, impair commercialization efforts, increase our cost of goods, and have an adverse effect on our business, financial condition, results of operations, and growth prospects.

We rely completely on third-party suppliers to manufacture our clinical drug supplies for our product candidates, and we intend to rely on third parties to produce preclinical, clinical, and commercial supplies of any future product candidates.

We do not currently have, nor do we plan to acquire, the infrastructure or capability to internally manufacture our clinical drug supply of our product candidates, or any future product candidates, for use in the conduct of our preclinical studies and clinical trials, and we lack the internal resources and the capability to manufacture any product candidates on a clinical or commercial scale. The facilities used by our contract manufacturers to manufacture the active pharmaceutical ingredient and final drug product must complete a pre-approval inspection by the FDA and other comparable foreign regulatory agencies to assess compliance with applicable requirements, including cGMPs, after we submit an NDA or relevant foreign regulatory submission to the applicable regulatory agency.

We do not control the manufacturing process of, and is completely dependent on, our contract manufacturers to comply with cGMPs for manufacture of both active drug substances and finished drug products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or applicable foreign regulatory agencies, they will not be able to pass a pre-approval inspection and we would be unable to obtain regulatory approval for our product candidate. We may be required to ~~curtail~~change contract manufacturers and verify that the new contract manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations. We will also need to verify, such as through a manufacturing comparability study, that any new manufacturing process will produce our product candidate according to the specifications previously submitted to the FDA or ~~cease its operations.~~

another regulatory authority. The delays associated with the verification of a new CMO could negatively affect our ability to develop product candidates or commercialize our products in a timely manner or within budget. In addition, we have no direct control over our contract manufacturers’ ability to maintain adequate quality control, quality assurance, and qualified personnel. Furthermore, all of our contract manufacturers are engaged with other companies to supply and/or manufacture materials or products for such companies, which exposes our manufacturers to regulatory risks for the production of such materials and products. As a result, failure to satisfy the regulatory requirements for the production of those materials and products may affect the regulatory clearance of our contract manufacturers’ facilities generally. If the ~~Merger~~FDA or an applicable foreign regulatory agency determines now or in the future that these facilities for the manufacture of our product candidates are noncompliant, we may need to find alternative manufacturing facilities, which would adversely impact our ability to develop, obtain regulatory approval for or market our product candidates. Our reliance on contract manufacturers also exposes us to the possibility that they, or third parties with access to their facilities, will have access to and may appropriate our trade secrets or other proprietary information.

We do not have long-term supply agreements in place with our contractors, and each batch of our product candidates is individually contracted under a quality and supply agreement. If we engage new contractors, such contractors must complete an inspection by the FDA and other applicable foreign regulatory agencies. We plan to continue to rely upon contract manufacturers and, potentially, collaboration partners to manufacture commercial quantities of our product candidates, if approved. Our current scale of manufacturing is adequate to support all of our needs for preclinical studies and clinical study supplies.

If we are unable to adequately protect our proprietary technology, or obtain and maintain issued patents that are sufficient to protect our product candidates, others could compete against us more directly by developing and commercializing products similar or identical to ours, which would have a material adverse impact on our business, results of operations, financial condition, and prospects.

Our success will depend significantly on our ability to obtain and maintain patent and other proprietary protection in the United States and other countries for commercially important technology, inventions, and know-how related to our business, defend and enforce our patents, should they issue, preserve the confidentiality of our trade secrets, and operate without infringing the valid and enforceable patents and proprietary rights of third parties. We strive to protect and enhance the proprietary technologies that we believe are important to our business, including seeking patents intended to cover our products and compositions, their methods of use, and any other inventions that are important to the development of our business. We also rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.

We do not currently have any issued patents covering our clinical-stage product candidate YTX-7739 as a composition of matter. We cannot provide any assurances that any of our pending patent applications will mature into issued patents in any particular jurisdiction and, if they do, that such patents will include claims with a scope sufficient to protect our product candidates or otherwise provide any competitive advantage. The patent application and approval process is expensive, complex, and time-consuming. We may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output in time to obtain patent protection. If we are unable to obtain or maintain patent protection with respect to any of our proprietary products and technology we develop, our business, financial condition, results of operations, and prospects could be materially harmed.

If the scope of any patent protection we obtain is not ~~completed, raising additional funding through debt~~sufficiently broad, or ~~equity financing~~if we lose any of our patent protection, our ability to prevent our competitors from commercializing similar or identical technology and product candidates would be adversely affected.

The patent positions of biotechnology and pharmaceutical companies, including our patent position, involve complex legal and factual questions, which in recent years have been the subject of much litigation, and, therefore, the issuance, scope, validity, enforceability, and commercial value of any patent claims that we may obtain cannot be predicted with certainty. No consistent policy regarding the breadth of claims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries.

Patent applications are generally maintained in confidence until publication. In the United States, for example, patent applications are typically maintained in secrecy for up to 18 months after their filing. Similarly, publication of discoveries in scientific or patent literature often lags behind actual discoveries. Consequently, we cannot be certain that we were the first to file patent applications on our product candidates. There is also no assurance that all of the potentially relevant prior art relating to our patents and patent applications has been found, which could be used by a third party to challenge the validity of our patents, should they issue, or prevent a patent from issuing from a pending patent application. Any of the foregoing could harm our competitive position, business, financial condition, results of operations, and prospects.

Moreover, our patents, if issued, may be challenged, deemed unenforceable, invalidated, or circumvented in the United States and abroad. U.S. patents and patent applications may also be subject to interference, derivation, exparte reexamination, post-grant review, or inter partes review proceedings, supplemental examination and challenges in district court. Patents may also be subjected to opposition, post-grant review, or comparable proceedings lodged in various foreign, both national and regional, patent offices or courts. An adverse determination in any such proceeding could result in either loss of the patent or denial of the patent application, or loss or reduction in the scope of one or more of the claims of the patent or patent application, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. In addition, such proceedings may be costly. Thus, any patents, should they issue, that we may own or exclusively license may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by us, which in turn could affect our ability to develop, market, or otherwise commercialize our product candidates.

Furthermore, though a patent, if it were to issue, is presumed valid and enforceable, our issuance is not conclusive as to our validity or our enforceability and it may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. Even if a patent issues and is held to be valid and enforceable, competitors may be able to design around or circumvent our patents, such as using pre-existing or newly developed technology or products in a non-infringing manner. Other parties may develop and obtain patent protection for more effective technologies, designs, or methods. If these developments were to occur, they could have a material adverse effect on our business, financial condition, results of operations, and prospects.

Our ability to enforce our patent rights depends on our ability to detect infringement. It is difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. We may not ~~successful at all, would~~prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be ~~dilutive~~commercially meaningful.

We will incur significant ongoing expenses in maintaining our patent portfolio. Should we lack the funds to maintain our patent portfolio or to enforce our rights against infringers, we could be adversely impacted.

We may in the future co-own patent rights relating to future product candidates and our discovery engine platform with third parties. Some of our in-licensed patent rights are, and may ~~cause~~in the future be, co-owned with third parties. In addition, our licensors may co-own the patent rights us in-licenses with other third parties with whom we do not have a direct relationship. Our exclusive rights to certain of these patent rights are dependent, in part, on inter-institutional or other operating agreements between the joint owners of such patent rights, who are not parties to our license agreements. If our licensors do not have exclusive control of the grant of licenses under any such third-party co-owners’ interest in such patent rights or we are otherwise unable to secure such exclusive rights, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market ~~price~~competing products and technology. In addition, we may need the cooperation of any such co-owners of our ~~common stock~~patent rights in order to ~~decline further.~~enforce such patent rights against third parties, and such cooperation may not be provided to it. Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations, and prospects.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example, we do not know whether:

Should any of these events occur, they could have a material adverse effect on our business, financial condition, results of operations and prospects.

If we fail to comply with our obligations in the ~~Merger~~agreements under which we license intellectual property rights from third parties or otherwise experience disruptions to our business relationships with our licensors, we could lose license rights that are important to our business.

We have entered into license agreements with third parties and may need to obtain additional licenses from others to advance our research or allow commercialization of product candidates we may develop or our discovery engine platform technology. It is possible that we may be unable to obtain additional licenses at a reasonable cost or on reasonable terms, if at all. In that event, we may be required to expend significant time and resources to redesign our technology, product candidates, or the methods for manufacturing them or to develop or license replacement technology, all of which may not ~~completed, raising additional funding through debt~~be feasible on a technical or ~~equity financing~~commercial basis. If we are unable to do so, we may be unable to develop or commercialize the affected product candidates or continue to utilize our existing discovery engine platform, which could harm our business, financial condition, results of operations, and prospects significantly. We cannot provide any assurances that third-party patents do not exist which might be enforced against our current technology, including our discovery engine platform technology, manufacturing methods, product candidates, or future methods or products resulting in either an injunction prohibiting our manufacture or future sales, or, with respect to our future sales, an obligation on our part to pay royalties and/or other forms of compensation to third parties, which could be ~~difficult~~significant.

In addition, each of our license agreements, and we expect our future agreements, will impose various development, diligence, commercialization, and other obligations on it. Certain of our license agreements also require us to meet development timelines, or ~~unavailable altogether given~~to exercise commercially reasonable efforts to develop and commercialize licensed products, in order to maintain the ~~turbulent financial markets. To the extent~~licenses. In spite of our efforts, our licensors might conclude that we ~~raise additional capital through~~have materially breached our obligations under such license agreements and might therefore terminate the ~~sale of equity~~license agreements, thereby removing or ~~convertible debt securities,~~limiting our ability to develop and commercialize products and technology covered by these license agreements. If these in-licenses are terminated, or if the ~~issuance of those securities would result in substantial dilution for our current stockholders and~~underlying patents fail to provide the ~~terms may include liquidation~~intended exclusivity, competitors or other ~~preferences that adversely affect~~third parties would have the ~~rights~~freedom to seek regulatory approval of, and to market, products identical to our and we may be required to cease our development and commercialization of certain of our product candidates or of our current ~~stockholders. Furthermore,~~discovery engine platform technology. Any of the ~~issuance~~foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of ~~additional securities, whether equity~~operations, and prospects.

