424B3 1 d29194d424b3.htm 424B3 424B3
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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-248993

 

 

LOGO

   LOGO

PROPOSED MERGER

YOUR VOTE IS VERY IMPORTANT

To the Stockholders of Proteostasis Therapeutics, Inc., the Stockholders of Yumanity Therapeutics, Inc. and the Equityholders of Yumanity Holdings, LLC:

Proteostasis Therapeutics, Inc. (“Proteostasis”), Yumanity Holdings, LLC (“Holdings”), Yumanity Therapeutics, Inc. (“Yumanity”), a wholly-owned subsidiary of Holdings, and Pangolin Merger Sub, a wholly-owned subsidiary of Proteostasis (“Merger Sub”) have entered into an Agreement and Plan of Merger and Reorganization, as amended by the First Amendment to Merger Agreement (the “Amendment to Merger Agreement”), dated November 6, 2020, and as may be amended from time to time (the “Merger Agreement”), pursuant to which Merger Sub will merge with and into Yumanity, with Yumanity surviving as a wholly owned subsidiary of Proteostasis (the “Merger”). Proteostasis 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.

Immediately prior to the effective time of the Merger, Holdings will merge with and into Yumanity, and Yumanity will continue to exist as the surviving corporation (the “Yumanity Reorganization”). In connection with the Yumanity Reorganization, all securities of Holdings will be converted into and become securities of Yumanity, and there will no longer be any securities of Holdings outstanding at the effective time of the Merger.

At the effective time of the Merger (the “Effective Time”), each share of Yumanity common stock outstanding immediately prior to the Effective Time (excluding shares held by stockholders who have exercised and perfected appraisal rights or dissenters’ rights as more fully described in the section titled “The Merger — Appraisal Rights and Dissenters’ Rights” in this proxy statement/prospectus/information statement) will be converted into the right to receive a number of shares of Proteostasis common stock. The final exchange ratio (the “Exchange Ratio”) will be determined pursuant to a formula described in more detail in the Merger Agreement and in this proxy statement/prospectus/information statement. Immediately after the consummation of the Merger, based solely on the estimated Exchange Ratio as described in this proxy statement/prospectus/information statement, Yumanity securityholders would own approximately 70.9% of the Proteostasis common stock on a fully diluted basis as defined in the Merger Agreement, and Proteostasis securityholders would own approximately 29.1% of the Proteostasis common stock on a fully diluted basis as defined in the Merger Agreement, subject to adjustment of the Exchange Ratio as set forth in the Merger Agreement and as described in the section titled “The Merger — Merger Consideration and Adjustment” in this proxy statement/prospectus/information statement.

At or immediately prior to the Effective Time, Proteostasis and the CVR Holders’ Representative will enter into a Contingent Value Rights Agreement (the “CVR Agreement”). Pursuant to the CVR Agreement, for each share of Proteostasis common stock held, Proteostasis stockholders of record as of immediately prior to the Effective Time (after giving effect to the exercise or settlement of any Proteostasis options or Proteostasis restricted stock units) will receive one contingent value right (“CVR”) entitling such holders to receive certain net proceeds, if any, derived from the grant, sale or transfer of rights of all or any part of Proteostasis’ intellectual property relating to its cystic fibrosis clinical programs (the “CF Assets”) completed prior to the Effective Time or during the nine-month period after the Effective Time (with any potential payment obligations continuing until the 10-year anniversary of the closing of the Merger Agreement). The portion of net proceeds to which CVR holders will be entitled will depend on when a sale of the CF Assets is completed, as described in the CVR Agreement. Under the CVR Agreement, Yumanity (as successor in interest to Proteostasis) has sole authority over whether and how to pursue the continued development of the CF Assets (if at all) and has agreed to reasonably cooperate with 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


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Effective Time. The CVRs are not transferable, except in certain limited circumstances, will not be certificated or evidenced by any instrument and will not be registered with the SEC or listed for trading on any exchange. The CVR Agreement will be effective at or immediately prior to the closing of the Merger and will continue in effect until the payment of all amounts payable thereunder or, if no CF Asset sale is completed, at the nine-month anniversary of the Effective Time.

Shares of Proteostasis common stock are currently listed on The Nasdaq Global Market under the symbol “PTI”. After completion of the Merger, Proteostasis will be renamed “Yumanity Therapeutics, Inc.” and is expected to trade on The Nasdaq Capital Market under the symbol “YMTX”. On November 3, 2020, the closing sale price of Proteostasis common stock was $1.05 per share.

Proteostasis is holding a special meeting of stockholders in order to obtain the stockholder approvals necessary to complete the Merger and related matters. At the Proteostasis special meeting, which will be held in a virtual-only format via live audio webcast at 9:00 a.m., Eastern Time, on December 16, 2020 at www.proxydocs.com/PTI, unless postponed or adjourned to a later date, Proteostasis will ask its stockholders to:

 

  1.

approve the issuance of shares of Proteostasis common stock to the Yumanity stockholders in accordance with the terms of the Merger Agreement and the change of control resulting from the Merger;

 

  2.

approve an amendment to the Proteostasis certificate of incorporation effecting a reverse stock split of Proteostasis common stock, at a ratio of one (1) new share for every 20 to 30 shares of outstanding Proteostasis common stock (the “Proteostasis Reverse Stock Split”);

 

  3.

approve, on a non-binding advisory vote basis, compensation that will or may become payable by Proteostasis to its named executive officers in connection with the Merger, each as described in the accompanying proxy statement/prospectus/information statement;

 

  4.

approve an amendment to the Proteostasis certificate of incorporation to effect the change of name from “Proteostasis Therapeutics, Inc.” to “Yumanity Therapeutics, Inc.” (the “Proteostasis Name Change Proposal”).

 

  5.

authorize the adjournment of the Proteostasis special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proteostasis Proposal Nos. 1, 2, 3, or 4; and

 

  6.

transact such other business as may properly come before the Proteostasis special meeting or any adjournment or postponement thereof.

Holdings equityholders and Yumanity stockholders (as applicable) are being asked to adopt the Merger Agreement, and vote in favor of any other matter necessary to consummate the transactions contemplated by the Merger Agreement, including the Yumanity Reorganization.

As described in the accompanying proxy statement/prospectus/information statement, Holdings and certain Holdings equityholders, including directors and executive officers of Holdings and Yumanity, and certain 5% or greater equityholders of Holdings, who in the aggregate will own approximately 75% of the outstanding shares of Yumanity common stock following the Yumanity Reorganization are parties to support agreements with Proteostasis, Holdings and Yumanity. Following the registration statement on Form S-4, of which this proxy statement/prospectus/information statement is a part, being declared effective by the U.S. Securities and Exchange Commission and pursuant to the conditions of the Merger Agreement, Holdings and the Holdings equityholders who are party to the support agreements have each agreed to execute an action by written consent of the Yumanity stockholders or the Holdings equityholders (as applicable), referred to as the written consent, (a) in favor of (i) adoption of the Merger Agreement and approval of the transactions contemplated by the Merger Agreement, (ii) approval of the Yumanity Reorganization (the “Company Reorganization,” as defined in the Merger Agreement) and approval and adoption of any and all agreements, certificates or documents required or deemed necessary or appropriate in connection with the Yumanity Reorganization, (iii) approval of any proposal to adjourn or postpone a meeting of the holders of Yumanity capital stock to a later date, if there are not


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sufficient votes for the adoption of the Merger Agreement and the transactions contemplated thereby on the date such meeting is held, and (iv) any other matter necessary to consummate the transactions contemplated by the Merger Agreement that are considered and voted upon by Holdings as the sole Yumanity stockholder or the Holdings equityholders (as applicable), and (b) against any “acquisition proposal,” as defined in the Merger Agreement. Therefore, absent termination of the Merger Agreement, Holdings and holders of a sufficient number of shares of Yumanity capital stock required to adopt the Merger Agreement have agreed to adopt the Merger Agreement, and no meeting of Yumanity stockholders to adopt the Merger Agreement and approve the Merger or the Yumanity Reorganization will be held. Nevertheless, all Holdings equityholders will have the opportunity to elect to adopt the Merger Agreement, thereby approving the Merger and related transactions, and the Yumanity Reorganization, by signing and returning to Yumanity a written consent.

After careful consideration, the Proteostasis, Holdings and Yumanity boards of directors have approved the Merger Agreement and the Merger and the respective proposals referred to above, and each of the Proteostasis, Holdings and Yumanity boards of directors has determined that it is advisable to enter into the Merger Agreement and related transactions. The Proteostasis board of directors recommends that its stockholders vote “FOR” the proposals described in the accompanying proxy statement/prospectus/information statement, and the board of directors of each of Holdings and Yumanity recommends that its securityholders sign and return the written consent indicating their approval of the Merger and the Yumanity Reorganization and adoption of the Merger Agreement and related transactions to Holdings and Yumanity described in the accompanying proxy statement/prospectus/information statement.

More information about Proteostasis, Yumanity and the proposed transaction is contained in this proxy statement/prospectus/information statement. Proteostasis and Yumanity urge you to read the accompanying proxy statement/prospectus/information statement, including the documents incorporated by reference herein, carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 36.

Proteostasis, Holdings and Yumanity are excited about the opportunities the Merger brings to both Proteostasis and Yumanity securityholders, and thank you for your consideration and continued support.

 

Meenu Chhabra

President and Chief Executive Officer

Proteostasis Therapeutics, Inc.

  

Richard Peters, M.D., Ph.D.

Chief Executive Officer

Yumanity Holdings, LLC

Yumanity Therapeutics, Inc.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this proxy statement/prospectus/information statement. Any representation to the contrary is a criminal offense.

The accompanying proxy statement/prospectus/information statement is dated November 10, 2020, and is first being mailed to Proteostasis, Holdings and Yumanity securityholders on or about November 12, 2020.


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LOGO

PROTEOSTASIS THERAPEUTICS, INC.

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON DECEMBER 16, 2020

Dear Stockholders of Proteostasis:

On behalf of the board of directors of Proteostasis Therapeutics, Inc., a Delaware corporation (“Proteostasis”), we are pleased to deliver this proxy statement/prospectus/information statement for the proposed Merger between Proteostasis and Yumanity Therapeutics, Inc., a Delaware corporation (“Yumanity”), pursuant to which Pangolin Merger Sub, a wholly owned subsidiary of Proteostasis (“Merger Sub”) will merge with and into Yumanity, with Yumanity surviving as a wholly owned subsidiary of Proteostasis (the “Merger”). The special meeting of stockholders of Proteostasis will be held in a virtual-only format via live audio webcast on December 16, 2020 at 9:00 a.m., Eastern Time, at www.proxydocs.com/PTI, for the following purposes:

 

  1.

To consider and vote upon a proposal to approve the issuance of Proteostasis common stock in the Merger in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of August 22, 2020, by and among Proteostasis, Merger Sub, Yumanity and Yumanity Holdings, LLC (“Holdings”), as amended by the First Amendment to Merger Agreement, dated November 6, 2020, a copy of which is attached as Annex A to the accompanying proxy statement/prospectus/information statement (the “Merger Agreement”) and the resulting change of control of Proteostasis resulting from the Merger.

 

  2.

To approve the amendment to the certificate of incorporation of Proteostasis to effect a reverse stock split of Proteostasis common stock, at a ratio of one (1) new share for every 20 to 30 shares of outstanding Proteostasis common stock, with the exact ratio and effective time of the reverse stock split of Proteostasis common stock to be determined by the Proteostasis board of directors and publicly announced by press release (the “Proteostasis Reverse Stock Split”), in the form attached as Annex B to the accompanying proxy statement/prospectus/information statement.

 

  3.

To consider and vote upon a proposal to approve, on a non-binding advisory vote basis, compensation that will or may become payable by Proteostasis to its named executive officers in connection with the Merger.

 

  4.

To approve the amendment to the certificate of incorporation of Proteostasis to effect the change of name from “Proteostasis Therapeutics, Inc.” to “Yumanity Therapeutics, Inc.” (the “Proteostasis Name Change Proposal”), in the form attached as Annex C to the accompanying proxy statement/prospectus/information statement.

 

  5.

To consider and vote upon an adjournment of the Proteostasis special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proteostasis Proposal Nos. 1, 2, 3, or 4.

 

  6.

To transact such other business as may properly come before the Proteostasis special meeting or any adjournment or postponement thereof.

The Proteostasis board of directors has fixed November 5, 2020 as the record date for the determination of stockholders entitled to notice of, and to vote at, the Proteostasis special meeting and any adjournment or postponement thereof. Only holders of record of shares of Proteostasis common stock at the close of business on the record date are entitled to notice of, and to vote at, the Proteostasis special meeting. At the close of business on the record date, Proteostasis had 52,180,380 shares of common stock outstanding and entitled to vote.

Your vote is important. The affirmative vote of a majority of the votes cast at the Proteostasis special meeting, whether present at the virtual special meeting or represented by proxy at the Proteostasis special meeting, is required for approval of Proteostasis Proposal Nos. 1, 3, and 5. The affirmative vote of the holders of a majority of shares of Proteostasis common stock having voting power outstanding on the


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record date for the Proteostasis special meeting is required for approval of Proteostasis Proposal No. 2 and 4. Proposal No. 1 is conditioned upon Proposal No. 2. Therefore, the Merger cannot be consummated without the approval of Proposal Nos. 1 and 2.

Even if you plan to attend the Proteostasis special meeting via live audio webcast, Proteostasis requests that you sign and return the enclosed proxy to ensure that your shares will be represented at the Proteostasis special meeting if you are unable to attend.

By Order of the Proteostasis Board of Directors,

/s/ Meenu Chhabra

Meenu Chhabra

President and Chief Executive Officer

Boston, Massachusetts

November 10, 2020

THE PROTEOSTASIS BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES THAT EACH OF THE PROPOSALS OUTLINED ABOVE IS ADVISABLE TO, AND IN THE BEST INTERESTS OF, PROTEOSTASIS AND ITS STOCKHOLDERS AND HAS APPROVED EACH SUCH PROPOSAL. THE PROTEOSTASIS BOARD OF DIRECTORS RECOMMENDS THAT PROTEOSTASIS STOCKHOLDERS VOTE “FOR” EACH SUCH PROPOSAL.


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REFERENCES TO ADDITIONAL INFORMATION

This proxy statement/prospectus/information statement incorporates important business and financial information about Proteostasis that is not included in or delivered with this document. You may obtain this information without charge through the SEC’s website (http://www.sec.gov) or upon your written or oral request by contacting the Secretary of Proteostasis Therapeutics, Inc., 80 Guest Street, Suite 500, Boston, Massachusetts 02135, or by calling (617) 225-0096.

To ensure timely delivery of these documents, any request should be made no later than December 6, 2020 to receive them before the Proteostasis special meeting.

For additional details about where you can find information about Proteostasis, please see the sections titled “Where You Can Find More Information” and “Incorporation of Certain Documents by Reference” in this proxy statement/prospectus/information statement.

 

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     Page  

QUESTIONS AND ANSWERS ABOUT THE MERGER

     1  

PROSPECTUS SUMMARY

     14  

The Companies

     14  

Reasons for the Merger

     17  

Opinion of Proteostasis’ Financial Advisor

     18  

Overview of the Merger Agreement

     18  

Support Agreements

     21  

Lock-Up Agreements

     22  

Management Following the Merger

     22  

Interests of Certain Directors, Officers and Affiliates of Proteostasis and Yumanity

     22  

Certain Material U.S. Federal Income Tax Consequences of the Merger

     24  

Risk Factors

     25  

Regulatory Approvals

     27  

Nasdaq Stock Market Listing

     27  

Anticipated Accounting Treatment

     27  

Appraisal Rights and Dissenters’ Rights

     27  

Comparison of Stockholder Rights

     28  

YUMANITY REORGANIZATION

     29  

SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

     30  

Selected Historical Consolidated Financial Data of Proteostasis

     30  

Selected Historical Consolidated Financial Data of Holdings

     31  

Selected Unaudited Pro Forma Condensed Combined Financial Data of Proteostasis and Yumanity

     32  

Comparative Historical and Unaudited Pro Forma Per Share Data

     34  

MARKET PRICE AND DIVIDEND INFORMATION

     35  

RISK FACTORS

     36  

FORWARD-LOOKING STATEMENTS

     101  

THE SPECIAL MEETING OF PROTEOSTASIS STOCKHOLDERS

     103  

Date, Time and Place

     103  

Purposes of the Proteostasis Special Meeting

     103  

Recommendation of the Proteostasis Board of Directors

     103  

Record Date and Voting Power

     104  

Voting and Revocation of Proxies

     104  

Required Vote

     105  

Solicitation of Proxies

     106  

Other Matters

     106  

THE MERGER

     107  

Background of the Merger

     107  

Proteostasis Reasons for the Merger

     117  

Yumanity Reasons for the Merger

     120  

Opinion of Proteostasis’ Financial Advisor

     122  

Historical Background for Amendment to Merger Agreement

     134  

Interests of the Proteostasis Directors and Executive Officers in the Merger

     134  

Overlapping Ownership Interests

     138  

Interests of the Yumanity Directors and Executive Officers in the Merger

     138  

Limitations of Liability and Indemnification

     141  

Stock Options and Warrants

     141  

Form of the Merger

     141  

Merger Consideration and Adjustment

     141  

Effective Time of the Merger

     144  

 

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Regulatory Approvals

     144  

Tax Treatment of the Merger

     144  

Certain Material U.S. Federal Income Tax Consequences of the Merger

     145  

The Nasdaq Stock Market Listing

     148  

Anticipated Accounting Treatment

     148  

Appraisal Rights and Dissenters’ Rights

     148  

THE MERGER AGREEMENT

     152  

General

     152  

Merger Consideration

     152  

Treatment of Yumanity Stock Options and Warrants

     154  

Directors and Officers of Proteostasis Following the Merger

     155  

Amendment to Certificate of Incorporation of Proteostasis

     156  

Conditions to the Completion of the Merger

     156  

Representations and Warranties

     159  

No Solicitation

     160  

Meetings of Stockholders

     162  

Covenants; Conduct of Business Pending the Merger

     163  

Regulatory Approvals

     166  

Other Agreements

     166  

Termination

     167  

Termination Fee

     169  

Amendment

     171  

AGREEMENTS RELATED TO THE MERGER

     172  

Support Agreements and Written Consent

     172  

Lock-Up Agreements

     172  

Contingent Value Rights Agreement

     172  

MATTERS BEING SUBMITTED TO A VOTE OF PROTEOSTASIS STOCKHOLDERS

     179  

Proteostasis Proposal No. 1: Approval of the Issuance of Common Stock in the Merger to the Yumanity Securityholders in Accordance with the Terms of the Merger Agreement, and the Change of Control Resulting Therefrom

     179  

Proteostasis Proposal No. 2: Approval of the Amendment to the Certificate of Incorporation of Proteostasis Effecting the Proteostasis Reverse Stock Split

     180  

Proteostasis Proposal No. 3: Advisory, Non-Binding Vote on Merger-Related Executive Compensation Arrangements

     186  

Proteostasis Proposal No. 4: Approval of the Amendment to the Certificate of Incorporation of Proteostasis Effecting the Proteostasis Name Change

     187  

Proteostasis Proposal No. 5: Approval of Possible Adjournment of the Special Meeting

     187  

PROTEOSTASIS BUSINESS

     188  

Overview

     188  

Intellectual Property

     189  

Employees

     190  

Corporate Information

     190  

Available Information

     190  

YUMANITY BUSINESS

     191  

YUMANITY MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     235  

MANAGEMENT FOLLOWING THE MERGER

     256  

Executive Officers and Directors

     256  

Composition of the Board of Directors

     260  

Committees of the Board of Directors

     262  

Yumanity Director Compensation

     265  

Yumanity Executive Compensation

     267  

 

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RELATED PARTY TRANSACTIONS OF DIRECTORS AND EXECUTIVE OFFICERS OF THE COMBINED ORGANIZATION

     275  

Proteostasis Transactions

     275  

Stockholders’ Agreement

     275  

Proteostasis Related Party Transaction Policy

     275  

Yumanity Transactions

     275  

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

     279  

COMPARISON OF RIGHTS OF HOLDERS OF PROTEOSTASIS STOCK AND YUMANITY STOCK

     292  

PRINCIPAL STOCKHOLDERS OF PROTEOSTASIS

     299  

PRINCIPAL STOCKHOLDERS OF YUMANITY

     301  

PRINCIPAL STOCKHOLDERS OF COMBINED ORGANIZATION

     304  

LEGAL MATTERS

     308  

EXPERTS

     308  

WHERE YOU CAN FIND MORE INFORMATION

     308  

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

     310  

OTHER MATTERS

     312  

Stockholder Proposals

     312  

Householding of Proxy Materials

     312  

INDEX TO FINANCIAL STATEMENTS

     F-1  

ANNEX A — AGREEMENT AND PLAN OF MERGER AND REORGANIZATION AND FIRST AMENDMENT TO MERGER AGREEMENT

     A-1  

ANNEX B — FORM OF PROTEOSTASIS REVERSE STOCK SPLIT CERTIFICATE OF AMENDMENT

     B-1  

ANNEX C — FORM OF PROTEOSTASIS NAME CHANGE CERTIFICATE OF AMENDMENT

     C-1  

ANNEX D — OPINION LETTER OF MTS SECURITIES, LLC

     D-1  

ANNEX E — SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW

     E-1  

ANNEX F — FORM OF CONTINGENT VALUE RIGHTS AGREEMENT

     F-1  

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER

Except where specifically noted, the following information and all other information contained in this proxy statement/prospectus/information statement or incorporated by reference herein does not give effect to the proposed reverse stock split at a ratio of one (1) new share for every 20 to 30 shares of outstanding Proteostasis common stock described in Proteostasis Proposal No. 2 (the “Proteostasis Reverse Stock Split”) in this proxy statement/prospectus/information statement. If the Merger and the Proteostasis Reverse Stock Split are approved, the Proteostasis Reverse Stock Split will be effected immediately prior to the closing of the Merger (the “Closing”).

The following section provides answers to frequently asked questions about the Merger (as defined below). This section, however, provides only summary information. For a more complete response to these questions and for additional information, please refer to the cross-referenced sections.

 

Q:

What is the Merger?

 

A:

Proteostasis Therapeutics, Inc. (“Proteostasis”), Yumanity Holdings, LLC (“Holdings”), Yumanity Therapeutics, Inc. (“Yumanity”) and Pangolin Merger Sub, Inc., a wholly-owned subsidiary of Proteostasis (“Merger Sub”) have entered into an Agreement and Plan of Merger and Reorganization dated as of August 22, 2020, as amended by the First Amendment to Merger Agreement, dated November 6, 2020, as may be amended from time to time (the “Merger Agreement”). The Merger Agreement contains the terms and conditions of the proposed business combination of Proteostasis and Yumanity. Under the Merger Agreement, Merger Sub will merge with and into Yumanity, with Yumanity surviving as a wholly-owned subsidiary of Proteostasis (the “Merger”).

Immediately prior to the effective time of the Merger, Holdings will merge with and into Yumanity, and Yumanity will continue to exist as the surviving corporation (the “Yumanity Reorganization”). In connection with the Yumanity Reorganization, all securities of Holdings will be converted into and become securities of Yumanity, and there will no longer be any securities of Holdings outstanding at the effective time of the Merger.

At the effective time of the Merger (the “Effective Time”), the shares of Yumanity common stock outstanding immediately prior to the Effective Time (excluding certain shares of Yumanity common stock that may be cancelled pursuant to the Merger Agreement and shares held by stockholders who have exercised and perfected appraisal rights or dissenters’ rights as more fully described in “The Merger — Appraisal Rights and Dissenters’ Rights” below) will be converted into the right to receive an estimated aggregate of 140,365,928 shares of Proteostasis common stock determined by the Exchange Ratio (defined below), without taking into account the proposed Proteostasis Reverse Stock Split but including shares of Proteostasis common stock reserved for issuance upon exercise of Yumanity options and warrants assumed in the Merger, to be implemented prior to the consummation of the Merger and which is the subject of Proposal No. 1. The estimated exchange ratio contained herein (the “Exchange Ratio”) is based upon Proteostasis’ and Yumanity’s capitalization immediately prior to the date of this proxy statement/prospectus/information statement, and will be adjusted based on the amount of Proteostasis net cash, and changes in the capitalization of Proteostasis and Yumanity prior to the consummation of the Merger, including after taking into account the Yumanity Reorganization. As a result of the Merger, holders of Yumanity stock, options and warrants are expected to own in the aggregate approximately 70.9% of Proteostasis and the Proteostasis stockholders, optionholders, holders of restricted stock units (“RSUs”) and warrantholders are expected to own in the aggregate approximately 29.1% of Proteostasis, in each case on a fully-diluted basis as defined in the Merger Agreement and subject to adjustment as described herein.

Additionally, at or before the Effective Time, Proteostasis and the CVR Holders’ Representative will enter into a Contingent Value Rights Agreement (the “CVR Agreement”). Pursuant to the Merger Agreement and the CVR Agreement, each Proteostasis stockholder of record as of immediately prior to the Effective Time (after giving effect to the exercise or settlement of any Proteostasis options or Proteostasis RSUs for shares

 

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of Proteostasis common stock that is to take place immediately prior to the Effective Time or otherwise having the right to receive Proteostasis common stock as of immediately prior to the Effective Time) will continue to own and hold their existing shares of Proteostasis common stock and will receive one contingent value right (a “CVR”) for each share of Proteostasis common stock held by such stockholder (before giving effect to the Reverse Stock Split), entitling the holder to receive a certain percentage of the net proceeds, if any, from any sale, license, transfer, spin-off or other monetizing event of all or any part of Proteostasis’ intellectual property relating to its cystic fibrosis clinical programs (the “CF Assets”) that is entered into during the period beginning on the date the Merger Agreement was signed and ending on the nine-month anniversary of the Closing (a “CF Asset Monetization”). The CVRs will not be transferable by the CVR holders (the “CVR Holders”), except in certain limited circumstances, will not be certificated or evidenced by any instrument, will not accrue interest and will not be registered with the SEC or listed for trading on any exchange. The net proceeds from a CF Asset Monetization will be split between the CVR Holders and Proteostasis depending on when a CF Asset Monetization closes. The CVR Holders will receive 100% of the net proceeds for a CF Asset Monetization transaction that closes prior to the Closing; 90% of the net proceeds for a CF Asset Monetization transaction that closes after the date of the Closing and on or prior to the three-month anniversary of the date of the Closing; 75% of the net proceeds for a CF Asset Monetization transaction that closes after the three-month anniversary of the date of the Closing and on or prior to the six-month anniversary of the date of the Closing; and 50% of the net proceeds for a CF Asset Monetization transaction that closes after the six-month anniversary of the date of the Closing and on or prior to the nine-month anniversary of the date of the Closing. Proteostasis will receive the remainder of any net proceeds not distributed to the CVR Holders, as applicable. The CVRs will terminate on the earlier of the (a) nine-month anniversary of the Effective Time if no CF Asset Monetization event has occurred or (b) 10-year anniversary of the date of the Effective Time if a CF Asset Monetization transaction closed within nine months of the Effective Time (the “CVR Termination Date”). No payments with respect to the CVRs will be payable in respect of any CF Asset Monetization actually received after the CVR Termination Date by Proteostasis. From and after the CVR Termination Date, any further proceeds received by Proteostasis arising from any CF Asset Monetization will be retained by Proteostasis and will not be distributed to the CVR Holders. See the section titled “Agreements Related to the Merger—Contingent Value Rights Agreement” beginning on page 169 of this proxy statement/prospectus/information statement.

 

Q:

Why is Proteostasis considering a disposition of the CF Assets separately from the Merger?

 

A:

Proteostasis was in discussions with global pharmaceutical companies for the sale or license of its CF Assets prior to commencing a review of its strategic alternatives, including the Merger. Because of the expressed third-party interest and the ongoing continued discussions regarding its CF Assets, as well as the changing regulatory environment for CF modulators that made further development of the CF Assets by Proteostasis (or the combined organization post-Merger) challenging, Proteostasis believed that disposing of the CF Assets to a separate third party will allow Proteostasis to maximize the potential value of the CF Assets receivable by its stockholders, while also maximizing the potential value of Proteostasis’ other assets in the Merger. Factors that may be considered when determining when and whether to dispose of the CF Assets will include, but are not limited to: (i) the purchase price to be received from the third party, (ii) potential upfront and milestone payments, as well as proposed royalties from commercial sales, if any, and (iii) the nature of the purchaser and ability to develop and commercialize the assets, including with respect to funding and scientific and technical expertise. Following the Effective Time, Yumanity (as successor in interest to Proteostasis) will have sole authority over whether and how to pursue the continued development or continue negotiations for the sale of the CF Assets, if at all.

 

Q:

What will happen to Proteostasis if, for any reason, the Merger does not close?