Moreover, disputes may arise regarding intellectual property subject to a licensing agreement, including:

In addition, the agreements under which we currently license intellectual property or technology from third parties are complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the ~~possibility of such issuance, may cause the market price~~scope of our ~~common stock~~rights to ~~decline further~~the relevant intellectual property or technology, or increase what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations, and ~~existing stockholders~~prospects. Moreover, if disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on commercially acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates, which could have a material adverse effect on our business, financial conditions, results of operations, and prospects.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be harmed.

We may also rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection. Additionally, we rely on unpatented know-how, continuing technological innovation to develop, strengthen, and maintain the proprietary and competitive position of our product candidates, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. However, trade secrets are difficult to protect. For example, we may be required to share our trade secrets with third-party licensees, collaborators, consultants, contractors, or other advisors and we have limited control over the protection of trade secrets used by such third parties. Although we use reasonable efforts to protect our trade secrets, including by entering into confidentiality agreements, our employees, consultants, contractors, outside scientific collaborators, and other advisors may unintentionally or willfully disclose our trade secrets and proprietary information to competitors and we may not ~~agree with its financing plans~~have adequate remedies for any such disclosure. Enforcing a claim that a third party illegally obtained and used, disclosed, or misappropriated any of our trade secrets is difficult, expensive, and time-consuming, and the outcome is unpredictable. Furthermore, we may not obtain these agreements in all circumstances, and the employees and consultants who are parties to these agreements may breach or violate the terms of these agreements, thus we may not have adequate remedies for any such ~~financings.~~breach or violation, and we could lose our trade secrets through such breaches or violations. In addition, trade secret laws in the United States vary, and some U.S. courts as well as courts outside the United States are sometimes less willing or unwilling to protect trade secrets. Moreover, it is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Further, our trade secrets could otherwise become known or be independently discovered by our competitors or other third parties. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former employees, and current employees. If our trade secrets or confidential or proprietary information is divulged to or acquired by third parties, including our competitors, our competitive position in the marketplace, business, financial condition, results of operations, and prospects may be materially adversely affected.

We may be sued for infringing the intellectual property rights of others, which may be costly and time-consuming and may prevent or delay our product development efforts and stop it from commercializing or increase the costs of commercializing our product candidates, if approved.

Our success will depend in part on our ability to operate without infringing, misappropriating, or otherwise violating the intellectual property and proprietary rights of third parties. We cannot assure you that our business, products, and methods do not or will not infringe the patents or other intellectual property rights of third parties. We may in the future become party to, or threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our product candidates and technologies we use in our business.

The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may allege that our product candidates or the use of our technologies infringe or otherwise violates patent claims or other intellectual property rights held by them or that we are employing their proprietary technology without authorization. As we continue to develop and, if approved, commercialize our current product candidates and future product candidates, competitors may claim that our technology infringes their intellectual property rights as part of business strategies designed to impede our successful commercialization. There may be third-party patents or patent applications with claims to compositions, materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates. In particular, we are

aware of an issued patent in each of the United States and Japan that expires in 2030 that covers one of our preclinical assets. We do not know if we will have reasonable defenses against a claim of infringement or if we will be able to obtain a license to such patent on commercially reasonable terms, if at all. As a result, we may not be able to commercialize such asset, if approved, prior to such patent’s expiration.

We are also aware of U.S. and foreign patents and applications owned by a third party claiming certain compositions of matter and methods of use which we expect to expire in 2031. While we believe that we have reasonable defenses against a claim of infringement, including non-infringement and invalidity, there can be no assurance that we will prevail in any such action by the holder of these patents. In the event such patents were enforced against us and deemed to cover one or more of our products, and our defenses were unsuccessful, we would then need to obtain a license to these patents, which license may not be available on commercially reasonable terms, or at all. As a result, we may not be free to manufacture or market our products, including YTX-7739, if approved, prior to expiration of such patents.

Additionally, because patent applications can take many years to issue and may be confidential for 18 months or more after filing, and because patent claims can be revised before issuance, third parties may have currently pending patent applications which may later result in issued patents that our product candidates may infringe, or which such third parties claim are infringed by our technologies. If a patent holder believes one or more of our product candidates infringe its patent rights, the patent holder may sue us even if we have received patent protection for our technology. Moreover, we may face patent infringement claims from non-practicing entities that have no relevant drug revenue and against whom our own patent portfolio may thus have no deterrent effect.

The outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our product candidates, products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid or unenforceable, and we may not be able to do this. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on our business and operating results. In addition, we may not have sufficient resources to bring these actions to a successful conclusion.

Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome is uncertain. If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from such third party to continue developing and marketing our product candidates and technology. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were to obtain a license, it could be granted on non-exclusive terms, thereby providing our competitors and other third parties access to the same technologies licensed to it. In addition, if any such claim were successfully asserted against us and we could not obtain such a license, we may be forced to stop or delay developing, manufacturing, selling or otherwise commercializing our product candidates. Any claim relating to intellectual property infringement that is successfully asserted against we may require us to pay substantial damages, including treble damages and attorney’s fees if we are found to be willfully infringing another party’s patents, for past use of the asserted intellectual property and royalties and other consideration going forward if we are forced to take a license.

Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on it. There could also be public announcements of the results of the hearing, motions, or other interim proceedings or developments and if securities analysts or investors perceive those results to be negative, it could cause the price of shares of our common stock to ~~Yumanity’s stockholders~~ decline. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, defend an infringement action, or challenge the validity of the patents in court, or redesign our products. Patent litigation is costly and time-consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, intellectual property litigation or claims could force us to do one or more of the following:

Any of these risks coming to fruition could have a material adverse effect on our business, results of operations, financial condition, and prospects.

We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.

We enter into confidentiality and intellectual property assignment agreements with our employees, consultants, outside scientific collaborators, sponsored researchers, and other advisors. These agreements generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. The assignment of intellectual property rights under these agreements may not be automatic upon the creation of the intellectual property or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against it, to determine the ownership of what we regard as our intellectual property. For example, even if we have a consulting agreement in place with an academic advisor pursuant to which such academic advisor is required to assign any inventions developed in connection with providing services to it, such academic advisor may not have the right to assign such inventions to us, as it may conflict with his or her obligations to assign all such intellectual property to his or her employing institution.

Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment, and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees, renewal fees, annuity fees, and various other government fees on our owned and in-licensed patents and patent applications are or will be due to be paid to the U.S. Patent and Trademark Office (“USPTO”) in several stages and various government patent agencies outside of the United States over the lifetime of such patents and patent applications and any patent rights we may own or license in the future. We have systems in place to remind us to pay these fees, and we employ outside firms to remind us or our licensors to pay annuity fees due to foreign patent agencies on our foreign patents and pending foreign patent applications. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment, and other similar provisions over the lifetime of our owned patents and applications. In some cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors or other third parties might be able to enter the market earlier than would otherwise have been the case and this circumstance could have a material adverse effect on our business, financial condition, results of operations, and prospects.

We may be involved in lawsuits or other proceedings to protect or enforce our intellectual property, which could be expensive, time-consuming, and unsuccessful.

Even if our patent applications are issued, competitors and other third parties may infringe, misappropriate, or otherwise violate our patents and other intellectual property rights. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming and divert the attention of our management and key personnel from our business operations.

Furthermore, many of our adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we can. Our ability to enforce our patent rights also depends on our ability to detect infringement. It is difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product.

In an infringement proceeding, a court may disagree with our allegations and refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question, or may decide that a patent of ours is invalid, unenforceable or not infringed. An adverse result in any litigation, defense or post-grant proceedings could result in one or more of our patents being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing. If any of our patents, if and when issued, covering our product candidates are invalidated or found unenforceable, our financial position and results of operations would be materially and adversely impacted. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.

Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions with respect to our patents or patent applications. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to us from the prevailing party. Our business could be harmed if the prevailing party does not offer us a

license on commercially reasonable terms. Our involvement in litigation or interference proceedings may fail and, even if successful, may result in substantial costs, and distract our management and other employees. We may not be able to prevent infringement, misappropriation of, or other violations of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing, or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

Issued patents covering our discovery engine platform and our product candidates could be found invalid or unenforceable if challenged.

If we initiated legal proceedings against a third party to enforce a patent, if and when issued, covering our discovery engine platform or one of our product candidates, the defendant could counterclaim that the patent covering our product candidate is invalid and/or unenforceable. The outcome of any such proceeding is generally unpredictable.

In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include alleged failures to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for unenforceability assertions of a patent include allegations that someone connected with prosecution of the patent application that matured into the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution of the patent application. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, inter partes review, post grant review and equivalent proceedings in foreign jurisdictions, e.g., opposition proceedings. Such proceedings could result in revocation or amendment of our patents in such a way that they no longer cover our product candidates or competitive products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates. Such a loss of patent protection would have a material adverse impact on our business.

We may not seek to protect our intellectual property rights in all jurisdictions throughout the world and we may not be able to adequately enforce our intellectual property rights even in the jurisdictions where we seek protection.