 

A:

If, for any reason, the Merger does not close and the Merger Agreement is terminated, the Proteostasis board of directors may elect to, among other things, attempt to complete another strategic transaction including a transaction similar to the Merger, continue to operate the business of Proteostasis or to dissolve and

 

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  liquidate the assets of Proteostasis, and may still elect to implement the Proteostasis Reverse Stock Split. If Proteostasis decides to dissolve and liquidate its assets, Proteostasis would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims. As of June 30, 2020, Proteostasis had cash and cash equivalents and short-term investments totaling approximately $48.9 million. However, there can be no assurances as to the amount or timing of available cash, if any, left to distribute to stockholders after paying the debts and other obligations of Proteostasis and setting aside funds for potential future claims.

 

Q:

Why are the two companies proposing to merge?

 

A:

Yumanity and Proteostasis 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. For a discussion of Proteostasis and Yumanity reasons for the Merger, please see the sections titled “The Merger — Proteostasis Reasons for the Merger” and “The Merger — Yumanity Reasons for the Merger” in this proxy statement/prospectus/information statement.

 

Q:

Why am I receiving this proxy statement/prospectus/information statement?

 

A:

You are receiving this proxy statement/prospectus/information statement because you have been identified as a stockholder of Proteostasis or securityholder of Yumanity or Holdings (as applicable) as of the applicable record date, and you are entitled, as applicable, to (i) vote at the Proteostasis special meeting of stockholders to approve the issuance of shares of Proteostasis common stock in the Merger in accordance with the terms of the Merger Agreement and the change of control resulting from the Merger, the proposed Proteostasis Reverse Stock Split, the approval on a non-binding, advisory basis of the compensation that will or may become payable by Proteostasis to its named executive officers in connection with the Merger and to approve the adjournment of the special meeting, if necessary, to solicit additional proxies or (ii) sign and return the Holdings written consent or Yumanity written consent (as applicable) to approve the Merger and adopt the Merger Agreement and related transactions, including the Yumanity Reorganization. This document serves as:

 

   

a proxy statement of Proteostasis used to solicit proxies for its special meeting;

 

   

a prospectus of Proteostasis used to offer shares of Proteostasis common stock in exchange for shares of Yumanity common stock in the Merger and issuable upon exercise of Yumanity warrants and options being assumed by Proteostasis in the Merger, as applicable; and

 

   

an information statement of Holdings and Yumanity used to solicit the written consent of their respective securityholders for the approval of the Merger and the adoption of the Merger Agreement and related transactions, including the Yumanity Reorganization.

 

Q:

What is required to consummate the Merger?

 

A:

To consummate the Merger, Proteostasis stockholders must approve the issuance of shares of Proteostasis common stock in the Merger in accordance with the terms of the Merger Agreement and the change of control resulting from the Merger, and the amendment to the certificate of incorporation of Proteostasis effecting the Proteostasis Reverse Stock Split, and Holdings and Yumanity securityholders must approve the Merger and adopt the Merger Agreement and related transactions, including the Yumanity Reorganization.

The approval by the stockholders of the issuance of Proteostasis common stock in the Merger in accordance with the terms of the Merger Agreement requires the affirmative vote of a majority of the votes cast at the Proteostasis special meeting. The approval of the Proteostasis Reverse Stock Split requires the affirmative vote of the holders of a majority of shares of Proteostasis common stock having voting power outstanding on the record date for the Proteostasis special meeting.

 

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The approval of the Merger and the adoption of the Merger Agreement and related transactions (including the Yumanity Reorganization) by the stockholders of Yumanity requires the affirmative votes of Holdings, as the sole stockholder of Yumanity and the approval of the Merger and the adoption of the Merger Agreement and related transactions (including the Yumanity Reorganization) by the Holdings equityholders requires the affirmative votes of the holders of at least (x) (A) 55% of Holdings outstanding Class A Units, (B) 55% of Holdings outstanding Class B Units, and (C) 55% of Holdings outstanding Class C Units, and (y) 6623% of the outstanding equity interests of Holdings (voting on an as-converted basis). In addition to the requirement of obtaining such securityholder approvals and appropriate regulatory approvals, each of the other closing conditions set forth in the Merger Agreement must be satisfied or waived.

One such closing condition consists of a requirement, as amended, that Proteostasis have no less than $28.0 million of net cash at closing. Proteostasis currently estimates that it will have between $28 million and $29 million of net cash at closing.

Holdings, as the sole stockholder of Yumanity before the Yumanity Reorganization, and certain Holdings equityholders, including directors and executive officers of Yumanity and certain 5% or greater equityholders of Holdings, who will own approximately 75% of the outstanding shares of Yumanity common stock following the Yumanity Reorganization, and certain Proteostasis stockholders, including certain directors, executive officers and former executive officers, of Proteostasis who in the aggregate own approximately 1% of the outstanding shares of Proteostasis common stock, are parties to support agreements with Proteostasis, Yumanity and Holdings. The Proteostasis stockholders who are party to such support agreements have agreed to vote (a) in favor of (i) the Proteostasis stockholder Proposals, (ii) approval of any proposal to adjourn or postpone a meeting of the holders of Proteostasis capital stock to a later date, if there are not sufficient votes for the adoption of the Merger Agreement and the transactions contemplated thereby on the date such meeting is held, and (iii) any other matter necessary to consummate the transactions contemplated by the Merger Agreement, and (b) against any “acquisition proposal,” as defined in the Merger Agreement. Following the registration statement on Form S-4, of which this proxy statement/prospectus/information statement is a part, being declared effective by the U.S. Securities and Exchange Commission and pursuant to the conditions of the Merger Agreement, Holdings and the Holdings equityholders who are party to the support agreements have each agreed to execute an action by written of Holdings, as the sole Yumanity stockholder, or the Holdings equityholders (as applicable), referred to as the written consent, (a) in favor of (i) adoption of the Merger Agreement and approval of the transactions contemplated by the Merger Agreement, (ii) approval of the Yumanity Reorganization (which is the “Company Reorganization” as defined in the Merger Agreement), and approval and adoption of any and all agreements, certificates or documents required or deemed necessary or appropriate in connection with the Yumanity Reorganization, (iii) approval of any proposal to adjourn or postpone a meeting of the holders of Yumanity capital stock to a later date, if there are not sufficient votes for the adoption of the Merger Agreement and the transactions contemplated thereby on the date such meeting is held, and (iv) any other matter necessary to consummate the transactions contemplated by the Merger Agreement that are considered and voted upon by Holdings, as the sole Yumanity stockholder or the Holdings equityholders (as applicable), and (b) against any “acquisition proposal,” as defined in the Merger Agreement. In the case of Holdings, such written consent will represent a number of its shares of Yumanity common stock proportionate to the outstanding equity interests of Holdings that have voted in favor of (or consented to) the matters set forth therein. Therefore, absent termination of the Merger Agreement, Holdings and holders of a sufficient number of shares of Yumanity capital stock required to adopt the Merger Agreement and approve the Merger and the Yumanity Reorganization have agreed to adopt the Merger Agreement and approve the Merger and the Yumanity Reorganization, and no meeting of Yumanity stockholders or Holdings equityholders to adopt the Merger Agreement and approve the Merger or the Yumanity Reorganization will be held. Nevertheless, all Yumanity stockholders and Holdings equityholders will have the opportunity to elect to adopt the Merger Agreement, thereby approving the Merger and related transactions, including the Yumanity Reorganization, by signing and returning to Holdings or Yumanity (as applicable) a written consent.

 

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For a more complete description of the closing conditions under the Merger Agreement, Proteostasis, Holdings and Yumanity urge you to read the section titled “The Merger Agreement — Conditions to the Completion of the Merger” in this proxy statement/prospectus/information statement.

 

Q:

What will Holdings equityholders receive in the Merger?

 

A:

Immediately prior to the Merger, Holdings and Yumanity will complete the Yumanity Reorganization. Accordingly, at the Effective Time, there will no longer be any outstanding securities of Holdings. Holdings equityholders will receive securities in Yumanity as a result of the Yumanity Reorganization, and will receive shares of Proteostasis as Yumanity stockholders in the Merger.

 

Q:

What will Yumanity stockholders, warrantholders and optionholders receive in the Merger?

 

A:

As a result of the Merger, Yumanity stockholders, warrantholders and optionholders will own approximately 70.9% of the outstanding common stock of Proteostasis on a fully diluted basis as defined in the Merger Agreement, subject to adjustment based upon whether Proteostasis’ net cash at the Closing increases or decreases and changes in the capitalization of Proteostasis and Yumanity prior to the Closing. At the Effective Time of the Merger, outstanding and unexercised Yumanity warrants and options will be assumed by Proteostasis and converted into warrants and options to purchase Proteostasis common stock, as applicable, with the number of shares and exercise price being appropriately adjusted to reflect the final Exchange Ratio as determined in accordance with the Merger Agreement.

For a more complete description of what Yumanity stockholders, warrantholders and optionholders will receive in the Merger, please see the sections titled “Market Price and Dividend Information” and “The Merger Agreement — Merger Consideration” in this proxy statement/prospectus/information statement.

 

Q:

Who will be the directors of the combined organization following the Merger?

 

A:

Following the Merger, the board of directors of Proteostasis will be as follows:

 

   

Name

  

Current Principal Affiliation

  N. Anthony Coles, M.D.    Yumanity Executive Chair of the Board of Directors
  Richard Peters, M.D., Ph.D.    Yumanity President, Chief Executive Officer and Director
  Patricia L. Allen    Yumanity Director
  Richard A. Heyman, Ph.D.    Yumanity Director
  Jeffery W. Kelly, Ph.D.    Yumanity Director and Proteostasis Director
  Cecil B. Pickett, Ph.D.    Yumanity Director
  Lynne Zydowsky, Ph.D.    Yumanity Director
  David Arkowitz    Proteostasis Director
  Kim C. Drapkin    Proteostasis Director

 

Q:

Who will be the executive officers of the combined organization immediately following the Merger?

 

A:

Immediately following the Merger, the executive management team of Proteostasis is expected to be composed solely of the members of the Yumanity executive management team prior to the Merger as set forth below:

 

   

Name

  

Position(s)

  N. Anthony Coles, M.D.    Executive Chair of the Board of Directors
  Richard Peters, M.D., Ph.D.    President, Chief Executive Officer and Director
  Paulash Mohsen    Chief Business Officer
  Brigitte Robertson, M.D.    Chief Medical Officer

 

Q:

What are the material U.S. federal income tax consequences of the Merger to Yumanity stockholders?

 

A:

Each of Proteostasis and Yumanity intends the Merger to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”). In general and subject to

 

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  the qualifications and limitations set forth in the section titled “The Merger — Certain Material U. S. Federal Income Tax Consequences, of the Merger” if the Merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code, the material tax consequences to U.S. Holders (as defined in the section titled “The Merger — Certain Material U.S. Federal Income Tax Consequences of the Merger”) of Yumanity common stock should be as follows:

 

   

a Yumanity stockholder generally will not recognize gain or loss upon the exchange of Yumanity common stock for Proteostasis common stock pursuant to the Merger, except to the extent of cash received in lieu of a fractional share of Proteostasis common stock as described below;

 

   

a Yumanity stockholder who receives cash in lieu of a fractional share of Proteostasis common stock in the Merger generally will recognize capital gain or loss in an amount equal to the difference between the amount of cash received instead of a fractional share and the stockholder’s tax basis allocable to such fractional share;

 

   

a Yumanity stockholder’s aggregate tax basis for the shares of Proteostasis common stock received in the Merger (including any fractional share interest for which cash is received) generally will equal the stockholder’s aggregate tax basis in the shares of Yumanity common stock surrendered in the Merger;

 

   

the holding period of the shares of Proteostasis common stock received by a Yumanity stockholder in the Merger generally will include the holding period of the shares of Yumanity common stock surrendered in exchange therefor; and

 

   

if a Yumanity stockholder acquired different blocks of shares of Yumanity common stock at different times or at different prices, the shares of Proteostasis common stock received in the Merger (including fractional shares deemed received and redeemed as described below) will be allocated pro rata to each block of shares of Yumanity common stock, and the basis and holding period of such shares of Proteostasis common stock will be determined on a block-for-block approach depending on the basis and holding period of each block of shares of Yumanity common stock exchanged for such shares of Proteostasis common stock.

Tax matters are very complicated, and the tax consequences of the Merger to a particular Yumanity stockholder will depend on such stockholder’s circumstances. Accordingly, each Yumanity stockholder is strongly urged to consult with his, her or its tax advisor for a full understanding of the tax consequences of the Merger to that stockholder, including the applicability and effect of federal, state, local and non-U.S. income and other tax laws. For more information, please see the section titled “The Merger — Certain Material U.S. Federal Income Tax Consequences of the Merger” in this proxy statement/prospectus/information statement.

 

Q:

What are the material U.S. federal income tax consequences of the receipt of CVRs and the Proteostasis Reverse Stock Split to U.S. Holders of Proteostasis?

 

A:

Proteostasis intends to report the issuance of the CVRs, to be received by Proteostasis stockholders pursuant to the Contingent Value Rights Agreement, to Proteostasis U.S. Holders (as defined in the section titled “Agreements Related to the Merger — Contingent Value Rights Agreement — Material U.S. Federal Income Tax Consequences of the Receipt of CVRs”) as a distribution of property with respect to its stock. Please review the information in the section titled “Agreements Related to the Merger — Contingent Value Rights Agreement — Material U.S. Federal Income Tax Consequences of the Receipt of CVRs” for a more complete description of the material U.S. federal income tax consequences of the receipt of CVRs to Proteostasis U.S. Holders, including possible alternative treatments. A Proteostasis U.S. Holder generally should not recognize gain or loss upon the Reverse Stock Split. Please review the information in the section titled “Proposal No. 2: Approval of the Amendment to the Certificate of Incorporation of Proteostasis Effecting the Proteostasis Reverse Stock Split — Certain Material U.S. Federal Income Tax Consequences of the Proteostasis Reverse Stock Split” beginning on page 180 of this proxy statement/prospectus/information statement for a more complete description of the material U.S. federal income tax consequences of the Proteostasis Reverse Stock Split to Proteostasis U.S. Holders.

 

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The tax consequences to you of the receipt of CVRs and the Proteostasis Reverse Stock Split will depend on your particular facts and circumstances. You should consult your tax advisors as to the specific tax consequences to you.

 

Q:

Do persons involved in the Merger have interests that may conflict with mine as a Proteostasis stockholder?