Filing and prosecuting patent applications, and defending patents on our discovery engine platform and product candidates in all countries and jurisdictions throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States could be less extensive than those in the United States, assuming that rights are obtained in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. In addition, the statutory deadlines for pursuing patent protection in individual foreign jurisdictions are based on the priority date of each of our patent applications and we may not timely file foreign patent applications. For the patent families related to YTX-7739, as well as for many of the patent families that we own, the relevant statutory deadlines have not yet expired. Thus, for each of the patent families that we believe provides coverage for our lead product candidate, we will need to decide whether and where to pursue protection outside the United States.

Competitors may use our technologies in jurisdictions where we do not pursue and obtain patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from so competing.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to biotechnology or pharmaceuticals. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of or marketing of competing products in violation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing, and could provoke third parties to assert claims against it. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

If we do not obtain additional protection under the Hatch-Waxman Act and similar foreign legislation by extending the patent terms and obtaining data exclusivity for our product candidates, our business may be materially harmed.

Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from our earliest U.S. non-provisional filing date in our chain of priority. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering our product candidates are obtained, once the patent life has expired for a product candidate, we may be open to competition from competitive medications, including generic medications. Given the amount of time required for the development, testing, and regulatory review of new product candidates, patents protecting such product candidates might expire before or shortly after such product candidates are commercialized. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing product candidates similar or identical to ours.

Depending upon the timing, duration, and specifics of FDA marketing approval of our product candidates, one or more of the U.S. patents we own may be eligible for a limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent term extension of up to five years as compensation for patent term lost during the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, only one patent may be extended and only those claims covering the approved drug, a method for using it, or a method for manufacturing it may be extended. However, we may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain a patent term extension or the term of any such extension is less than we request, the duration of patent protection we obtain for our product candidates may not provide us with any meaningful commercial or competitive advantage, our competitors may obtain approval of competing products earlier than they would otherwise be able to do so, and our ability to generate revenues could be materially adversely affected.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

As is the case with other biotechnology companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biotechnology industry involve both technological and legal complexity, and is therefore costly, time-consuming, and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation: the Leahy-Smith America Invents Act. The America Invents Act includes a number of significant changes to U.S. patent law. After March 2013, under the America Invents Act, the United States transitioned to a first-inventor-to-file system in which, assuming that other requirements for patentability are met, the first-inventor-to-file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. The America Invents Act also includes provisions that affect the way patent applications will be prosecuted and that may also affect patent litigation. It is not yet clear what, if any, impact the America Invents Act will have on the operation of our business. However, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any patents that may issue from our patent applications, all of which could have a material adverse effect on our business and financial condition.

In addition, recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. The full impact of these decisions is not yet known. For example, on March 20, 2012, in Mayo Collaborative Services, DBA Mayo Medical Laboratories, et al. v. Prometheus Laboratories, Inc., the Court held that several claims drawn to measuring drug metabolite levels from patient samples and correlating them to drug doses were not patentable subject matter. The decision appears to impact diagnostics patents that merely apply a law of nature via a series of routine steps and it has created uncertainty around the ability to obtain patent protection for certain inventions. Additionally, on June 13, 2013, in Association for Molecular Pathology v. Myriad Genetics, Inc., the Court held that claims to isolated genomic DNA are not patentable, but claims to complementary DNA molecules are patent eligible because they are not a natural product. The effect of the decision on patents for other isolated natural products is uncertain. However, on March 4, 2014, the USPTO issued a memorandum to patent examiners providing guidance for examining claims that recite laws of nature, natural phenomena or natural products under the Myriad and Prometheus decisions. This guidance did not limit the application of Myriad to DNA but rather applied the decision to other natural products.

In addition to increasing uncertainty with regard to our ability to obtain future patents, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on these and other decisions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new patents or to enforce any patents that may issue in the future.

We may be subject to damages resulting from claims that us or our employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of their current ~~stockholders.~~or former employers.

Our employees have been previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We also engage advisors and consultants who are concurrently employed at universities or who perform services for other entities.

Although we try to ensure that our employees, consultants, and advisors do not use the proprietary information or know-how of others in their work for it, and although we are not aware of any claims currently pending against it, we may be subject to claims that us or our employees, advisors, or consultants have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third party. We have and may in the future also be subject to claims that an employee, advisor, or consultant performed work for us that conflicts with that person’s obligations to a third party, such as an employer, and thus, that the third party has an ownership interest in the intellectual property arising out of work performed for it. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our product candidates, which would materially adversely affect our commercial development efforts.

We may not be successful in obtaining, through acquisitions, in-licenses or otherwise, necessary rights to our discovery engine platform, product candidates or other technologies.

We currently have rights to intellectual property, through licenses from third parties, to identify and develop our discovery engine platform technology and product candidates. Many pharmaceutical companies, biotechnology companies, and academic institutions are competing with it in the field of neurodegeneration and discovery engine platform and may have patents and have filed and are likely filing patent applications potentially relevant to our business. In order to avoid infringing these third party patents, we may find it necessary or prudent to obtain licenses to such patents from such third party intellectual property holders. In addition, with respect to any patents we co-own with third parties, we may require licenses to such co-owners’ interest to such patents. However, we may be unable to secure such licenses or otherwise acquire or in-license any compositions, methods of use, processes, or other intellectual property rights from third parties that we identify as necessary for our current or future product candidates and our discovery engine platform technology. The licensing or acquisition of third party intellectual property rights is a competitive area, and several more established companies may pursue strategies to license or acquire third party intellectual property rights that we may consider attractive or necessary. These established companies may have a competitive advantage over it due to their size, capital resources and greater clinical development and commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to it. We also may be unable to license or acquire third party intellectual property rights on terms that would allow us to make an appropriate return on our investment or at all. If we are unable to successfully obtain rights to required third party intellectual property rights or maintain the existing intellectual property rights we have, we may have to abandon development of the relevant program or product candidate, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Numerous factors may limit any potential competitive advantage provided by our intellectual property rights.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, provide a barrier to entry against our competitors or potential competitors, or permit us to maintain our competitive advantage. Moreover, if a third party has intellectual property rights that cover the practice of our technology, we may not be able to fully exercise or extract value from our intellectual property rights. The following examples are illustrative:

Should any of these events occur, they could significantly harm our business and results of operations.

Our level of indebtedness and debt service obligations could adversely affect our financial condition and may make it more difficult for us to fund our operations.

In December 2019, we entered into a loan and security agreement with Hercules Capital, Inc. (“Hercules”) (the “Term Loan”), which was most recently amended in April 2021. The Term Loan provides up to $30.0 million of debt financing and has interest-only payments through August 1, 2021, with the option to extend an additional six months upon the drawdown following occurrence of a development milestone and an equity event as defined in the agreement. Thereafter, we are obligated to make payments that will include equal installments of principal and interest through the maturity date of January 1, 2024. As of September 30, 2021, $14.1 million of principal was outstanding under the Term Loan.

All obligations under the Term Loan are secured by substantially all of our existing property and assets, excluding our intellectual property. This indebtedness may create additional financing risk for us, particularly if our business or prevailing financial market conditions are not conducive to paying off or refinancing our outstanding debt obligations at maturity. This indebtedness could also have important negative consequences, including the fact that:

To the extent that additional debt is added to our current debt levels, the risks described above could increase.

We may not have cash available to us in an amount sufficient to enable us to make interest or principal payments on our indebtedness when due. If we do not make scheduled payments when due, or otherwise materially breaches or experiences an event of default under the Term Loan, Hercules could accelerate our total loan obligation or enforce our security interest against us.

Failure to satisfy our current and future debt obligations under the Term Loan could result in an event of default. In addition, other events, including certain events that are not entirely in our control, such as the occurrence of a material adverse event on our business, could cause an event of default to occur. As a result of the occurrence of an event of default, Hercules could accelerate all of the amounts due. In the event of an acceleration of amounts due under the Term Loan, we may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness. In addition, Hercules could seek to enforce our security interests in the assets securing such indebtedness. If we are unable to pay amounts due to Hercules upon acceleration of the Term Loan or if Hercules enforces our security interest against our assets securing our indebtedness to Hercules, our ability to continue to operate our business may be jeopardized.

We are subject to certain restrictive covenants which, if breached, could result in the acceleration of our debt under the Term Loan and have a material adverse effect on our business and prospects.

The Term Loan imposes operating and other restrictions on us. Such restrictions will affect, and in many respects limit or prohibit, our ability and the ability of any future subsidiary to, among other things:

These restrictive covenants may prevent us from undertaking an action that we feel is in the best interests of our business. In addition, if we were to breach any of these restrictive covenants, Hercules could accelerate our indebtedness under the Term Loan or enforce our security interest against our assets, either of which would materially adversely affect our ability to continue to operate our business.

We will need to develop and expand our company, and we may encounter difficulties in managing this development and expansion, which could disrupt our operations.

In connection with becoming a public company, we expect to increase our number of employees and the scope of our operations. To manage our anticipated development and expansion, we must continue to implement and improve our managerial, operational, and financial systems, expand our facilities, and continue to recruit and train additional qualified personnel. Also, our management may need to divert a disproportionate amount of its attention away from its day-to-day activities and devote a substantial amount of time to managing these development activities. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. This may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees, and reduced productivity among remaining employees. The physical expansion of our operations may lead to significant costs and may divert financial resources from other projects, such as the development of our product candidates. If our management is unable to effectively manage our expected development and expansion, our expenses may increase more than expected, our ability to generate or increase our revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize our product candidates, if approved, and compete effectively will depend, in part, on our ability to effectively manage the future development and expansion of our company.

Our future success depends on our ability to retain our management team and to attract, retain, and motivate qualified personnel.

Our ability to compete in the highly competitive biotechnology and biopharmaceuticals industries depends upon our ability to attract and retain highly qualified managerial, scientific, and medical personnel. In order to induce valuable employees to continue their employment with us, we have provided stock options that vest over time. The value to employees of stock options that vest over time

is significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies.

We are highly dependent on our management, scientific and medical personnel, including our Chief Executive Officer, Richard Peters, M.D., Ph.D. Despite our efforts to retain valuable employees, members of our management, scientific, and development teams may terminate their employment with us on short notice. The loss of the services of any of our executive officers, including Dr. Peters, other key employees and other scientific and medical advisors, and an inability to find suitable replacements could result in delays in product development and harm our business. Pursuant to their employment arrangements, each of our executive officers, and other employees may voluntarily terminate their employment at any time, with or without notice. Our success also depends on our ability to continue to attract, retain, and motivate highly skilled junior, mid-level, and senior managers as well as junior, mid-level, and senior scientific and medical personnel.

We may not be able to attract or retain qualified management and scientific personnel in the future due to the intense competition for a limited number of qualified personnel among biopharmaceutical, biotechnology, pharmaceutical, and other businesses. Many of the other pharmaceutical companies that we compete against for qualified personnel have greater financial and other resources, different risk profiles, and a longer history in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates than what we may be able to offer. We also experience competition for the hiring of scientific personnel from universities and research institutions. If we are unable to continue to attract and retain high quality personnel, the rate and success at which we can develop and commercialize product candidates will be limited.

We face potential product liability exposure, and, if claims are brought against us, we may incur substantial liability.

The use of our product candidates in clinical trials and the sale of our product candidates, if approved, exposes us to the risk of product liability claims. Product liability claims might be brought against us by patients, healthcare providers, or others selling or otherwise coming into contact with our product candidates. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, including as a result of interactions with alcohol or other drugs, negligence, strict liability, and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we become subject to product liability claims and cannot successfully defend itself against them, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in, among other things:

We maintain product liability insurance coverage for our clinical trials with a €5 million annual aggregate coverage limit. Nevertheless, our insurance coverage may be insufficient to reimburse us for any expenses or losses we may suffer. Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses, including if insurance coverage becomes increasingly expensive. If and when we obtain marketing approval for our product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may not be able to obtain this product liability insurance on commercially reasonable terms. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. The cost of any product liability litigation or other proceedings, even if resolved in our favor, could be substantial, particularly in light of the size of our business and financial resources. A product liability claim or series of claims brought against us could cause our stock price to decline and, if we are unsuccessful in defending such a claim or claims and the resulting judgments exceed our insurance coverage, our financial condition, business, and prospects could be materially adversely affected.

Inadequate funding for the FDA, the SEC and other government agencies, including from government shut downs, or other disruptions to these agencies’ operations, could hinder their ability to hire and retain key leadership and other personnel, prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal business functions on which the operation of our business may rely, which could negatively impact our business.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, the ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of the SEC and other government agencies on which our operations may rely, including those that fund research and development activities, is subject to the political process, which is inherently fluid and unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new product candidates to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. Further, future government shutdowns could impact our ability to access the public markets and obtain necessary capital in order to properly capitalize and continue our operations.

We will incur increased costs as a result of operating as a public company, and our management team will be required to devote substantial time to new compliance initiatives.

As a public company, and particularly after we are no longer an “emerging growth company,” we will incur significant legal, accounting, and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and rules subsequently implemented by the SEC and The Nasdaq Stock Market have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

Pursuant to Section 404 of the Sarbanes-Oxley Act (“Section 404”), we will be required to furnish a report by our management on our internal control over financial reporting, which may include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. While we remain an “emerging growth company” or a “smaller reporting company” with less than $100 million in annual revenues, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants, and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented, and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could result in sanctions or other penalties that would harm our business.

After the completion of the Merger, we became subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the rules and regulations of The Nasdaq Capital Market. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. Commencing with our fiscal year ending the year that the Merger is completed, ~~each outstanding share~~we must perform system and process design evaluation and testing of ~~Yumanity capital stock~~the effectiveness of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Form 10-K filing for that year, as required by Section 404 of the Sarbanes-Oxley Act. This will require that we incur substantial additional professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts. Prior to the Merger, we had never been required to test our internal controls within a specified period and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner.

We may discover weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our financial statements. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be ~~converted into~~met. Because of the ~~right~~inherent limitations in all control systems, no evaluation of controls can provide

absolute assurance that misstatements due to ~~receive approximately 4.3084 shares~~error or fraud will not occur or that all control issues and instances of fraud will be detected.

If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls over financial reporting, we may not be able to produce timely and accurate financial statements. If that were to happen, our investors could lose confidence in our reported financial information, the market price of our ~~common~~ stock could decline and we could be subject to ~~adjustment~~sanctions or investigations by the SEC or other regulatory authorities.

In order to ~~account for the proposed reverse stock split. Immediately following the Merger,~~satisfy our stockholders and optionholders are expected to own, or hold rights to acquire, approximately 29.1% of our common stock on a fully diluted basis as defined in the Merger Agreement, and Yumanity’s stockholders, optionholders and warrantholders are expected to own, or hold rights to acquire, approximately 70.9% of our common stock on a fully diluted basis as defined in the Merger Agreement. Accordingly, the issuance of shares of our common stock to Yumanity’s stockholders in the Merger will reduce significantly the relative voting power of each share of our common stock held by our current stockholders. Consequently, our stockholders as a group will have significantly less influence over the management and polices of the combined organization after the Merger than prior to the Merger.

~~We have incurred and will continue to incur significant transaction costs in connection with the Merger.~~

We have incurred and will continue to incur significant transaction costs in connection with the Merger. We estimate that we will incur aggregate direct transaction costs of approximately $12.2 million associated with the Merger and approximately $0.2 million for its portion of shared transaction expenses, as well as additional costs associated with the commencement of the combined organization’s operationobligations as a public company, we will need to hire additional qualified accounting and financial personnel with appropriate public company experience.

As a newly public company, we will need to establish and maintain effective disclosure and financial controls and make changes in our corporate governance practices. We will need to hire additional accounting and financial personnel with appropriate public company experience and technical accounting knowledge, and it may be difficult to recruit and maintain such personnel. Even if we are able to hire appropriate personnel, our existing operating expenses and operations will be impacted by the direct costs of their employment and the indirect consequences related to the diversion of management resources from product development efforts.

The rules dealing with U.S. federal, state, and local and non-U.S. taxation are constantly under review by persons involved in the legislative process, the Internal Revenue Service, the U.S. Treasury Department and other taxing authorities. Changes to tax laws or tax rulings, or changes in interpretations of existing laws (which changes may have retroactive application), could adversely affect us or holders of our common stock. These changes could subject us to additional income-based taxes and non-income taxes (such as payroll, sales, use, value-added, digital tax, net worth, property, and goods and services taxes), which ~~cannot be estimated accurately at this time.~~in turn could materially affect our financial position and results of operations. Additionally, new, changed, modified, or newly interpreted or applied tax laws could increase our customers’ and our compliance, operating and other costs, as well as the costs of our products. In recent years, many such changes have been made, and changes are likely to continue to occur in the future. As we expand the scale of our business activities, any changes in the U.S. and non-U.S. taxation of such activities may increase our effective tax rate and harm our business, financial condition, and results of operations.

Our ability to use our net operating loss carryforwards and certain tax credit carryforwards may be subject to limitation.

As of December 31, 2020, we had federal and state net operating loss (“NOL”) carryforwards of $453.8 million and ~~other tax attributes may be limited in connection with~~$429.9 million, respectively. Of the ~~Merger and other ownership changes.~~

We have incurred substantial losses during its history and does not expect to become profitable in the near future, and we may never achieve profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire (if at all). At September 30, 2020, we had federal ~~and state~~ NOL carryforwards, ~~of approximately $308.8~~$228.1 million ~~and $295.4 million, respectively. Such federal and state NOL carryforwards will~~ begin to expire in 2026, and ~~2030, respectively unless previously utilized. At September 30, 2020, we had federal~~$225.7 million can be carried forward indefinitely. Under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, changes in our ownership may limit the amount of our net operating loss carryforwards and ~~state~~ research and development tax credit carryforwards that could be utilized annually to offset our future taxable income, if any. This limitation would generally apply in the event of ~~approximately $11.6 million~~a cumulative change in ownership of our company of more than 50% within a three-year period. Any such limitation may significantly reduce our ability to utilize our net operating loss carryforwards and ~~$4.1 million, respectively. The federal~~ research and development tax credit carryforwards ~~will begin expiring~~before they expire. The completion of our merger with Proteostasis Therapeutics, Inc., together with private placements and other transactions that have occurred since our inception, likely triggered such an ownership change pursuant to Section 382. Any such limitation, whether as the result of the merger, prior private placements, sales of our common stock by our existing stockholders, or additional sales of our common stock by us after the Merger, could have a material adverse effect on our results of operations in ~~2027~~future years. We have not yet completed a Section 382 analysis, and ~~2025, respectively, unless previously utilized.~~therefore, there can be no assurances that our NOLs are not already limited

Under current law, federal NOLs incurred in tax years beginning after December 31, 2017 and before January 1, 2021 may be carried back to each of the five tax years preceding such loss, and NOLs arising in tax years beginning after December 31, 2020 may not be carried back. ~~Because we had no taxable income in prior years, it does not anticipate carrying back any of its net operating losses.~~ Moreover, federal NOLs generated in taxable years ~~ending~~beginning after December 31, 2017 may be carried forward indefinitely, but the deductibility of such federal NOLs ~~may be~~is limited to 80% of our taxable income annually for tax years beginning after December 31, 2020. ~~Our NOL carryforwards~~NOLs generated in tax years beginning before January 1, 2018, however, have a 20-year carryforward period, but are not subject to ~~review and possible adjustment by~~ the ~~U.S. Internal Revenue Service (the “IRS”), and state tax authorities. Under Sections 382 and 383 of the Code,~~80% limitation.