 

A:

Yes. In considering the recommendation of Proteostasis’ board of directors with respect to issuing shares of Proteostasis common stock pursuant to the Merger Agreement and the other matters to be acted upon by Proteostasis stockholders at the Proteostasis special meeting, Proteostasis stockholders should be aware that certain members of the Proteostasis board of directors and executive officers of Proteostasis have interests in the Merger that may be different from, or in addition to, interests they have as Proteostasis stockholders.

For example, the employment agreements of the Proteostasis named executive officers provide for post-employment compensation arrangements. These Proteostasis employment agreements, establish the amount of severance payments and benefits available in the event of a termination of employment by Proteostasis without “cause” (as such term is defined in the agreement), or the employee’s termination of employment with Proteostasis for “good reason” (as such term is defined in the agreement). If terminated prior to a “change in control” (as such term is defined in the agreement) or at any time prior to or within 12 months following a change in control, the named executive officers will be entitled to (i) base salary continuation after termination (Meenu Chhabra is entitled to 12 months continuation and Marija Zecevic is entitled to nine months), (ii) a monthly cash payment in an amount equal to the monthly contribution that Proteostasis would have made to provide health insurance to the named executive officer had the named executive officer remained employed until the earlier of 12 months (nine months for Dr. Zecevic) following termination or the date the named executive officer becomes eligible for health benefits through another employer or otherwise becomes ineligible for COBRA, and (iii) on the date that is 35 days after the date of termination, the portion of any outstanding equity grants subject to time-based vesting that would have vested in the 12 months (nine months for Dr. Zecevic) following the date of termination had the named executive officer remained employed will accelerate and vest. Alternatively, if terminated within 12 months following a change in control, the named executive officers will be entitled to (i) base salary continuation after termination (Ms. Chhabra is entitled to 18 months continuation, and Dr. Zecevic is entitled to 12 months), (ii) a monthly cash payment in an amount equal to the monthly contribution that Proteostasis would have made to provide health insurance to the named executive officer had the named executive officer remained employed until the earlier of 18 months (12 months for Dr. Zecevic) following termination or the date the named executive officer becomes eligible for health benefits through another employer or otherwise becomes ineligible for COBRA, and (iii) on the date that is 35 days after the date of termination, acceleration of 100% of the equity awards held by the named executive officer that are subject to time-based vesting. In the event that the named executive obtains employment during the period during which she is receiving severance payments, any remaining severance payments will be reduced by the amount of any cash compensation she received pursuant to such employment during the severance period. Proteostasis has the option to condition receipt of the severance payments and benefits described above upon Ms. Chhabra entering into and not revoking a separation agreement with Proteostasis, including a general release of claims.

Ms. Chhabra has entered into an Employee Proprietary Information, Inventions, Non-Competition and Non-Solicitation Agreement that contains, among other things, non-competition and non-solicitation provisions that apply during the term of the named executive officer’s employment and for 12 months thereafter. In addition, Dr. Zecevic has entered into an Employee Confidential Information, Inventions, Non-Competition and Non-Solicitation Agreement (“CIIA”) that contains, among other things, non-competition and non-solicitation provisions that apply during the term of the named executive officer’s employment and for 12 months thereafter. If Proteostasis elects to enforce the non-competition provision in the CIIA that Proteostasis entered into with Dr. Zecevic, then Proteostasis will be required to either: (i) accelerate the vesting of stock options held by her by 12 months; or (ii) pay continuing salary payments

 

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to her for one year following termination of employment at a rate equal to no less than 50% of the highest annualized base salary paid to her within the two years prior to the date of termination.

Further, the Transaction Committee of the Proteostasis board of directors approved a Key Employee Retention Program (the “Retention Program”), pursuant to which certain employees of Proteostasis, including Ms. Chhabra and Dr. Zecevic, will receive one-time retention incentive awards.

Based on the terms of their respective agreements and the terms of the Retention Program, Proteostasis’ current executive officers will be entitled to receive a total value of approximately $1.7 million (collectively, not individually) in connection with the consummation of the Merger and the associated termination of their employment from Proteostasis, not including the value associated with the acceleration of their outstanding equity awards. Such compensation is the subject of Proposal No. 3.

Additionally, pursuant to the terms of the Merger Agreement, David Arkowitz and Kim C. Drapkin, who are currently directors of Proteostasis will continue as directors of the combined organization after the Closing and will be eligible for certain compensation as non-employee directors.

As of October 31, 2020, the directors and executive officers of Proteostasis owned, in the aggregate, approximately 1% of the outstanding voting shares of Proteostasis common stock. Each of Proteostasis’ executive officers and directors have entered into support agreements and lock-up agreements in connection with the Merger. The support agreements and lock-up agreements are discussed in greater detail in the section titled “Agreements Related to the Merger” in this proxy statement/prospectus/information statement.

The Proteostasis board of directors was aware of these interests and considered them, among other matters, in the decision to approve the Merger Agreement. For more information, please see the section titled “The Merger — Interests of the Proteostasis Directors and Executive Officers in the Merger” in this proxy statement/prospectus/information statement.

 

Q:

Do persons involved in the Merger have interests that may conflict with mine as a Holdings equityholder?

 

A:

Yes. In considering the recommendation of the board of directors of Yumanity and the board of directors of Holdings with respect to approving the Merger and related transactions by written consent, Holdings equityholders should be aware that certain members of the board of directors and executive officers of Yumanity have interests in the Merger that may be different from, or in addition to, interests they have as Holdings equityholders. For example, all of Yumanity’s executive officers and all of its directors have options, subject to vesting, to purchase units of Holdings that will convert into options to purchase a number of shares of Proteostasis common stock (after giving effect to the Yumanity Reorganization) determined by the Exchange Ratio; certain directors of Yumanity have warrants to purchase units of Holdings that will convert into warrants to purchase a number of shares of Proteostasis common stock (after giving effect to the Yumanity Reorganization) determined by the Exchange Ratio; all of Yumanity’s directors and all its executive officers are expected to become directors and executive officers of Proteostasis upon the consummation of the Merger; and all of Yumanity’s directors and executive officers are entitled to certain indemnification and liability insurance coverage pursuant to the terms of the Merger Agreement. In addition, certain of Yumanity’s executive officers and directors and affiliates of Yumanity’s directors currently hold units of Holdings that will convert into shares of Proteostasis common stock (after giving effect to the Yumanity Reorganization) determined by the Exchange Ratio. The Yumanity board of directors and the Holdings board of directors were aware of these interests and considered them, among other matters, in its decision to approve the Merger Agreement and the Yumanity Reorganization. For more information, please see the section titled “The Merger — Interests of the Yumanity Directors and Executive Officers in the Merger” of this proxy statement/prospectus/information statement.

 

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Q:

As a Proteostasis stockholder, how does the Proteostasis board of directors recommend that I vote?

 

A:

After careful consideration, the Proteostasis board of directors recommends that Proteostasis stockholders vote:

 

   

“FOR” Proposal No. 1 to approve the issuance of shares of Proteostasis common stock to the Yumanity stockholders in accordance with the terms of the Merger Agreement and the change of control resulting from the Merger;

 

   

“FOR” Proposal No. 2 to approve the amendment to the certificate of incorporation of Proteostasis to effect the Proteostasis Reverse Stock Split, at a ratio of one (1) new share for every 20 to 30 shares outstanding;

 

   

“FOR” Proposal No. 3 to consider and vote upon a proposal to approve, on a non-binding advisory vote basis, compensation that will or may become payable by Proteostasis to its named executive officers in connection with the Merger;

 

   

“FOR” Proposal No. 4 to approve the amendment to the certificate of incorporation of Proteostasis to effect the Proteostasis Name Change Proposal; and

 

   

“FOR” Proposal No. 5 to adjourn the special meeting, if necessary, if a quorum is present, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1, 2, 3, or 4.

 

Q:

Why am I being asked to cast a non-binding, advisory vote regarding compensation that will or may become payable by Proteostasis to its named executive officers in connection with the Merger?

 

A:

Securities and Exchange Commission (the “SEC”) rules require Proteostasis to seek a non-binding, advisory vote regarding compensation that will or may become payable by Proteostasis to its named executive officers in connection with the Merger.

 

Q:

What is the compensation that will or may become payable by Proteostasis to its named executive officers in connection with the Merger for purposes of this advisory vote?

 

A:

The compensation that will or may become payable by Proteostasis to its named executive officers in connection with the Merger includes cash severance payments, reimbursement of health coverage costs, and accelerated vesting of outstanding equity awards pursuant to the Employment Agreements with named executive officers and the Retention Program. Proteostasis’ named executive officers will be entitled to receive a total value of approximately $1.7 million (collectively, not individually) in connection with the consummation of the Merger and the associated termination of their employment from Proteostasis, not including the value associated with the acceleration of their outstanding equity awards. For further detail, see the section titled “Proteostasis Proposal No. 3: Advisory, Non-Binding Vote on Merger-Related Executive Compensation Arrangements” in this proxy statement/prospectus/information statement.

 

Q:

What will happen if stockholders do not approve the compensation that will or may become payable by Proteostasis to its named executive officers in connection with the Merger at the Proteostasis special meeting?

 

A:

Approval of the compensation that will or may become payable by Proteostasis to its named executive officers in connection with the Merger (and their associated termination from Proteostasis) is not a condition to completion of the Merger. The vote with respect to the compensation that will or may become payable by Proteostasis to its named executive officers in connection with the Merger is an advisory vote and will not be binding on Proteostasis. Accordingly, regardless of the outcome of the advisory vote, if the Merger Agreement is adopted by the stockholders and the Merger is completed, certain of Proteostasis’ named executive officers will be eligible to receive the compensation that is based on or otherwise relates to the Merger and their associated termination from Proteostasis in accordance with the Employment Agreements that each named executive officer has entered into in connection therewith.

 

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Q:

Why am I being asked to approve the Proteostasis Reverse Stock Split?

 

A:

The Proteostasis board of directors approved the proposal approving the amendment to the Proteostasis certificate of incorporation effecting the Proteostasis Reverse Stock Split for the following reasons: the Proteostasis Reverse Stock Split is required in order to make sufficient shares of Proteostasis common stock available for issuance to Yumanity stockholders pursuant to the Merger Agreement; the Proteostasis board of directors believes an investment in Proteostasis common stock may not appeal to brokerage firms that are reluctant to recommend lower priced securities to their clients and investors may also be dissuaded from purchasing lower priced stocks because the brokerage commissions, as a percentage of the total transaction, tend to be higher for such stocks; the analysts at many brokerage firms do not monitor the trading activity or otherwise provide coverage of lower priced stocks; and the Proteostasis board of directors believes that most investment funds are reluctant to invest in lower priced stocks. If the Proposal No. 1 is not approved at the Proteostasis special meeting the Proteostasis board of directors may still elect to effect the Proteostasis Reverse Stock Split. For further detail, see the section titled “Proteostasis Proposal No. 2: Approval of the Amendment to the Certificate of Incorporation of Proteostasis Effecting the Proteostasis Reverse Stock Split.”

 

Q:

As a Holdings equityholder, how does the Holdings board of directors recommend that I vote?

 

A:

After careful consideration, the Holdings board of directors recommends that Holdings equityholders execute the written consent indicating their vote in favor of the approval of the Merger and the adoption of the Merger Agreement and the transactions contemplated thereby, including the Yumanity Reorganization.

 

Q:

What risks should I consider in deciding whether to vote in favor of the approval of the issuance of shares of Proteostasis common stock in the Merger to the Yumanity securityholders in accordance with the terms of the Merger Agreement or to execute and return the written consent, as applicable?

 

A:

You should carefully review the section of this proxy statement/prospectus/information statement, including any information incorporated into such section, titled “Risk Factors,” which sets forth certain risks and uncertainties related to the Merger, risks and uncertainties to which the combined organization’s business will be subject and risks and uncertainties to which each of Proteostasis and Yumanity, as an independent company, is subject.

 

Q:

What is the quorum requirement?

 

A:

A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present if stockholders holding at least a majority in voting power of the shares of Proteostasis common stock issued and outstanding and entitled to vote at the Proteostasis special meeting, are present at the live audio webcast Proteostasis special meeting or represented by proxy at the Proteostasis special meeting, which will be held in a virtual-only format at www.proxydocs.com/PTI. On November 5, 2020, there were 52,180,380 shares of Proteostasis common stock issued and outstanding and entitled to vote. Accordingly, holders of at least 26,090,191 shares of Proteostasis common stock must be present at the Proteostasis special meeting for a quorum to exist. Your shares of Proteostasis common stock will be counted toward the quorum at the Proteostasis special meeting only if you attend the Proteostasis special meeting via live audio webcast at www.proxydocs.com/PTI or are represented at the Proteostasis special meeting by proxy.

Abstentions and broker non-votes (as described below) will be counted towards the quorum requirement. If there is no quorum, the holders of a majority of shares present and entitled to vote at the virtual-only format special meeting or represented by proxy may adjourn the Proteostasis special meeting to another date.

 

Q:

If my Proteostasis shares are held in “street name” by my broker, will my broker vote my shares for me?

 

A:

If you hold shares beneficially in street name and do not provide your broker or other agent with voting instructions, your shares may constitute “broker non-votes.” Broker non-votes occur on a matter when

 

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  banks, brokers and other nominees are not permitted to vote on certain non-discretionary matters without instructions from the beneficial owner and instructions are not given. These matters are referred to as “non-discretionary” matters. Proposals No. 1 and 3 are anticipated to be non-discretionary matters. Proposals No. 2, 4 and 5 are anticipated to be discretionary matters. Broker non-votes will not be considered as votes cast by the holders of Proteostasis common stock present in person or represented by proxy at the Proteostasis special meeting, and will therefore not have any effect with respect to Proposal Nos. 1, 3, and 5. Broker non-votes, if any, will have the effect of an “Against” vote with respect to Proposals No. 2 and 4.

 

Q:

When do you expect the Merger to be consummated?

 

A:

Proteostasis, Holdings and Yumanity anticipate that the Merger will occur sometime soon after the Proteostasis special meeting to be held on December 16, 2020, but cannot predict the exact timing. For more information, please see the section titled “The Merger Agreement — Conditions to the Completion of the Merger” in this proxy statement/prospectus/information statement.

 

Q:

What do I need to do now?

 

A:

Proteostasis, Holdings and Yumanity urge you to read this proxy statement/prospectus/information statement and the documents incorporated by reference carefully, including its annexes, and to consider how the Merger affects you.