Furthermore, our federal NOL and research and development tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50 percentage points. Our ability to utilize NOLs is conditioned upon our maintaining profitability in the future and generating U.S. federal taxable income. Since we do not know whether or when we will generate the U.S. federal taxable income necessary to utilize our remaining NOLs, these NOL carryforwards ~~and other~~generated in tax ~~attributes to offset future taxable income or tax liabilities may be limited as a result~~years beginning before January 1, 2018 could expire unused. Notwithstanding the foregoing discussion of ownership changes, including in connection with the Merger. Similar rules may apply under state tax laws. We have not yet determined the amount of the cumulative change in its ownership resulting from the Merger or other transactions, or any resulting limitations on its ability to utilize its NOL carryforwards and other tax attributes. IfNOLs, we ~~earn taxable income, such limitations could result in increased future tax liability to our company and our future cash flows could be adversely affected. We~~ have recorded a full valuation allowance related to our NOLs ~~and other deferred tax assets~~ due to the uncertainty of the ultimate realization of the future benefits of ~~those assets.~~such NOLs.

We have not yet begun a Phase 3 clinical trial of our triple combination of posenacaftor, dirocaftor, and nesolicaftor in patients with the most common F508del mutation and if such trial fails to materializemay acquire businesses or ~~fails to demonstrate safety and efficacy to the satisfaction of regulatory authorities~~products, or does not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our lead product candidates.

Before obtaining marketing approval from regulatory authorities for the sale of our proprietary triple combination product candidates, we or a potential collaborator must conduct extensive trials to demonstrate the safety and efficacy of our proprietary triple combination in humans. We will not be able to submit an NDA or MAA unless and until we receive data demonstrating that a pivotal trial has achieved its primary endpoints.

Despite the results reported in our Phase 2 clinical trials, we do not know whether a potential Phase 3 clinical trial will demonstrate adequate efficacy and safety to result in regulatory approval to market our proprietary triple combination to address the treatment of rare CFTR mutations in any particular jurisdiction. We also do not know if we will have the funds or the operational capacity to proceed with the initiation of a Phase 3 clinical trial given our focus and attention on the proposed Merger.

Clinical testing is expensive and difficult to design and implement, can take many years to complete and is inherently uncertain as to the outcome. A failure of one or more trials can occur at any stage of testing. The outcome of preclinical studies and early clinical trials may not accurately predict the success of later trials, and interim results of a trial do not necessarily predict final results. A number of companiesform strategic alliances, in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced trials due to lack of efficacy or unacceptable safety profiles, notwithstanding promising results in earlier trials.

~~We have incurred significant losses since our inception. We will continue to incur significant losses for the foreseeable~~ future, and we may ~~never achieve or maintain profitability.~~not realize the benefits of such acquisitions.

We are a clinical stage biopharmaceutical company. We have incurred significant net losses in each year since our inception, including net losses of $8.3 million and $27.0 million for the three and nine months ended September 30, 2020, respectively. As of September 30, 2020, we had an accumulated deficit of $363.7 million.

We do not have any drugs that have received regulatory approval. Our business is dependent on our ability to successfully complete preclinical and clinical development of, obtain regulatory approval for, and, if approved, successfully commercialize our current and future drug candidates in a timely manner. ~~If the Merger is not successful, and we determine to operate as a stand-alone entity, we will~~ ~~require additional funding to fund our pipeline and advance our proprietary candidates through regulatory approval and into commercialization, if approved.~~

To date, we have financed our operations primarily through the sale of equity securities, debt financings, payments received in connection with collaboration agreements and a research grant, as well as funds from the sale of stock under at-the-market offering programs. We have devoted substantially all of our efforts to organizing and staffing our Company, business planning, raising capital, acquiring and developing product and technology rights, and conducting research and development activities. We have not completed the development of any of our product candidates. We do not have any products approved for sale and have not generated any commercial revenue since inception. We also expect to continue to incur significant and increasing losses and negative cash flows for the foreseeable future, and will require additional funding to pursue our business strategy. In the event that the Merger fails to close, we will need additional funding to continue our operations.

~~While we continue to pursue cost saving initiatives to reduce operating expenses, we may also need to raise additional funds and periodically explore sources of equity or debt financing.~~ We may ~~seek to raise such capital through a combination of equity offerings, debt financings, collaborations,~~acquire additional businesses or products, form strategic alliances, ~~and licensing arrangements. We do not have any committed external source of funds. However, additional funding may not be available on favorable terms~~ or ~~at all.~~

Payor approval and reimbursement may not be available for posenacaftor, dirocaftor, nesolicaftor, any proprietary combination therapy candidates and our other product candidates, or third-party therapies takencreate joint ventures with ~~our drugs, which could make it difficult or impossible for us to sell our products profitably.~~

~~Market acceptance and sales of posenacaftor, dirocaftor or nesolicaftor, any proprietary combination therapy candidates, or any other product candidates~~third parties that we ~~develop,~~believe will depend in part on the extent to which reimbursement for these products and related third party treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and third-party payors, such as private health insurers, health maintenance organizations and pharmacy benefit management organizations, decide which medications they will pay for, at what tier level and establish reimbursement levels. In the United States, non-governmental payors often rely upon Medicare coverage policy and payment limitations in setting their own coverage and reimbursement policies. A primary trend in the United States healthcare industry and elsewhere is cost containment. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that companies provide themcomplement or augment our existing business. If we acquire businesses with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that reimbursement will be available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will be. Even if we are successful in gaining reimbursement in one country, that does not mean we will achieve reimbursement at the same levelspromising markets or at all in any other country. Reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. Obtaining reimbursement for our products may be particularly difficult because of the higher prices often associated with products administered under the supervision of a physician. Reimbursement levels may be impacted by factors including, without limitation, the perceived safety and efficacy of our products relative to the cost (and relative to the perceived safety and efficacy and cost for available competitive products), the views of independent research organizations on drug pricing and the political climate, many of which factors we cannot control. Also, reimbursement amounts may reduce the demand for, or the price of, our products. If reimbursement is not available, or is available only to limited levels,technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully ~~commercialize posenacaftor, dirocaftor, nesolicaftor,~~integrate them with our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing, and marketing any ~~proprietary combination therapy~~new products resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. We cannot provide assurance that, following any such acquisition, we will achieve the synergies expected in order to justify the transaction.

The market price of our common stock may be highly volatile, and you may not be able to resell your shares at or above the price at which you purchased our shares.

The market price for our common stock historically has been highly volatile and could continue to be subject to wide fluctuations in response to various factors. The daily closing market price for our common stock has varied between a high price of $25.40 on December 10, 2020 and a low price of $5.40 on November 11, 2021 in the twelve-month period ending on November 11, 2021. The stock market in general, and the market for biopharmaceutical companies in particular, has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your common stock at or above the price at which you purchased your shares. The market price for our common stock may be influenced by many factors, including:

In addition, companies trading in the stock market in general, and The Nasdaq Capital Market in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.

Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.

The trading market for our common stock will likely depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. Although we have obtained research coverage from certain analysts, there can be no assurance that analysts will continue to cover us or provide favorable coverage. If one or more analysts downgrade our stock or change their opinion of our stock, our share price would likely decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

As of September 30, 2021, our executive officers, directors, five percent or greater stockholders and their affiliates beneficially own approximately 46.3% of our outstanding voting stock. These stockholders will have the ability to influence us through their ownership positions. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders, acting together, may be able to control elections of directors or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may believe are in your best interest as one of our stockholders.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because pharmaceutical companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

Although our common stock is listed on The Nasdaq Capital Market, an active trading market for our shares may never be sustained. If an active market for our common stock is not sustained, it may be difficult for you to sell shares you purchased without depressing the market price for the shares, or at all.

An inactive trading market may also impair our ability to raise capital to continue to fund operations by selling additional shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

We have never paid and do not intend to pay cash dividends in the foreseeable future. As a result, capital appreciation, if any, will be your sole source of gain.

We have never paid cash dividends on any of our capital stock and we currently intend to retain future earnings, if any, to fund the development and growth of our business. In addition, the terms of our Term Loan restricts our ability to pay dividends, and we may enter into future debt agreements with similar restrictions. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

Our bylaws contain exclusive forum provisions, which may limit a stockholder’s ability to bring a claim in a judicial forum it finds favorable and may discourage lawsuits with respect to such claims.

Our third amended and restated bylaws provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for the following types of actions or proceedings under Delaware statutory or common law (1) any derivative action or proceeding brought on our behalf; (2) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, officers or other employees to us or our stockholders; (3) any action or proceeding asserting a claim against us or any of our current or former directors, officers, employees arising out of or pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws (each as may be amended from time to time); (4) any action or proceeding to interpret, apply, enforce or determine the validity of our certificate of incorporation or our bylaws (including any right, obligation, or remedy thereunder); (5) any action or proceeding as to which the Delaware General Corporation Law confers jurisdiction to the Court of Chancery of the State of Delaware; and (6) any action or proceeding asserting a claim against us or any director, officer or other ~~product candidates~~employee, governed by the internal affairs doctrine (the “Delaware Forum

Provision”). The Delaware Forum Provision will not apply to any causes of action arising under the Securities Act, the Exchange Act or for which the federal courts have exclusive jurisdiction.