If you are a Proteostasis stockholder, you may provide your proxy instructions in one of two different ways. First, you can mail your signed proxy card in the enclosed return envelope. You may also provide your proxy instructions via the Internet by following the instructions on your proxy card or voting instruction form. Please provide your proxy instructions only once, unless you are revoking a previously delivered proxy instruction, and as soon as possible so that your shares can be voted at the special meeting of Proteostasis stockholders.

If you are a Holdings securityholder or Yumanity stockholder, you may execute and return your written consent to Holdings or Yumanity (as applicable) in accordance with the instructions provided.

 

Q:

What happens if I do not return a proxy card or otherwise provide proxy instructions, as applicable?

 

A:

If you are a Proteostasis stockholder, the failure to return your proxy card or otherwise provide proxy instructions will reduce the aggregate number of votes required to approve Proteostasis Proposal Nos. 1 and 3, and will have the same effect as voting against Proteostasis Proposals No. 2 and 4, and your shares will not be counted for purposes of determining whether a quorum is present at the Proteostasis special meeting. Banks, brokers and other nominees will have discretion to vote on Proteostasis Proposals No. 2, 4 and 5.

 

Q:

May I vote in person at the special meeting of stockholders of Proteostasis?

 

A:

Yes, Proteostasis stockholders entitled to vote at the virtual-only format Proteostasis special meeting may vote their shares during the live audio webcast.

Stockholders of Record

If your shares of Proteostasis common stock are registered directly in your name with the Proteostasis transfer agent, you are considered to be the stockholder of record with respect to those shares, and the proxy materials and proxy card are being sent directly to you by Proteostasis.

If you are a Proteostasis stockholder of record, you may register to attend the Proteostasis special meeting and by accessing the meeting center at www.proxydocs.com/PTI and entering the control number on the proxy card previously received. You will need to register to attend the special meeting at

 

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www.proxydocs.com/PTI by no later than December 14, 2020 at 5:00 p.m. Eastern Time. You will be emailed an individual link to attend the virtual special meeting. Instructions on how to connect to the special meeting and participate via the Internet, including how to demonstrate proof of stock ownership, are posted at www.proxydocs.com/PTI.

Even if you plan to attend the Proteostasis special meeting via live audio webcast, Proteostasis requests that you sign and return the enclosed proxy to ensure that your shares will be represented at the Proteostasis special meeting if you are unable to attend.

Beneficial Owners

If your shares of Proteostasis common stock are held in a brokerage account or by another nominee, you are considered the beneficial owner of shares held in “street name,” and the proxy materials are being forwarded to you by your broker or other nominee together with a voting instruction card. As the beneficial owner, you are also invited to attend the Proteostasis special meeting via live audio webcast. Because a beneficial owner is not the stockholder of record, you may not vote these shares at the Proteostasis special meeting unless you obtain a proxy from the broker, trustee or nominee that holds your shares, giving you the right to vote the shares at the meeting.

We have been advised by Mediant that beneficial stockholders as of the record date who want to attend the special meeting virtually must register in advance at www.proxydocs.com/PTI using the control number found on the proxy card previously received by no later than December 14, 2020 at 5:00 p.m. Eastern Time. Proteostasis stockholders will then receive a confirmation of registration and an individual link to access the virtual special meeting.

To vote at the special meeting, beneficial owners must obtain a legal proxy from the holder of record and submit proof of legal proxy reflecting the number of shares of Proteostasis common stock held as of the record date.

Even if you plan to attend the Proteostasis special meeting via live audio webcast, Proteostasis requests that you sign and return the proxy materials provided by your broker or other nominee together with a voting instruction to ensure that your shares will be represented at the Proteostasis special meeting if you are unable to attend.

 

Q:

When and where is the special meeting of Proteostasis stockholders?

 

A:

The special meeting of Proteostasis stockholders will be held in a virtual-only format via live audio webcast at www.proxydocs.com/PTI, at 9:00 a.m, Eastern Time, on December 16, 2020. All Proteostasis stockholders as of the record date, or their duly appointed proxies, may attend the virtual special meeting.

 

Q:

May I change my vote after I have submitted a proxy or provided proxy instructions?

 

A:

Proteostasis stockholders of record, other than those Proteostasis stockholders who are parties to support agreements, may change their vote at any time before their proxy is voted at the Proteostasis special meeting in one of three ways. First, a stockholder of record of Proteostasis can send a written notice to the Secretary of Proteostasis stating that it would like to revoke its proxy. Second, a stockholder of record of Proteostasis can submit new proxy instructions either on a new proxy card or via the Internet. Third, a stockholder of record of Proteostasis can attend the Proteostasis special meeting and vote during the live audio webcast. Attendance alone at the virtual special meeting will not revoke a proxy. If a Proteostasis stockholder of record or a stockholder who owns Proteostasis shares in “street name” has instructed a broker to vote its shares of Proteostasis common stock, the stockholder must follow directions received from its broker to change those instructions.

 

Q:

Who is paying for this proxy solicitation?

 

A:

Proteostasis and Yumanity and Holdings will share equally the cost of printing and filing of this proxy statement/prospectus/information statement and the proxy card. Arrangements will also be made with

 

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  brokerage firms and other custodians, nominees and fiduciaries who are record holders of Proteostasis common stock for the forwarding of solicitation materials to the beneficial owners of Proteostasis common stock. Proteostasis will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.

 

Q:

Who can help answer my questions?

 

A:

If you are a Proteostasis stockholder and would like additional copies, without charge, of this proxy statement/prospectus/information statement please contact:

Proteostasis Therapeutics, Inc.

80 Guest Street, Suite 500

Boston, Massachusetts 02135

(617) 225-0096

Attn: Secretary

Secretary@proteostasis.com

 

    

If you have questions about the Merger, including the procedures for voting your shares, please contact:

Innisfree M&A Incorporated

501 Madison Avenue, 20th Floor

New York, New York 10022

Stockholders may call toll-free: (877) 800-5186

Banks and Brokers may call collect: (212) 750-5833

If you are a Holdings securityholder or a Yumanity stockholder, and would like additional copies, without charge, of this proxy statement/prospectus/information statement or if you have questions about the Merger, including the procedures for voting your shares, you should contact:

Yumanity Holdings LLC

Yumanity Therapeutics, Inc.

40 Guest Street, Suite 4410

Boston, Massachusetts 02135

(617) 409-5300

Attn: Secretary

 

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PROSPECTUS SUMMARY

This summary highlights selected information from this proxy statement/prospectus/information statement and may not contain all of the information that is important to you. To better understand the Merger, the proposals being considered at the Proteostasis special meeting and the Holdings securityholder and Yumanity stockholder actions that are the subject of the written consents, you should read this entire proxy statement/prospectus/information statement carefully, including the Merger Agreement attached as Annex A, the opinion of MTS Securities, LLC attached as Annex D and the other annexes to which you are referred herein. In addition, Proteostasis incorporates by reference certain financial information about Proteostasis into this proxy statement/prospectus/information statement, For more information, please see the sections titled “Where You Can Find More Information” and “Incorporation of Certain Documents By Reference” in this proxy statement/prospectus/information statement.

The Companies

Proteostasis Therapeutics, Inc.

80 Guest Street, Suite 500

Boston, MA 02135

(617) 225-0096

Proteostasis is a clinical stage biopharmaceutical company committed to the discovery 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 CFTR mutations. CF is a disease caused by defects in the function or abundance of cystic fibrosis transmembrane conductance regulator (“CFTR protein”).

Proteostasis requires additional funding to fund its CF-focused pipeline and namely, its CHOICES program, and to advance its proprietary combination therapy candidates posenacaftor, dirocaftor, and nesolicaftor, through regulatory approval and into commercialization, if approved. Proteostasis currently has five full time employees supporting the proposed Merger transaction, strategic efforts related to its CF assets, and continuing operations.

After consideration of various financing and strategic alternatives for its CF portfolio, with the goal of maximizing stockholder value of these assets, Proteostasis decided to continue its operations while exploring business and strategic options related to its research and discovery platform and intellectual property portfolio. It has retained certain key management, employees and consultants, its core intellectual property, licenses, collaborations with research institutions and universities, and proprietary equipment.

After conducting a diligent and extensive process of evaluating strategic alternatives for Proteostasis and identifying and reviewing potential candidates for a strategic acquisition or other transaction, which included the receipt of 13 non-binding indications of interest from interested parties and careful evaluation and consideration of those proposals, and following extensive negotiation with Holdings and Yumanity, on August 22, 2020, Proteostasis entered into the Merger Agreement with Holdings and Yumanity. Pursuant to the Merger Agreement, among other matters, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, at the Effective Time, Merger Sub, a wholly-owned subsidiary of Proteostasis, will merge with and into Yumanity, with Yumanity continuing as a wholly-owned subsidiary of Proteostasis and the surviving corporation of the Merger. If the Merger is completed, the business of Proteostasis will become the business of Yumanity as described beginning on page 188 of this proxy statement/prospectus/information under the caption “Yumanity Business.”



 

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Yumanity Holdings LLC

Yumanity Therapeutics, Inc.

40 Guest Street, Suite 4410

Boston, Massachusetts 02135

(617) 409-5300

Yumanity is a clinical stage biopharmaceutical company dedicated to accelerating the revolution in the treatment of 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. Yumanity is specifically focused on developing novel disease-modifying therapies to treat devastating conditions, either with large or orphan disease markets, including Parkinson’s disease, dementia with Lewy bodies, multiple system atrophy, or MSA, amyotrophic lateral sclerosis, or ALS (also known as Lou Gehrig’s disease), frontotemporal lobar degeneration, or FTLD, and Alzheimer’s disease.

Yumanity’s goal is to advance one new program into the clinic every year. Yumanity’s lead program, YTX-7739, is now in Phase 1 clinical trials for the potential treatment and disease modification of Parkinson’s disease. YTX-7739 targets an enzyme known as stearoyl-CoA desaturase, 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 reverse the toxicity of misfolded alpha-synuclein, or α-synuclein, a protein strongly associated with Parkinson’s disease. Yumanity recently completed enrollment of a Phase 1 single ascending dose (SAD) study of YTX-7739 in healthy volunteers, which evaluated a broad range of doses of YTX-7739. Yumanity initiated a multiple ascending dose (MAD) study in healthy volunteers in the third quarter of 2020 with results anticipated in the first quarter of 2021. A Phase 1b clinical study of YTX-7739 in patients with Parkinson’s disease is planned as a continuation of the MAD study. The Phase 1b study will assess safety, tolerability and pharmacokinetics of YTX-7739 as well as proof of biology by exploring biomarkers of target engagement and potential correlative clinical parameters such as neuroimaging measurements to monitor for early effects of YTX-7739. Early results from the Phase 1b trial are anticipated in the second quarter of 2021. Yumanity’s second program, YTX-9184, also inhibits SCD but is chemically distinct from YTX-7739. Investigational new drug, or IND-enabling safety pharmacology and toxicological studies for YTX-9184 were initiated in the second quarter of 2020. Yumanity anticipates commencing the first in human studies of YTX-9184 in 2021, and intends to develop YTX-9184 for the potential treatment of dementia with Lewy bodies, which is another devasting neurodegenerative disease characterized by the abnormal accumulation of aggregates of α-synuclein. To date, none of Yumanity’s product candidates have advanced into late-stage development or a pivotal clinical study.

At the center of Yumanity’s scientific foundation is its drug discovery engine, which is based on technology licensed from the Whitehead Institute for Biomedical Research (the “Whitehead Institute”), an affiliate of the Massachusetts Institute of Technology. This core technology, combined with investments and advancements by Yumanity, 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. Yumanity leverages its 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, Yumanity has identified over one dozen targets, most of which have not previously been linked to neurodegenerative diseases. Yumanity believes this discovery platform will allow it to replenish its pipeline as programs graduate towards the clinic. Following the Merger, the combined organization will need substantial additional funding to continue to advance its product candidates through clinical trials.

Pangolin Merger Sub, Inc.

Pangolin Merger Sub, Inc. is a wholly-owned subsidiary of Proteostasis, and was formed solely for the purposes of carrying out the Merger.



 

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The Merger (see page 107)

If the Merger is completed, Merger Sub will merge with and into Yumanity, with Yumanity surviving as a wholly-owned subsidiary of Proteostasis.

Immediately prior to the effective time of the Merger, Holdings will merge with and into Yumanity, and Yumanity will continue to exist as the surviving corporation (the “Yumanity Reorganization”). In connection with the Yumanity Reorganization, all securities of Holdings will be converted into and become securities of Yumanity, and there will no longer be any securities of Holdings outstanding at the effective time of the Merger. Following the Yumanity Reorganization, Yumanity’s equity capitalization will consist entirely of shares of common stock and options and warrants exercisable for common stock. For a more complete description of the Yumanity Reorganization please see the section titled “Yumanity Reorganization” in this proxy statement/prospectus/information statement.

At the Effective Time, each share of Yumanity common stock outstanding immediately prior to the Effective Time (excluding certain shares of Yumanity common stock that may be cancelled pursuant to the Merger Agreement and shares held by stockholders who have exercised and perfected appraisal rights or dissenters’ rights as more fully described in “The Merger — Appraisal Rights and Dissenters’ Rights” in this proxy statement/prospectus/information statement) will be converted into the right to receive a number of shares of Proteostasis common stock. The final Exchange Ratio will be determined pursuant to a formula described in more detail in the Merger Agreement and in this proxy statement/prospectus/information statement. Immediately after the consummation of the Merger, based solely on the estimated Exchange Ratio set forth below, Yumanity securityholders would own approximately 70.9% of the Proteostasis common stock on a fully diluted basis as defined in the Merger Agreement, and Proteostasis securityholders would own approximately 29.1% of the Proteostasis common stock on a fully diluted basis as defined in the Merger Agreement, subject to adjustment of the Exchange Ratio as set forth in the Merger Agreement. Proteostasis will assume all outstanding and unexercised Yumanity options and warrants to purchase Yumanity common stock, and each such Yumanity option and warrant will be converted into an option or warrant, respectively, to purchase shares of Proteostasis common stock, with the number of shares of Proteostasis common stock subject to such option or warrant and the exercise price being appropriately adjusted to reflect the Exchange Ratio. The percentages set forth above assume that the initial estimate of the Exchange Ratio is not changed; however, the Exchange Ratio is subject to change as described in the section titled “The Merger Agreement — Merger Consideration” in this proxy statement/prospectus/information statement. The initial estimate of the Exchange Ratio set forth below assumes (i) that Proteostasis will have $28.5 million in net cash immediately prior to the Closing, (ii) Proteostasis outstanding shares, options, warrants and RSUs as of the Closing will be equal to 57,488,785 (on a pre-Proteostasis Reverse Stock Split basis), (iii) Yumanity outstanding shares as of the Closing will be equal to 32,579,311 (on a fully-diluted, as-converted basis).