Our third amended and restated bylaws further provide that, unless we ~~develop. We will also be required~~consent in writing to ~~establish systems and programs that assist patients in determining~~an alternative forum, the ~~reimbursement level and in some instances establishing patient economic support programs to alleviate the economic burden~~federal district courts of ~~co-pays and/or co-insurance. These patient support programs are complex, costly and require knowledge and expertise that we currently do not possess.~~

~~There have been a number of legislative and regulatory proposals to change the healthcare system in~~ the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act (the “Federal Forum Provision”). In addition, our third amended and restated bylaws provide that any person or entity holding, owning or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the foregoing Delaware Forum Provision and the Federal Forum Provision.

The Delaware Forum Provision and the Federal Forum Provision may impose additional litigation costs on stockholders in pursuing the claims identified above, particularly if the stockholders do not reside in or near the State of Delaware. Additionally, the Delaware Forum Provision and the Federal Forum Provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the Delaware Forum Provision and the Federal Forum Provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition. The Court of Chancery of the State of Delaware may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than our stockholders.

Unfavorable global economic conditions could adversely affect our business, financial condition, or results of operations.

Our results of operations could be adversely affected by general conditions in the global economy and in ~~some foreign jurisdictions that~~the global financial markets. The recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such as the recent global financial crisis, could ~~affect~~result in a variety of risks to our business, including, weakened demand for our product candidates and our ability to ~~sell any future products profitably. For example, the Trump administration’s budget proposal~~raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for fiscal year 2021 includes a $135 billion allowance to support legislative proposals seeking to reduce drug prices, increase competition, lower out-of-pocket drug costs for patients, and increase patient access to lower-cost generic and biosimilar drugs. On March 10, 2020, the Trump administration sent “principles” for drug pricing to Congress, calling for legislation that would, among other things, cap Medicare Part D beneficiary out-of-pocket pharmacy expenses, provide an option to cap Medicare Part D beneficiary monthly out-of-pocket expenses, and place limits on pharmaceutical price increases. Further, the Trump administration previously released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contained additional proposals to increase drug manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products, and reduce the out of pocket costs of drug products paid by consumers. The Department of Health and Human Services, or HHS, has solicited feedback on some of these measures and has implemented others under its existing authority. On July 24, 2020, the Trump administration announced four executive orders related to prescription drug pricing that attempt to implement severalour services. Any of the ~~administration’s proposals, including a policy that would tie certain Medicare Part B drug prices to international drug prices~~foregoing could harm our business and also expanded the policy to cover certain Part D drugs; one that directs HHS to finalize the Canadian drug importation proposed rule previously issued by HHS and makes other changes allowing for personal importation of drugs from Canada; one that directs HHS to finalize the rulemaking process on modifying the anti-kickback law safe harbors for plans, pharmacies, and pharmaceutical benefit managers; and one that reduces costs of insulin and epipens to patients of federally qualified health centers. Although a number of these and other measures may require additional authorization to become effective,

Congress and the Trump administration have both stated that they will continue to seek new legislative and/or administrative measures to control drug costs. These legislative and regulatory changes may negatively impact the reimbursement for any future products, following approval. The availability of generic treatments may also substantially reduce the likelihood of reimbursement for any future products, including posenacaftor, dirocaftor and nesolicaftor or any proprietary combination therapy candidates. The application of user fees to generic drug products will likely expedite the approval of additional generic drug treatments. We expect to experience pricing pressures in connection with the sale of posenacaftor, dirocaftor, nesolicaftor, any proprietary combination therapy candidates, and any other product candidate that we ~~develop, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes. We~~ cannot ~~predict the likelihood, nature, or extent of health reform initiatives that may arise from future legislation or administrative action, particularly as a result~~anticipate all of the ~~recent presidential election. However,~~ways in which the current economic climate and financial market conditions could adversely impact our business.

We, or the third parties upon whom we expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products, which could result in reduced demand for our products or additional pricing pressure.

~~In addition, there~~depend, may be ~~significant delays in obtaining reimbursement for approved products,~~adversely affected by earthquakes or other natural disasters and coverage may be more limited than the purposes for which the product is approved by the FDA or regulatory authorities in other countries. Moreover, eligibility for reimbursement does not imply that any product will be paid for in all cases or at a rate that covers our ~~costs, including research, development, manufacture, sale~~business continuity and ~~distribution. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and~~disaster recovery plans may not ~~be made permanent. Payment rates may vary according to the use of the product~~adequately protect us from a serious disaster.

Earthquakes or other natural disasters could severely disrupt our operations, and the clinical setting in which it is used, may be based on payments allowed for lower cost products that are already reimbursed, and may be incorporated into existing payments for other services. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of products from countries where they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies, however reimbursement and levels of reimbursement may also vary within a country based on the individual decisions of private payors.

Our inability to promptly obtain coverage and profitable payment rates from both government-funded and private payors for any of our product candidates, including posenacaftor, dirocaftor and nesolicaftor and any proprietary combination therapy candidates, could have a material adverse effect on ~~our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.~~

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and health information privacy and security laws. Some of these laws were recently amended, and their interpretation following such amendments remains unclear. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

Our current and future operations may be directly, or indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without limitation, the federal anti-kickback statute. These laws may impact, among other things, our research, proposed sales, marketing and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

Further, the ACA, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes. A person or entity can now be found guilty of fraud or false claims under ACA without actual knowledge of the statute or specific intent to violate it. In addition, ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes.

It is possible that some of our business activities could be subject to challenge by federal or state regulatory authorities under one or more of these laws. The scope and enforcement of these laws is uncertain and subject to change in the current environment of health care reform. Possible sanctions for violation of these laws include significant monetary fines, administrative, civil and criminal penalties, exclusion from Medicare, Medicaid and other government programs, forfeiture of amounts collected in violation of such prohibitions, imprisonment, and integrity oversight and ongoing monitoring. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our reputation, business, results of operations and financial condition. Any state or federal regulatory review of us, regardless of the outcome, would be costly and time-consuming, and could have a material adverse effect on our business, financial condition and results of operations.

In addition, regulators globally are also imposing greater monetary fines for privacy violations. For example, in 2016, the E.U. adopted a new regulation governing data practices and privacy called the General Data Protection Regulation, or GDPR, which became effective on May 25, 2018. The GDPR applies to any company established in the E.U. as well as to those outside the E.U. if they collect and use personal data in connection with the offering goods or services to individuals in the E.U. or the monitoring of their behavior. The GDPR enhances data protection obligations for processors and controllers of personal data, including, for example, expanded disclosures about how personal information is to be used, limitations on retention of information, mandatory data breach notification requirements and onerous new obligations on services providers. Non-compliance with the GDPR may result in monetary penalties of up to €20 million or 4% of worldwide revenue, whichever is higher. The GDPR and other changes in laws or regulations associated with the enhanced protection of certain types of personal data, such as healthcare data or other sensitive information, could greatly increase our cost of providing our products and services or even prevent us from offering certain services in jurisdictions that we operate in.

In the United States and foreign jurisdictions, there have been a number of legislative and regulatory changes to the healthcare system that could affect our future results of operations. In particular, there have been and continue to be a number of initiatives at the U.S. federal and state levels that seek to reduce healthcare costs. For example, the ACA, which includes measures to significantly change the way health care is financed by both governmental and private insurers, was enacted in March 2010. Among the provisions of the ACA of greatest importance to the pharmaceutical and biotechnology industry are the following:

At this time, the full effect that the ACA would have on our business remains unclear. There remain executive, judicial, Congressional and efforts by the current administration to challenge certain aspects of the ACA. Legislation has been drafted and enacted to repeal and replace parts of the ACA, but no comprehensive ACA replacement law has been enacted. However, on December 14, 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individual mandate portion of the ACA is an essential and inseverable feature of the ACA, and therefore because the mandate was repealed as part of the Tax Cuts and Jobs Act, the remaining provisions of the ACA are invalid as well. Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the ACA are invalid as well. On March 2, 2020, the United States Supreme Court granted the petitions for writs of certiorari to review this case. It is unclear how such litigation and other efforts to repeal and replace the ACA will impact the ACA and our business. We cannot predict any initiatives that may be adopted in the future.

Individual states have become increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access, and marketing cost disclosure and transparency measures, and designed to encourage importation from other countries and bulk purchasing. Legally mandated price controls on payment amounts by third-party payors or other restrictions could harm our business, results of operations, financial condition, and prospects. ~~In addition, regional healthcare authorities and individual hospitals are increasingly~~If a natural disaster, power outage, or other event occurred that prevented us from using ~~bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. This could reduce ultimate demand for~~all or a significant portion of our ~~products or put pressure on our product pricing, which could negatively affect our business, results of operations, financial condition and prospects.~~

In addition, given recent federal and state government initiatives directed at lowering the total cost of healthcare, Congress and state legislatures will likely continue to focus on healthcare reform, the cost of prescription drugs and biologics and the reform of the Medicare and Medicaid programs. While we cannot predict the full outcome of any such legislation, it may result in decreased reimbursement for drugs and biologics, which may further exacerbate industry-wide pressure to reduce prescription drug prices. This could harm our ability to generate revenues. Increases in importation or re-importation of pharmaceutical products from foreign countries into the United States could put competitive pressure on our ability to profitably price our products, which, in turn, could adversely affect our business, results of operations, financial condition and prospects. We might elect not to seek approval for or market our products in foreign jurisdictions in order to minimize the risk of re-importation, which could also reduce the revenue we generate from our product sales. It is also possibleheadquarters, that ~~other legislative proposals having similar effects will be adopted.~~

~~Furthermore, regulatory authorities’ assessment of the data and results required to demonstrate safety and efficacy can change over time and can be affected by many factors,~~damaged critical infrastructure, such as the ~~emergence~~manufacturing facilities of ~~new information, including on other products, changing policies~~our third-party contract manufacturers and ~~agency funding, staffing and leadership. We cannot~~suppliers, or that otherwise disrupted operations, it may be ~~sure whether future changes~~difficult or, in certain cases, impossible for us to ~~the regulatory environment will be favorable or unfavorable to~~continue our business ~~prospects. For example, average review times at the FDA~~ for ~~marketing approval applications can be affected by~~ a ~~variety~~substantial period of ~~factors, including budget~~time. The disaster recovery and ~~funding levels and statutory, regulatory and policy changes.~~

~~Additionally, it is possible that additional governmental action is taken~~business continuity plans we have in response to the COVID-19 pandemic. For example, on August 6, 2020, the Trump administration issued another executive order that instructs the federal government to develop a list of “essential” medicines and then buy them and other medical supplies from U.S. manufacturers instead of from companies around the world, including China. The order is meant to reduce regulatory barriers to domestic pharmaceutical manufacturing and catalyze manufacturing technologies needed to keep drug prices low and the production of drug productsplace may prove inadequate in the ~~United States.~~

event of a serious disaster or similar event. We ~~cannot predict the likelihood, nature, or extent of health reform initiatives that~~ may ~~arise from future legislation or administrative action, particularly~~incur substantial expenses as a result of the ~~recent presidential election. If~~limited nature of our disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business.