The Exchange Ratio is calculated using a formula intended to allocate a percentage of the combined organization to existing Holdings and Yumanity securityholders. Based on the assumptions described above, the Exchange Ratio would be equal to approximately 4.3084 shares of Proteostasis common stock for each share of Yumanity common stock (without giving effect to the Proteostasis Reverse Stock Split but giving effect to the Yumanity Reorganization), which Exchange Ratio is subject to change based on the amount of Proteostasis net cash, and changes in the capitalization of Proteostasis or Holdings and Yumanity prior to the Closing (and as a result, Proteostasis securityholders and Yumanity securityholders could own more or less of the combined organization).

For a more complete description of the Merger and the Exchange Ratio please see the section titled “The Merger Agreement” in this proxy statement/prospectus/information statement.



 

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The Closing will occur as promptly as practicable (but in no event later than the second business day after the last of the conditions to the Merger has been satisfied or waived (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of each such conditions), or at such other time as Proteostasis, Holdings and Yumanity agree). Proteostasis, Holdings and Yumanity anticipate that the consummation of the Merger will occur in Proteostasis’ fourth fiscal quarter of 2020. However, because the Merger is subject to a number of conditions, none of Proteostasis, Holdings nor Yumanity can predict exactly when the Closing will occur or if it will occur at all.

Reasons for the Merger (see page 117)

Following the Merger, the combined organization will continue to focus on the development of Yumanity’s pipeline. Proteostasis and Yumanity believe that the combined organization will have the following potential advantages:

 

   

the development of Yumanity’s pipeline of neurodegenerative diseases programs has potential to create value for the current Proteostasis and Yumanity stockholders;

 

   

Yumanity’s platform has the potential to advance one new clinical candidate into human trials each year;

 

   

Yumanity’s executive leadership team, which has extensive experience in neuroscience, rare disease, and oncology drug development, as well as considerable transaction experience, will give the combined organization the opportunity to reach significant value inflection points; and

 

   

Yumanity and Proteostasis shared scientific legacy and approach to drug discovery in indications could potentially extract additional value from existing Proteostasis assets that include compound library, drug candidates, and intellectual property portfolio.

Each of the boards of directors of Proteostasis and Yumanity also considered other reasons for the Merger, as described herein. For example, the Proteostasis board of directors considered, among other things:

 

   

the strategic alternatives to the Merger available to Proteostasis, including the discussions that Proteostasis’ management and the Proteostasis board of directors previously conducted with other potential merger partners, and the time to negotiate and complete an alternative merger transaction and anticipated cash burn;

 

   

the risks and delays associated with, and uncertain value and costs to Proteostasis stockholders of, liquidating Proteostasis, including the uncertainties of continuing cash burn while contingent liabilities are resolved, uncertainty of timing of release of cash until contingent liabilities are resolved, and the risks associated with being a shell company prior to cash distribution;

 

   

the risks and challenges of attempting to continue to operate Proteostasis on a stand-alone basis, including the changing competitive landscape for cystic fibrosis-related treatments, which had increased the complexity and costs associated with continuing Proteostasis’ ongoing operations as a stand-alone entity, and that financing such ongoing operations through a variety of potential transaction structures would nonetheless be challenging in the current environment, as well as the substantial time required to rebuild infrastructure, including a dedicated research team, and the need to rely on established working collaborations with a number of academic institutions who have capabilities and research interest in patient derived cells and commercially available sources novel agents; and

 

   

Proteostasis’ prospects to restructure its business to focus on novel drug discovery and development efforts, and its ability to raise the significant amount of funds it would require to pursue such opportunity and seek regulatory approvals and commence commercialization activities with no ultimate assurance that such activities would be successful or enable Proteostasis to operate a profitable business.



 

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Opinion of Proteostasis Financial Advisor (see page 122)

Proteostasis retained MTS Health Partners, L.P. as its exclusive financial advisor in connection with the Merger. On August 20, 2020, MTS Securities, LLC, an affiliate of MTS Health Partners, L.P., rendered its oral opinion to the Proteostasis board of directors (which was subsequently confirmed in writing as of August 20, 2020), that, as of that date and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth in such written opinion and described below, the Exchange Ratio is fair, from a financial point of view, to Proteostasis.

The full text of the opinion of MTS Securities, LLC (which we refer to herein as the “MTS Opinion”) sets forth the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken by MTS Securities, LLC in connection with its opinion. As described therein, MTS Securities, LLC assumed, among others, for purposes of the MTS Opinion that the only material asset of Proteostasis was the PTI Net Cash (as defined therein), and that no other assets of Proteostasis (including the CF Assets) would have any value. The MTS Opinion is attached as Annex D to the accompanying proxy statement/prospectus/information statement and is incorporated herein by reference. The summary of the MTS Opinion set forth in this proxy statement/prospectus/information statement is qualified in its entirety by reference to the full text of the MTS Opinion. We urge you to read carefully the MTS Opinion, together with the summary thereof in this proxy statement/prospectus/information statement, in its entirety.

MTS provided its opinion for the information and assistance of the Proteostasis board of directors in connection with its consideration of the Merger. The MTS Opinion addressed solely the fairness, from a financial point of view, of the Exchange Ratio to Proteostasis and does not address any other aspect or implication of the Merger. The MTS Opinion was not a recommendation to the Proteostasis board of directors or any stockholder of Proteostasis as to how to vote or to take any other action in connection with the merger.

Overview of the Merger Agreement

Merger Consideration and Adjustment (see page 141)

At the Effective Time, each outstanding share of common stock of Yumanity will be converted into the right to receive a number of shares of Proteostasis common stock pursuant to the Exchange Ratio.

The Merger Agreement does not provide for an adjustment to the total number of shares of Proteostasis common stock that Yumanity stockholders will be entitled to receive for changes in the market price of Proteostasis common stock. Accordingly, the market value of the shares of Proteostasis common stock issued pursuant to the Merger will depend on the market value of the shares of Proteostasis common stock at the time the Merger closes, and could vary significantly from the market value of the shares of Proteostasis common stock on the date of this proxy statement/prospectus/information statement.

At the Effective Time:

 

   

each share of Yumanity common stock outstanding immediately prior to the Effective Time (excluding certain shares of Yumanity common stock that may be cancelled pursuant to the Merger Agreement and shares held by stockholders who have exercised and perfected appraisal rights or dissenters’ rights as more fully described in “The Merger — Appraisal Rights and Dissenters’ Rights” below) will automatically be converted into the right to receive a number of shares of Proteostasis common stock pursuant to the estimated Exchange Ratio of 4.3084 (which is subject to adjustment to account for the proposed Proteostasis Reverse Stock Split). The estimated Exchange Ratio contained herein is based upon Proteostasis, Holdings and Yumanity’s capitalization immediately prior to the date of this proxy statement/prospectus/information statement, and is subject to change based on the amount of Proteostasis net cash, and changes in the capitalization of Proteostasis or Yumanity prior to the Closing;



 

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each option to purchase shares of Yumanity common stock outstanding and unexercised immediately prior to the Effective Time will be assumed by Proteostasis and will become an option to purchase shares of Proteostasis common stock, with the number of shares and exercise price being adjusted by the Exchange Ratio (which is subject to adjustment to account for the proposed Proteostasis Reverse Stock Split); and

 

   

each warrant to purchase shares of Yumanity capital stock outstanding and not terminated or exercised immediately prior to the Effective Time will be assumed by Proteostasis and will become a warrant to purchase shares of Proteostasis common stock, with the number of shares and exercise price being adjusted by the Exchange Ratio (which is subject to adjustment to account for the proposed Proteostasis Reverse Stock Split).

The Exchange Ratio provided herein is an estimate based upon capitalization immediately prior to the date of this proxy statement/prospectus/information statement. The final Exchange Ratio calculation is the quotient determined by dividing the Surviving Corporation Allocation Shares (as defined in the Merger Agreement) by the total number of shares of Yumanity common stock outstanding immediately prior to the Closing as expressed on a fully-diluted and as-converted to common stock basis in the manner described in the Merger Agreement.

Treatment of Yumanity Stock Options and Warrants (see page 154)

At the Effective Time, each option to purchase Yumanity common stock that is outstanding and unexercised immediately prior to the Effective Time under the Yumanity Therapeutics, Inc. 2018 Stock Option and Grant Plan (the “2018 Yumanity Plan”), whether or not vested, will automatically and without any action on the part of the holder thereof, be converted into an option to purchase Proteostasis common stock. Proteostasis will assume the 2018 Yumanity Plan. All rights with respect to Yumanity common stock under Yumanity options assumed by Proteostasis will be converted into rights with respect to Proteostasis common stock. Accordingly, from and after the Effective Time, each Yumanity stock option assumed by Proteostasis may be exercised for such number of shares of Proteostasis common stock as is determined by multiplying the number of shares of Yumanity common stock subject to the option by the Exchange Ratio (which is subject to adjustments to account for the effect of the proposed Proteostasis Reverse Stock Split) and rounding that result down to the nearest whole number of shares of Proteostasis common stock. The per share exercise price of the converted option will be determined by dividing the existing exercise price of the option by the Exchange Ratio (which is subject to adjustments to account for the effect of the proposed Proteostasis Reverse Stock Split prior to the consummation of the Merger) and rounding that result up to the nearest whole cent. Any restrictions on the exercise of any Yumanity option assumed by Proteostasis will continue following the conversion and the term, exercisability, vesting schedules and other provisions of assumed Yumanity options will generally remain unchanged; provided, that the Proteostasis board of directors will succeed to the authority of the Yumanity board of directors with respect to each assumed Yumanity option.

In connection with the Yumanity Reorganization, warrants previously issued by Holdings to purchase its common or preferred units will become warrants to purchase shares of Yumanity’s common stock. Each outstanding warrant to purchase shares of Yumanity capital stock not terminated or exercised at or prior to the Effective Time will be assumed by Proteostasis at the Effective Time in accordance with its terms and will become a warrant to purchase shares of Proteostasis common stock. The number of shares of Proteostasis common stock subject to each assumed warrant will be determined by multiplying the number of shares of Yumanity common stock issuable (including upon conversion of shares of preferred stock issuable following exercise) upon exercise of such warrant prior to the Effective Time by the Exchange Ratio (which is subject to adjustments to account for the effect of the proposed Proteostasis Reverse Stock Split prior to the consummation of the Merger) and rounding that result down to the nearest whole number of shares of Proteostasis common stock. The per share exercise price for the Proteostasis common stock issuable upon exercise of each of the



 

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assumed warrants will be determined by dividing the per share exercise price of the Yumanity common stock subject to each warrant as in effect immediately prior to the Effective Time by the Exchange Ratio (which is subject to adjustments to account for the effect of the proposed Proteostasis Reverse Stock Split prior to the consummation of the Merger) and rounding that result up to the nearest whole cent.

Conditions to the Completion of the Merger (see page 156)

To consummate the Merger, Proteostasis stockholders must approve the issuance of shares of Proteostasis common stock in the Merger to the Yumanity securityholders and the change of control resulting from the Merger, and approve the amendment to the certificate of incorporation of Proteostasis effecting the Proteostasis Reverse Stock Split. Additionally, the Holdings equityholders and the Yumanity stockholders must approve the Merger and adopt the Merger Agreement and the related transactions, including the Yumanity Reorganization. In addition to obtaining such stockholder approvals and appropriate regulatory approvals, each of the other closing conditions set forth in the Merger Agreement must be satisfied or waived.

One such closing condition consists of a requirement, as amended, that Proteostasis have no less than $28.0 million of net cash at closing. Proteostasis currently estimates that it will have between $28 million and $29 million of net cash at closing.

No Solicitation (see page 160)

Each of Proteostasis, Holdings and Yumanity agreed that, subject to limited exceptions, Proteostasis, Holdings and Yumanity and any of their respective subsidiaries will not, and each party will use its reasonable best efforts to cause each of its officers, directors, employees, investment bankers, attorneys, accountants, representatives, consultants or other agents retained by it or any of its subsidiaries not to, directly or indirectly:

 

   

solicit, initiate, knowingly encourage, induce or knowingly facilitate the communication, making, submission or announcement of, any “acquisition proposal” or “acquisition inquiry,” each as defined in the Merger Agreement, or take any action that could reasonably be expected to lead to an acquisition proposal or an acquisition inquiry;

 

   

furnish any nonpublic information with respect to it to any person in connection with or in response to an acquisition proposal or acquisition inquiry;

 

   

engage in discussions (other than to inform any person of the existence of such non-solicitation obligations) or negotiations with any person with respect to any acquisition proposal or acquisition inquiry;

 

   

approve, endorse or recommend an acquisition proposal; or

 

   

execute or enter into any letter of intent or similar document or any contract contemplating or otherwise relating to an “acquisition transaction,” as defined in the Merger Agreement.

Termination (see page 167)

Either Proteostasis or Yumanity can terminate the Merger Agreement under certain circumstances, which would prevent the Merger from being consummated.

Termination Fee (see page 169)

If the Merger Agreement is terminated under certain circumstances, Proteostasis will be required to pay Yumanity a termination fee equal to $2,100,000, and reimburse certain third-party expenses incurred up to a



 

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maximum of $703,000 and Yumanity will be required to pay Proteostasis a termination fee equal to $4,380,000 and reimburse certain third-party expenses up to a maximum of $1,460,000.

Amendment to Merger Agreement (see page 134)

On November 6, 2020, Proteostasis, Merger Sub, Yumanity and Holdings entered into the First Amendment to the Merger Agreement (the (“First Amendment”).

The First Amendment reduced the minimum net cash that Proteostasis must have at closing from $30.0 million to $28.0 million.

For more information, please see the section titled “Merger Agreement — Amendment” of this proxy statement/prospectus/information statement.

Support Agreements (see page 172)

Certain Holdings equityholders and directors and officers of Yumanity are each party to a support agreement with Proteostasis pursuant to which, among other things, each of these equityholders agreed, solely in its capacity as a securityholder, to vote all of its Holdings equity interest (a) in favor of (i) the approval and adoption of the Merger Agreement, (ii) the approval of the Yumanity Reorganization and approval and adoption of any and all agreements, certificates or documents required or deemed necessary or appropriate in connection with the Yumanity Reorganization, (iii) any proposal to adjourn or postpone the meeting if there are not sufficient votes for the adoption of the Merger Agreement and approval of related transactions on the date on which such meeting is held and (iv) the approval of any other matter necessary to consummate the transactions contemplated by the Merger Agreement that are considered and voted upon by Holdings’ equityholders, such as the Yumanity Reorganization, and (b) against any “acquisition proposal,” as defined in the Merger Agreement. Holdings, as the sole stockholder of Yumanity before the Yumanity Reorganization, is also party to a support agreement with Proteostasis pursuant to which Holdings will vote a number of its shares proportionate to the outstanding equity interests of Holdings that have voted in favor of (or consented to) the approval and adoption of the Merger Agreement and approval of the Merger, approval of the Yumanity Reorganization or any other matter necessary to consummate the transactions contemplated by the Merger Agreement and against any “Acquisition Proposal,” as defined in the Merger Agreement.

The Holdings equityholders and Yumanity directors and officers that are party to a support agreement with Proteostasis owned approximately 75% of the outstanding shares of Holdings as of October 31, 2020 (after giving effect to the Yumanity Reorganization). These Yumanity parties to the support agreements include executive officers and directors of Yumanity and certain entities who will directly own at least 5% of Yumanity’s outstanding stock following the Yumanity Reorganization. Following the effectiveness of the Registration Statement of which this proxy statement/prospectus/information statement is a part, Holdings and equityholders of Holdings, in each case holding a sufficient number of shares to adopt the Merger Agreement and approve the Merger and the Yumanity Reorganization, will execute written consents providing for such adoption and approval.

Proteostasis directors and officers (each in their capacities as stockholders) are each party to a support agreement with Holdings and Yumanity pursuant to which, among other things, each of these stockholders agreed, solely in his or her capacity as a stockholder, to vote all of his or her shares of Proteostasis common stock (a) in favor of the Proteostasis stockholder Proposals and any other matter necessary to consummate the transactions contemplated by the Merger Agreement and voted on by the Proteostasis stockholders and (b) against any “acquisition proposal,” as defined in the Merger Agreement.

The directors and officers of Proteostasis that are party to a support agreement with Holdings and Yumanity owned an aggregate of 499,864 outstanding shares of Proteostasis common stock, representing approximately 1% of the outstanding Proteostasis common stock as of October 31, 2020.



 

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CVR Agreement (see page 172)

Pursuant to the CVR Agreement, holders of Proteostasis capital stock of record as of immediately before the Effective Time (or as of such other date as may be mutually agreed by Proteostasis, Holdings and Yumanity) will be entitled to receive one contractual CVR issued by Proteostasis subject to and in accordance with the terms and conditions of the CVR Agreement for each share of Proteostasis common stock held by such stockholder (after giving effect to the exercise or settlement of any Proteostasis options or Proteostasis RSUs for shares of Proteostasis common stock that is to take place immediately prior to the Effective Time or otherwise having the right to receive Proteostasis common stock as of immediately prior to the Effective Time). Each CVR will entitle its holder to receive a pro rata portion of a certain percentage of the net proceeds, if any, from any CF Asset Monetization that is entered into during the period beginning on the date of the Closing and ending on the date that is nine months following the closing date of the Merger.

The CVRs will not be transferable by the CVR Holders, except in certain limited circumstances; will not have any voting or dividend rights; will not be certificated or evidenced by any instrument; will not accrue interest; and will not be registered with the SEC or listed for trading on any exchange. It is intended that the CVRs will not constitute securities, or a class of securities, for the purposes of any securities laws. The CVRs will not represent any equity or ownership interest in Proteostasis (or in Yumanity) or in all or any part of Proteostasis’ intellectual property or any other asset.

Lock-Up Agreements (see page 172)

Officers and directors of Proteostasis and Yumanity and certain equityholders of Holdings have entered into lock-up agreements, pursuant to which such parties have agreed not to, except in limited circumstances, sell or transfer, or engage in swap or similar transactions with respect to, shares of Proteostasis common stock, including, as applicable, shares received in the Merger and issuable upon exercise of certain Yumanity options, in each case from the Closing until the date that is 180 days from the Closing.

As of October 31, 2020, Proteostasis stockholders who have executed lock-up agreements owned in the aggregate approximately 1% of the outstanding voting shares of Proteostasis common stock.

Holdings equityholders who have executed lock-up agreements as of October 31, 2020 owned in the aggregate approximately 75% of the outstanding shares of Yumanity capital stock (after giving effect to the Yumanity Reorganization).

Management Following the Merger (see page 256)

Effective as of the consummation of the Merger, the combined organization’s executive officers (who are currently executive officers of Yumanity) are expected to be:

 

Name

  

Position(s)

N. Anthony Coles, M.D.

   Executive Chair of the Board of Directors

Richard Peters, M.D., Ph.D.

   President, Chief Executive Officer and Director

Paulash Mohsen

   Chief Business Officer

Brigitte Robertson, M.D.

   Chief Medical Officer

Interests of Certain Directors, Officers and Affiliates of Proteostasis and Yumanity (see page 134)

In considering the recommendation of the Proteostasis board of directors with respect to issuing shares of Proteostasis common stock pursuant to the Merger Agreement and the other matters to be acted upon by



 

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Proteostasis stockholders at the Proteostasis special meeting, Proteostasis stockholders should be aware that certain members of the Proteostasis board of directors and executive officers of Proteostasis have interests in the Merger that may be different from, or in addition to, interests they have as Proteostasis stockholders. For example, Proteostasis recently adopted the Retention Program and is party to post-employment arrangements with the named executive officers pursuant to their employment agreements that may result in the receipt by such executive officers of cash severance payments and other benefits with a total value of approximately $1.7 million (collectively and not individually), but not including the value of any accelerated vesting of Proteostasis equity awards held by those officers.

Additionally, pursuant to the terms of the Merger Agreement, David Arkowitz, Kim C. Drapkin and Jeffery W. Kelly, Ph.D., who are currently directors of Proteostasis, will continue as directors of the combined organization after the Closing and will be due certain compensation as non-employee directors.

As of October 31, 2020, the directors and executive officers of Proteostasis owned, in the aggregate, approximately 1% of the outstanding voting shares of Proteostasis common stock. Each of Proteostasis’ officers and directors has entered into support agreements and lock-up agreements in connection with the Merger. The support agreements and lock-up agreements are discussed in greater detail in the section titled “Agreements Related to the Merger” in this proxy statement/prospectus/information statement. The Proteostasis board of directors was aware of these interests and considered them, among other matters, in the decision to approve the Merger Agreement. For more information, please see the section titled “The Merger — Interests of the Proteostasis Directors and Executive Officers in the Merger” of this proxy statement/prospectus/information statement.

In considering the recommendation of the Holdings and Yumanity boards of directors with respect to approving the Merger and related transactions by written consent, Holdings and Yumanity securityholders should be aware that certain members of the board of directors and executive officers of Holdings and Yumanity have interests in the Merger that may be different from, or in addition to, interests they have as Holdings and Yumanity securityholders. For example, all of Yumanity’s executive officers and all of its directors have options, subject to vesting, to purchase units of Holdings that will convert into options to purchase a number of shares of Proteostasis common stock (after giving effect to the Yumanity Reorganization); certain directors of Yumanity have warrants to purchase units of Holdings that will convert into warrants to purchase a number of shares of Proteostasis common stock (after giving effect to the Yumanity Reorganization); all of Yumanity’s directors and all its executive officers are expected to become directors and executive officers of Proteostasis upon the consummation of the Merger and all of Yumanity’s directors and executive officers are entitled to certain indemnification and liability insurance coverage pursuant to the terms of the Merger Agreement. In addition, certain of Yumanity’s executive officers and directors and affiliates of Holdings’ and Yumanity’s directors currently hold units of Holdings that will convert into shares of Proteostasis common stock (after giving effect to the Yumanity Reorganization).

As of October 31, 2020, all current directors and executive officers of Yumanity, together with their affiliates, owned approximately 26% of the shares of Yumanity capital stock, on an as-converted to common stock basis (and after giving effect to the Yumanity Reorganization). Certain Yumanity officers and directors, and their affiliates, have also entered into support agreements in connection with the Merger. The support agreements are discussed in greater detail in the section titled “Agreements Related to the Merger — Support Agreements and Written Consent” in this proxy statement/prospectus/information statement.

The boards of directors of Yumanity and Holdings were aware of these interests and considered them, among other matters, in their decisions to approve the Merger Agreement and the Yumanity Reorganization. For more information, please see the section titled “The Merger — Interests of the Yumanity Directors and Executive Officers in the Merger.”



 

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Certain Material U.S. Federal Income Tax Consequences of the Merger (see page 145)

Each of Proteostasis and Yumanity intends the Merger to qualify as a reorganization within the meaning of Section 368(a) of the Code. In general and subject to the qualifications and limitations set forth in the section titled “The Merger — Certain Material U.S. Federal Income Tax Consequences of the Merger,” if the Merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code, the material tax consequences to U.S. Holders (as defined in the section titled “The Merger — Certain Material U.S. Federal Income Tax Consequences of the Merger”) of Yumanity common stock will be as follows:

 

   

a Yumanity stockholder generally will not recognize gain or loss upon the exchange of Yumanity common stock for Proteostasis common stock pursuant to the Merger, except to the extent of cash received in lieu of a fractional share of Proteostasis common stock as described below;

 

   

a Yumanity stockholder who receives cash in lieu of a fractional share of Proteostasis common stock in the Merger generally will recognize capital gain or loss in an amount equal to the difference between the amount of cash received instead of a fractional share and the stockholder’s tax basis allocable to such fractional share;

 

   

a Yumanity stockholder’s aggregate tax basis for the shares of Proteostasis common stock received in the Merger (including any fractional share interest for which cash is received) generally will equal the stockholder’s aggregate tax basis in the shares of Yumanity common stock surrendered in the Merger;

 

   

the holding period of the shares of Proteostasis common stock received by a Yumanity stockholder in the Merger generally will include the holding period of the shares of Yumanity common stock surrendered in exchange therefor; and

 

   

if a Yumanity stockholder acquired different blocks of shares of Yumanity common stock at different times or at different prices, the shares of Proteostasis common stock received in the Merger (including fractional shares deemed received and redeemed as described below) will be allocated pro rata to each block of shares of Yumanity common stock, and the basis and holding period of such shares of Proteostasis common stock will be determined on a block-for-block approach depending on the basis and holding period of each block of shares of Yumanity common stock exchanged for such shares of Proteostasis common stock.

Tax matters are very complicated, and the tax consequences of the Merger to a particular Yumanity stockholder will depend on such stockholder’s circumstances. Accordingly, you are strongly urged to consult your tax advisor for a full understanding of the tax consequences of the Merger to you, including the applicability and effect of federal, state, local and non-U.S. income and other tax laws. For more information, please see the section titled “The Merger — Certain Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 142 of this proxy statement/prospectus/information statement.

Material U.S. Federal Income Tax Consequences of Receipt of CVRs and the Reverse Stock Split (see pages 172 and 180)

Proteostasis intends to report the issuance of the CVRs, to be received by Proteostasis stockholders pursuant to the Contingent Value Rights Agreement, to Proteostasis U.S. Holders (as defined in the section titled “Agreements Related to the Merger — Contingent Value Rights Agreement — Material U.S. Federal Income Tax Consequences of the Receipt of CVRs”) as a distribution of property with respect to its stock. Please review the information in the section titled “Agreements Related to the Merger — Contingent Value Rights Agreement — Material U.S. Federal Income Tax Consequences of the Receipt of CVRs” for a more complete description of the material U.S. federal income tax consequences of the receipt of CVRs to Proteostasis U.S. Holders, including possible alternative treatments.



 

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A Proteostasis U.S. Holder generally should not recognize gain or loss upon the Reverse Stock Split. Please review the information in the section titled “Proposal No. 2: Approval of the Amendment to the Certificate of Incorporation of Proteostasis Effecting the Proteostasis Reverse Stock Split — Certain Material U.S. Federal Income Tax Consequences of the Proteostasis Reverse Stock Split” beginning on page 180 of this proxy statement/prospectus/information statement for a more complete description of the material U.S. federal income tax consequences of the Proteostasis Reverse Stock Split to Proteostasis U.S. Holders.

The tax consequences to you of the receipt of CVRs and the Proteostasis Reverse Stock Split will depend on your particular facts and circumstances. You should consult your tax advisors as to the specific tax consequences to you.

Risk Factors (see page 36)

Both Proteostasis and Yumanity are subject to various risks associated with their businesses and their industries. In addition, the Merger, including the possibility that the Merger may not be completed, poses a number of risks to each company and its respective stockholders. These risks include the following:

Risks related to the Merger:

 

   

The Exchange Ratio is not adjustable based on the market price of Proteostasis common stock so the Merger consideration at the Closing may have a greater or lesser value than at the time the Merger Agreement was signed; however, the estimated Exchange Ratio is based upon Proteostasis’ capitalization immediately prior to the date of this proxy statement/prospectus/information statement, and will be adjusted based on the amount of Proteostasis net cash, and changes in the capitalization of Proteostasis or Yumanity prior to the consummation of the Merger;

 

   

Failure to complete the Merger may result in Proteostasis and Yumanity paying a termination fee or expenses to the other and could harm the common stock price of Proteostasis and future business and operations of each company;

 

   

The Merger may be completed even though material adverse changes may result solely from the announcement of the Merger, changes in the industry in which Proteostasis and Yumanity operate that apply to all companies generally and other causes;

 

   

Some Proteostasis and Yumanity officers and directors have conflicts of interest that may influence them to support or approve the Merger without regard to your interests;

 

   

The market price of the combined organization common stock may decline as a result of the Merger;

 

   

Proteostasis and Yumanity stockholders may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection with the Merger;

 

   

During the pendency of the Merger, Proteostasis and Yumanity may not be able to enter into a business combination with another party under certain circumstances because of restrictions in the Merger Agreement, which could adversely affect their respective businesses;

 

   

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;

 

   

Proteostasis stockholders may not receive any payment on the CVRs and the CVRs may otherwise expire valueless;

 

   

Because the lack of a public market for Yumanity shares makes it difficult to know the fair market value of Yumanity, the stockholders of Yumanity may receive consideration in the Merger that is less



 

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than the fair market value of the Yumanity shares and/or Proteostasis may pay more than the fair market value of the Yumanity shares; and

 

   

If the conditions to the Merger are not met, the Merger will not occur.