Our internal computer systems, or those of our third-party CROs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product candidates’ development programs.

Despite the implementation of security measures, our internal computer systems and those of our third-party CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war, and telecommunication and electrical failures. While we have not experienced any such system failure, accident, or ~~any third parties we may engage are slow or unable~~security breach to ~~adapt~~date, if such an event were to ~~changes~~occur and cause interruptions in ~~existing requirements or~~our operations, it could result in a material disruption of our programs. For example, the ~~adoption~~loss of ~~new requirements or policies, or if we or such third parties are not able to maintain regulatory compliance,~~clinical study data for our product candidates ~~may lose any~~could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that ~~may~~any disruption or security breach results in a loss of or damage to our data or applications or other data or applications relating to our technology or product candidates, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the further development of our product candidates could be delayed.

On November 8, 2021, in accordance with that certain Third Amended and Restated Stockholders’ Agreement, by and among the Company and the stockholders party thereto, dated September 1, 2015 (the “Agreement”), the Company and the stockholders holding sufficient shares to terminate the Agreement mutually agreed to terminate the Agreement. As a result, the registration rights afforded to stockholders provided thereunder have been ~~obtained and we may not achieve or sustain profitability.~~terminated.

*~~This certification is being~~ The certifications furnished ~~herewith~~in Exhibit 32.1 hereto are deemed to accompany this Quarterly Report on Form 10-Q and iswill not ~~being filed~~be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as ~~amended, or otherwise subject~~amended. Such certifications will not be deemed to ~~the liability of that section, nor shall it~~ be ~~deemed~~ incorporated by reference into any ~~filing of the Registrant~~filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, ~~whether made before or after~~except to the ~~date hereof, regardless of any general incorporation language in such filing.~~extent that the Registrant specifically incorporates it by reference.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Delaware	20-8436652
(State or ~~Other~~other jurisdiction of ~~Incorporation~~incorporation or organization)	(I.R.S. Employer Identification No.)
~~80 Guest Street, Suite 500~~ ~~Boston, Massachusetts~~	~~02135~~
40 Guest Street, Suite 4410 Boston, MA	02135
(Address of ~~Principal Executive Offices)~~principal executive offices)	(Zip Code)


		Page		~~Page~~
PART ~~I –~~ I.	FINANCIAL INFORMATION	1
Item 1.		~~Condensed Consolidated~~ Financial Statements ~~(unaudited):~~(Unaudited)		41
		Condensed Consolidated Balance Sheets ~~as of September 30, 2020 and December 31, 2019~~		41
		Condensed Consolidated Statements of Operations ~~and Comprehensive Loss for the Three and Nine Months Ended September 30, 2020 and 2019~~		52
		Condensed Consolidated Statements of ~~Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019~~Comprehensive Loss		63
		Condensed Consolidated Statements of Preferred Units and Stockholders’ Equity (Deficit)	4
	Condensed Consolidated Statements of Cash Flows ~~for the Nine Months Ended September 30, 2020 and 2019~~		75
		Notes to Unaudited Condensed Consolidated Financial Statements		86
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		1820
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		2533
Item 4.		~~Management’s Evaluation of our Disclosure~~ Controls and Procedures		2533
PART II.	OTHER INFORMATION	34
Item 1.	~~PART II – OTHER INFORMATION~~Legal Proceedings	34
Item 1.	1A.	~~Legal Proceedings~~Risk Factors		2634
Item ~~1A.~~	2.	~~Risk Factors~~		26
~~Item 2.~~		Unregistered Sales of Equity Securities and Use of Proceeds		3778
Item 5.	3.	~~Other Information~~Defaults Upon Senior Securities		3778
Item 6.	4.	~~Exhibits~~Mine Safety Disclosures		3878
Item 5.	Other Information	78
Item 6.	Exhibits	79
Signatures			4080


	Nine Months Ended September 30,
	2021				2020
Cash flows from operating activities:
Net loss	$	(29,092	)		$	(20,822	)
Adjustments to reconcile net loss to net cash used in operating activities:
Net amortization of premiums (accretion of discounts) on marketable securities		(9	)			(3	)
Depreciation and amortization expense		513				577
Non-cash lease expense		3,814				1,692
Stock/equity-based compensation expense		3,958				1,766
Other non-cash expense		55				0
Non-cash interest expense		412				387
Gain on debt extinguishment		(1,134	)			0
Change in fair value of preferred unit warrant liability		0				(72	)
Loss (gain) on sale of property and equipment		63				(2	)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		668				(1,365	)
Deposits		0				(339	)
Operating lease liabilities		(3,300	)			(858	)
Accounts payable		(6,417	)			286
Accrued expenses and other current liabilities		(2,428	)	��		683
Deferred revenue		(7,281	)			11,693
Net cash used in operating activities		(40,178	)			(6,377	)
Cash flows from investing activities:
Purchases of marketable securities		(11,267	)			(3,597	)
Proceeds from sales and maturities of marketable securities		12,875				1,350
Purchases of property and equipment		(114	)			(173	)
Proceeds from sale of property and equipment		0				13
Net cash provided by (used in) investing activities		1,494				(2,407	)
Cash flows from financing activities:
Proceeds from issuance of Class C preferred units, net of offering costs paid		0				21,235
Proceeds from Paycheck Protection Program loan		0				1,123
Proceeds from at the market offering, net of issuance costs		1,313				0
Proceeds from exercise of stock options		83				0
Payments of principal portion of long-term debt		(894	)			0
Payments of debt issuance costs related to long-term debt		(103	)			(72	)
Payments of finance lease obligations		(140	)			(264	)
Net cash provided by financing activities		259				22,022
Net (decrease) increase in cash, cash equivalents and restricted cash		(38,425	)			13,238
Cash, cash equivalents and restricted cash at beginning of period		82,885				14,246
Cash, cash equivalents and restricted cash at end of period	$	44,460			$	27,484
Supplemental cash flow information:
Cash paid for interest	$	326			$	952
Supplemental disclosure of noncash investing and financing activities:
Additions to property and equipment included in accounts payable and accrued expenses	$	9			$	0
Additions to property and equipment under finance lease	$	0			$	7
Deferred financing costs included in accounts payable	$	0			$	1,412
Operating lease liabilities arising from obtaining right-of-use assets	$	0			$	10,219


	Number of Shares/ Units			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
						(in years)		(in thousands)
Outstanding as of December 31, 2020		944,961		$	20.70		8.29		6,522
Granted		986,014		$	15.33		9.91		0
Exercised		(9,241	)		8.97		7.37		9
Forfeited		(139,290	)	$	13.70				—
Outstanding as of September 30, 2021		1,782,444		$	19.01		7.92		1,521
Vested and expected to vest as of September 30, 2021		1,767,444		$	19.03		7.90		0

	Number of Shares			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
						(Years)
Outstanding at December 31, 2019		4,364,839		$	5.30		7.32	$	132
Granted		1,663,000			1.56
Forfeited		(1,862,404	)		3.52
Outstanding at September 30, 2020		4,165,435		$	4.60		6.90	$	7
Exercisable at September 30, 2020		2,776,235		$	5.58		6.19	$	7
Vested and expected to vest at September 30, 2020		4,082,185		$	4.65		7.03	$	7


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth company	☒

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Revenue	$	—		$	—		$	—		$	5,000
Operating expenses:
Research and development		1,240			10,145			12,342			43,217
General and administrative		4,536			3,154			12,489			10,781
Restructuring costs		2,401			—			2,401			—
Total operating expenses		8,177			13,299			27,232			53,998
Loss from operations		(8,177	)		(13,299	)		(27,232	)		(48,998	)
Interest income		8			224			269			879
Interest expense		(4	)		—			(13	)		—
Other income, net		4			242			36			850
Net loss	$	(8,169	)	$	(12,833	)	$	(26,940	)	$	(47,269	)
Net loss per share—basic and diluted	$	(0.16	)	$	(0.25	)	$	(0.52	)	$	(0.93	)
Weighted average common shares outstanding—basic and diluted		52,177,557			51,099,307			52,157,355			51,058,339
Other comprehensive income:
Unrealized gain (loss) on investments		—			(17	)		(7	)		15
Comprehensive loss	$	(8,169	)	$	(12,850	)	$	(26,947	)	$	(47,254	)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Collaboration revenue	$	1,635		$	3,308		$	7,282		$	3,308
Operating expenses:
Research and development		6,624			5,489			20,729			14,457
General and administrative		4,513			3,725			15,277			8,356
Total operating expenses		11,137			9,214			36,006			22,813
Loss from operations		(9,502	)		(5,906	)		(28,724	)		(19,505	)
Other income (expense):
Change in fair value of preferred unit warrant liability		0			46			0			72
Interest expense		(454	)		(501	)		(1,407	)		(1,410	)
Interest income and other income (expense), net		0			(24	)		(95	)		21
Gain on debt extinguishment		0			—			1,134			—
Total other income (expense), net		(454	)		(479	)		(368	)		(1,317	)
Net loss	$	(9,956	)	$	(6,385	)	$	(29,092	)	$	(20,822	)
Gain on extinguishment of Class B preferred units		0			—			0			6,697
Net loss applicable to common shareholders		(9,956	)		(6,385	)		(29,092	)		(14,125	)
Net loss per share/unit, basic and diluted	$	(0.97	)	$	(2.96	)	$	(2.84	)	$	(6.55	)
Weighted average common shares/units outstanding, basic and diluted		10,304,775			2,159,403			10,239,502			2,155,276

	Common Stock				Additional Paid-		Accumulated Other Comprehensive		Accumulated			Total Stockholders’
	Shares		Amount		in Capital		Income (Loss)		Deficit			Equity
Balances at June 30, 2020		52,147,656	$	52	$	400,315	$	—	$	(355,431	)	$	44,936
Stock-based compensation expense		—		—		287		—		—			287
Issuance of common stock pursuant to employee stock purchase plan		28,205		—		33		—		—			33
Issuance of common stock for restricted stock units		4,519		—		—		—		—			—
Other comprehensive income (loss)		—		—		—		—		—			—
Net loss		—		—		—		—		(8,169	)		(8,169	)
Balances at September 30, 2020		52,180,380	$	52	$	400,635	$	—	$	(363,600	)	$	37,087


	Preferred Units				Common Units				Defaulting Class B Preferred Units				Common Stock				Additional Paid-in		Accumulated Other Comprehensive		Accumulated			Total Stockholders’ Equity/ Members’
	Units		Amount		Units		Amount		Shares		Amount		Shares		Amount		Capital		Gain (Loss)		Deficit			(Deficit)
Balances at December 31, 2020		—	$	—		—	$	—		—	$	—		10,193,831	$	10	$	204,007	$	—	$	(147,810	)	$	56,207
Stock/equity-based compensation expense		—		—		—		—		—		—		—		—		1,407		—		—			1,407
Net loss		—		—		—		—		—		—		—				—		—		(8,682	)		(8,682	)
Balances at March 31, 2021		—		—		—		—		—		—		10,193,831	$	10	$	205,414	$	—	$	(156,492	)	$	48,932
Issuance of common stock from at the market offering, net of issuance costs		—		—		—		—		—		—		82,132		—		1,313		—		—			1,313
Exercises of common stock options		—		—		—		—		—		—		6,083		—		57		—		—			57
Stock/equity-based compensation expense		—		—		—		—		—		—		—		—		1,259		—		—			1,259
Net loss		—		—		—		—		—		—		—		—		—		—		(10,454	)		(10,454	)
Balances at June 30, 2021		—	$	—		—	$	—		—	$	—		10,282,046	$	10		208,043	$	—	$	(166,946	)	$	41,107
Exercises of common stock options		—		—		—		—		—		—		3,158		—		26		—		—			26
Vesting of restricted stock units		—		—		—		—		—		—		23,146		—		—		—		—			—
Stock/equity-based compensation expense		—		—		—		—		—		—		—		—		1,292		—		—			1,292
Net loss		—		—		—		—		—		—		—				—		—		(9,956	)		(9,956	)
Balances at September 30, 2021		—	$	—		—	$	—		—	$	—		10,308,350	$	10		209,361	$	—	$	(176,902	)	$	32,469

	September 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. treasury securities	$	5,000	$	—	$	—		$	5,000
	$	5,000	$	—	$	—		$	5,000

	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. government-sponsored enterprise securities	$	20,456	$	2	$	(1	)	$	20,457
U.S. treasury securities		23,996		7		(1	)		24,002
	$	44,452	$	9	$	(2	)	$	44,459

	One-Time Termination Benefits
Balance at December 31, 2019	$	—
Costs incurred and charged to expense		2,401
Costs paid or otherwise settled		(796	)
Balance at September 30, 2020	$	1,605

Future Operating Lease Payments
2020	$	437
2021		1,780
2022		1,829
2023		1,880
2024		1,931
Thereafter		6,825
Total lease payments		14,682
Less: imputed interest		(2,342	)
Total operating lease liabilities	$	12,340


	•		adverse results or delays in preclinical studies or clinical trials;


	•		failure by us to successfully develop and commercialize our product candidates;


	•		failure by us to maintain our existing strategic collaborations or enter into new collaborations;


	•		failure by us or our licensors and strategic partners to prosecute, maintain or enforce our intellectual property rights;


	•		changes in laws or regulations applicable to future products;


	•		an inability to obtain adequate product supply for our product candidates or the inability to do so at acceptable prices;


	•		the introduction of new products, services or technologies by our competitors;


	•		failure by us to meet or exceed financial projections we may provide to the public;


	•		failure by us to meet or exceed the financial projections of the investment community;


	•		the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;


	•		announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us, our strategic partners or our competitors;


	•		disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;


	•		additions or departures of key scientific or management personnel;


	•		significant lawsuits, including patent or stockholder litigation;


	•		sales of our common stock by us or our stockholders in the future; and


~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form	File No.	Exhibit No.	Filing Date

2.1	Agreement and Plan of Merger and Reorganization, dated August 22, 2020, by and among the Registrant, Yumanity, Holdings and Merger Sub.	8-K	001-37695	2.1	August 24, 2020

2.2	First Amendment to Merger Agreement, dated November 6, 2020, by and among the Registrant, Yumanity, Holdings and Merger Sub.	8-K	001-37695	2.1	November 6, 2020

2.3	Form of CVR Agreement by and between the Registrant and the CVR Rep.	8-K	001-37695	2.2	August 24, 2020

2.4	Form of PTI Support Agreement, dated August 22, 2020, by and between the Registrant, Yumanity and each of the parties named in each agreement therein.	8-K	001-37695	2.3	August 24, 2020

2.5	Form of Yumanity Support Agreement, dated August 22, 2020, by and between the Registrant, Yumanity and each of the parties named in each agreement therein.	8-K	001-37695	2.4	August 24, 2020

2.6	Form of PTI Lock-Up Agreement, dated August 22, 2020, by each of the parties named in each agreement therein.	8-K	001-37695	2.5	August 24, 2020

2.7	Form of Yumanity Lock-Up Agreement, dated August 22, 2020, by each of the parties named in each agreement therein.	8-K	001-37695	2.6	August 24, 2020

3.1	Fifth Amended and Restated Certificate of Incorporation of the Registrant.	S-3	333-228529	3.1	November 23, 2018

3.2	Third Amended and Restated By-laws of the Registrant.	8-K	001-37695	3.1	August 24, 2020

4.1	Specimen Common Stock Certificate.	S-1/A	333-208735	4.1	February 1, 2016

4.2	Third Amended and Restated Stockholders’ Agreement of the Registrant.	S-1/A	333-208735	4.2	February 1, 2016

4.3	Form of Preferred Stock Warrant.	S-1	333-208735	4.3	December 23, 2015

4.4	Form of Senior Indenture	S-3	333-228529	4.6	November 23, 2018

4.5	Form of Subordinated Indenture	S-3	333-228529	4.7	November 23, 2018

31.1	Certification of Principal Executive Officer and Interim Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				Filed herewith

32.1*	Certification of Principal Executive Officer and Interim Principal Financial Officer and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350., as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				Furnished herewith

101.INS	XBRL Instance Document.				Filed herewith

101.SCH	XBRL Taxonomy Extension Schema Document.				Filed herewith

101.CAL	XBRL Taxonomy Extension Calculation Document.				Filed herewith

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.				Filed herewith

			~~Incorporated by Reference~~
Exhibit ~~No.~~Number		~~Exhibit~~ Description	~~Form~~	~~File No.~~	~~Exhibit~~ ~~No.~~		~~Filing Date~~

~~101.LAB~~10.1	Employment Offer Letter by and between Yumanity Therapeutics, Inc. and Michael D. Wyzga, dated July 12, 2021 (filed as Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No.: 001-37695) filed on August 16, 2021).

31.1+	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2+	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	Inline XBRL Instance Document

101.SCH	Inline XBRL Taxonomy Extension ~~Labels Linkbase Document.~~					~~Filed herewith~~Schema Document

~~101.PRE~~101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE	Inline XBRL Taxonomy Extension Presentation ~~Link Document.~~					~~Filed herewith~~Linkbase Document

104 #		Cover Page Interactive Data ~~File—the cover page interactive data is embedded within the~~File (formatted as Inline XBRL ~~document or included within the Exhibit 101 attachments.~~					~~Filed herewith~~with applicable taxonomy extension information contained in Exhibits 101)


	~~PROTEOSTASIS THERAPEUTICS, INC.~~
				Company Name
~~Date: November 16, 2020~~	~~By:~~		~~/s/ Meenu Chhabra~~
Date: November 15, 2021	By:	/s/ Richard Peters	~~Meenu Chhabra~~
			~~President and Chief Executive Officer~~Richard Peters
			~~(Principal~~President, Chief Executive Officer and ~~Interim~~Principal Executive Officer

Date: November 15, 2021	By:	/s/ Michael Wyzga
		Michael Wyzga
		Chief Financial Officer and Principal Financial ~~Officer)~~ Officer