Risks related to Yumanity:

 

   

Yumanity’s historical operating results indicate substantial doubt exists related to its ability to continue as a going concern;

 

   

Yumanity has incurred significant operating losses since its inception and anticipates it will incur continued losses for the foreseeable future;

 

   

Even if this Merger is successful, Yumanity 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 Yumanity to delay, limit, or terminate its product development efforts or other operations;

 

   

Yumanity has concentrated its research and development efforts on the treatment of neurodegenerative diseases, a field that has seen limited success in drug development. Further, its 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;

 

   

Yumanity depends on its 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 Yumanity may develop. If any such collaborations are not successful, Yumanity may not be able to realize the market potential of those product candidates;

 

   

Yumanity may encounter difficulties in enrolling subjects in its clinical trials, thereby delaying or preventing development of its product candidates;

 

   

Yumanity’s clinical trials may fail to demonstrate adequate safety and efficacy of its product candidates, which would prevent, delay, or limit the scope of regulatory approval and commercialization;

 

   

Yumanity’s 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;

 

   

Yumanity faces significant competition in an environment of rapid technological and scientific change, and there is a possibility that its competitors may achieve regulatory approval before it does or develop therapies that are safer, more advanced, or more effective, which may negatively impact its ability to successfully market or commercialize any product candidates Yumanity may develop and ultimately harm its financial condition;

 

   

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

 

   

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



 

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Yumanity may not seek to protect its intellectual property rights in all jurisdictions throughout the world and Yumanity may not be able to adequately enforce its intellectual property rights even in the jurisdictions where Yumanity seeks protection.

Risks Related to the Combined Organization

 

   

The combined organization’s stock price is expected to be volatile, and the market price of its common stock may drop following the Merger;

 

   

The combined organization will need to raise additional financing in the future to fund its operations, which may not be available to it on favorable terms or at all; and

 

   

The combined organization will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.

These risks and other risks are discussed in greater detail under the section titled “Risk Factors” in this proxy statement/prospectus/information statement. Proteostasis and Yumanity both encourage you to read and consider all of these risks carefully.

Regulatory Approvals (see page 144)

In the United States, Proteostasis must comply with applicable federal and state securities laws and the rules and regulations of The Nasdaq Stock Market LLC (“Nasdaq”) in connection with the issuance of shares of Proteostasis common stock and the filing of this proxy statement/prospectus/information statement with the SEC. As of the date hereof, the Registration Statement, of which this proxy statement/prospectus/information statement is a part, has not become effective.

Nasdaq Stock Market Listing (see page 148)

Proteostasis common stock currently is listed on The Nasdaq Global Market under the symbol “PTI”. Proteostasis has filed an initial listing application with The Nasdaq Capital Market pursuant to Nasdaq rules relating to reverse mergers. If such application is accepted, Proteostasis anticipates that Yumanity’s common stock will be listed on The Nasdaq Capital Market following the Closing under Proteostasis’ new name, “Yumanity Therapeutics, Inc.” with the trading symbol “YMTX”.

Anticipated Accounting Treatment (see page 148)

The Merger is expected to be treated by Proteostasis as a reverse merger accounted for as an asset acquisition in accordance with accounting principles generally accepted in the United States. For accounting purposes, Yumanity is considered to be acquiring Proteostasis in the Merger, and the transaction is expected to be recorded as an asset acquisition.

Appraisal Rights and Dissenters’ Rights (see page 148)

Holders of Proteostasis common stock are not entitled to appraisal rights in connection with the Merger. The sole Yumanity stockholder is entitled to appraisal rights in connection with the Merger under Delaware law, but those rights have been waived pursuant to the Merger Agreement. For more information about such rights, see the provisions of Section 262 of the Delaware General Corporation Law (the “DGCL”), attached hereto as Annex E, and the section titled “The Merger — Appraisal Rights and Dissenters’ Rights” in this proxy statement/prospectus/information statement.



 

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Comparison of Stockholder Rights (see page 292)

Both Proteostasis and Yumanity are incorporated under the laws of the State of Delaware and, accordingly, the rights of the stockholders of each are currently, and will continue to be, governed by the DGCL. If the Merger is completed, Yumanity stockholders will become stockholders of Proteostasis, and their rights will be governed by the DGCL, the bylaws of Proteostasis and, assuming Proteostasis Proposal No. 2 is approved by Proteostasis stockholders at the Proteostasis special meeting, the fifth amended and restated certificate of incorporation of Proteostasis, as amended by the certificate of amendment attached to this proxy statement/prospectus/information statement as Annex B. The rights of Proteostasis stockholders contained in the fifth amended and restated certificate of incorporation, as amended and bylaws of Proteostasis differ from the rights of Yumanity stockholders under the certificate of incorporation and bylaws of Yumanity, as more fully described under the section titled “Comparison of Rights of Holders of Proteostasis Stock and Yumanity Stock” in this proxy statement/prospectus/information statement.



 

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YUMANITY REORGANIZATION

Immediately prior to completing the Merger, Yumanity will complete a series of transactions pursuant to which Holdings, the sole stockholder and holding company parent of Yumanity, will merge with and into Yumanity, and Yumanity will continue to exist as the surviving corporation. These transactions are referred to through this proxy statement/prospectus/information statement collectively as the “Yumanity Reorganization.” To consummate the Yumanity Reorganization, Yumanity will file a certificate of merger with the Secretary of State of the State of Delaware.

In connection with the Yumanity Reorganization, by operation of law, Yumanity will acquire all assets of Holdings and assume all of its liabilities and obligations, and all securities of Holdings will be converted into and become securities of Yumanity. Following the Yumanity Reorganization, Yumanity’s equity capitalization will consist entirely of shares of common stock and options and warrants exercisable for common stock, and there will no longer be any securities of Holdings outstanding at the effective time of the Merger. The purpose of the Yumanity Reorganization is to reorganize the corporate structure so that Yumanity would continue as a corporation and so that Yumanity’s existing investors would own Yumanity capital stock rather than equity interests in a limited liability company.

Immediately prior to the completion of the Yumanity Reorganization, Yumanity will be governed by an amended certificate of incorporation, with such amendment to be filed with the Delaware Secretary of State.

Assuming for purposes of the conversion of outstanding incentive units of Holdings, a Proteostasis price per share of $1.05, which was the closing price of Proteostasis’ common stock on November 3, 2020, as reported on The Nasdaq Stock Market, Yumanity will have an aggregate of 28,535,351 shares of common stock issued and outstanding following the Yumanity Reorganization. Because the market price of Proteostasis common stock is subject to fluctuation, the aggregate number of shares of common stock of Yumanity that will be outstanding following the Yumanity Reorganization may increase or decrease.

For the convenience of the reader, except as context otherwise requires, all information included in this proxy statement/prospectus/information statement is presented giving effect to the Yumanity Reorganization, assuming for purposes of the conversion of outstanding incentive units, a Proteostasis price per share of $1.05, which was the closing price of Proteostasis’ common stock on November 3, 2020, as reported on The Nasdaq Stock Market.

 

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SELECTED HISTORICAL AND UNAUDITED PRO FORMA

COMBINED FINANCIAL DATA

The following tables present summary historical financial data for Proteostasis and Yumanity, summary unaudited pro forma combined financial data for Proteostasis and Yumanity, and comparative historical and unaudited pro forma per share data for Proteostasis and Yumanity.

Selected Historical Consolidated Financial Data of Proteostasis

The following tables summarize Proteostasis’ consolidated financial data. The consolidated statement of operations data for the years ended December 31, 2018 and 2019 and the consolidated balance sheet data as of December 31, 2018 and 2019 have been derived from the audited consolidated financial statements included in Proteostasis’ Annual Report on Form 10-K, which is incorporated herein by reference. The consolidated statement of operations data for the six months ended June 30, 2019 and 2020 and the consolidated balance sheet data as of June 30, 2020 have been derived from the unaudited condensed consolidated financial statements included in Proteostasis’ Quarterly Report on Form 10-Q, which is incorporated herein by reference. The unaudited consolidated financial statements of Proteostasis have been prepared on the same basis as the audited consolidated financial statements of Proteostasis. In the opinion of Proteostasis’ management, the unaudited consolidated financial data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements. You should read the following selected consolidated financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Proteostasis’ financial statements and the related notes incorporated by reference. Proteostasis’ historical results are not necessarily indicative of results that should be expected in any future period and Proteostasis’ results for the interim period are not necessarily indicative of the results that should be expected for the full year ending December 31, 2020.

 

    For the Year
Ended December 31,
    For the Six Months
Ended June 30,
 
    2018     2019     2019     2020  
    (in thousands, except share and per share data)  

Revenue

  $ 2,840     $ 5,000     $ 5,000     $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

       

Research and development

    50,312       52,319       33,702       11,102  

General and administrative

    15,710       13,835       7,626       7,953  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    66,022       66,154       40,698       19,055  
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (63,182     (61,154     (35,698     (19,055

Interest income

    872       1,093       654       261  

Interest expense

    —         —         —         (9

Other income, net

    478       936       608       32  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (61,832   $ (59,125   $ (34,436   $ (18,771
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share — basic and diluted

  $ (1.61   $ (1.16   $ (0.67   $ (0.36
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding — basic and diluted

    38,495,103       51,139,531       51,037,514       52,147,145  
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income:

       

Unrealized gain (loss) on investments

    3       6       32       (7
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

  $ (61,829   $ (59,119   $ (34,404   $ (18,778
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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     As of December 31,
2019
     As of June 30,
2020
 
     (in thousands)  

Consolidated Balance Sheet Data:

     

Cash, cash equivalents and short-term investments

     25,008        48,866  

Restricted cash

     828        828  

Working capital(1)

     60,571        43,230  

Total assets

     84,724        63,968  

Total stockholders’ equity

     62,738        44,936  

 

(1)

Working capital is defined as current assets less current liabilities.

Selected Historical Consolidated Financial Data of Yumanity Holdings, LLC

The following tables summarize Holdings’ consolidated financial data. The consolidated statement of operations data for the years ended December 31, 2018 and 2019 and the consolidated balance sheet data as of December 31, 2018 and 2019 have been derived from Holdings’ audited consolidated financial statements included elsewhere in this proxy statement/prospectus/information statement. The consolidated statement of operations data for the six months ended June 30, 2019 and 2020 and the consolidated balance sheet data as of June 30, 2020 have been derived from Holdings’ unaudited consolidated financial statements included elsewhere in this proxy statement/prospectus/information statement. The unaudited consolidated financial statements of Holdings have been prepared on the same basis as the audited consolidated financial statements of Holdings. In the opinion of Yumanity’s management, the unaudited consolidated financial data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements. You should read the following selected consolidated financial data together with “Yumanity Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Holdings’ consolidated financial statements and the related notes included elsewhere in this proxy statement/prospectus/information statement. Holdings’ historical results are not necessarily indicative of results that should be expected in any future period and Holdings’ results for the interim period are not necessarily indicative of the results that should be expected for the full year ending December 31, 2020.

 

     Year Ended December 31,      Six Months Ended June 30,  
     2018      2019      2019      2020  
     (in thousands)  

Consolidated Statement of Operations Data:

  

Operating expenses:

           

Research and development

   $ 17,822      $ 22,969      $ 11,017      $ 8,968  

General and administrative

     5,567        7,062        2,981        4,631  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     23,389        30,031        13,998        13,599  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from operations

     (23,389      (30,031      (13,998      (13,599
  

 

 

    

 

 

    

 

 

    

 

 

 

Other income (expense):

           

Change in fair value of preferred unit warrant liability

     6        12        9        26  

Interest expense

     (740      (1,209      (613      (909

Interest income and other income (expense), net

     536        530        366        45  

Loss on debt extinguishment

     —          (511      —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income (expense), net

     (198      (1,178      (238      (838
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

   $ (23,587    $ (31,209    $ (14,236    $ (14,437
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     As of December 31,      As of June 30,  
     2018      2019      2020  
     (in thousands)  

Consolidated Balance Sheet Data:

        

Cash, cash equivalents and marketable securities

   $ 39,965      $ 15,368      $ 23,205  

Working capital(1)

     34,973        11,214        18,315  

Total assets

     42,000        17,606        50,247  

Long-term debt, net of discount, including current portion

     9,953        14,470        15,825  

Capital (finance) lease obligations, including current portion

     1,417        459        284  

Preferred unit warrant liability

     50        261        235  

Preferred units

     89,699        89,699        103,949  

Total members’ deficit

     (62,244      (91,900      (98,280

 

(1)

Working capital is defined as current assets less current liabilities.

Selected Unaudited Pro Forma Condensed Combined Financial Data of Proteostasis and Yumanity

The following unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting under U.S. GAAP. For accounting purposes, Yumanity is considered to be acquiring Proteostasis and the merger is expected to be accounted for as an asset acquisition. Yumanity is considered the accounting acquirer even though Proteostasis will be the issuer of the common stock in the merger. To determine the accounting for this transaction under U.S. GAAP, a company must assess whether an integrated set of assets and activities should be accounted for as an acquisition of a business or an asset acquisition. The guidance requires an initial screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen is met, the set is not a business. The initial screen test is not met as there is no single asset or group of similar assets for Proteostasis will represent a significant majority in this acquisition. However, in connection with the acquisition, Proteostasis does not have an organized workforce that significantly contributes to its ability to create output, and substantially all of its fair value is concentrated in cash, working capital, leases and in process research and development (“IPR&D”). As such, the acquisition is expected to be treated as an asset acquisition.

The unaudited pro forma condensed combined balance sheet assumes that Yumanity’s corporate reorganization from a limited liability company (“LLC”) to a corporation and the merger were consummated as of June 30, 2020 and combines the historical balance sheets of Proteostasis and Yumanity as of such date. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2019 and the six months ended June 30, 2020 assumes that the Yumanity corporate reorganization from a LLC to a corporation and the merger were consummated as of January 1, 2019 and combines the historical results of Proteostasis and Yumanity for the respective periods presented.

The selected unaudited pro forma condensed combined financial data are presented for illustrative purposes only and are not necessarily indicative of the combined financial position or results of operations of future periods or the results that actually would have been realized had the entities been a single entity during these periods. The selected unaudited pro forma condensed combined financial data for the year ended December 31, 2019 and as of and for the six months ended June 30, 2020 are derived from the unaudited pro forma condensed combined financial information and should be read in conjunction with that information. For more information, please see the section entitled “Unaudited Pro Forma Condensed Combined Financial Information” in this proxy statement/ prospectus/information statement.

Immediately prior to the effective time of the Merger, Holdings will merge with and into Yumanity, and Yumanity will continue to exist as the surviving corporation (the “Yumanity Reorganization”). In connection

 

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with the Yumanity Reorganization, all securities of Holdings will be converted into and become securities of Yumanity, and there will no longer be any securities of Holdings outstanding at the effective time of the Merger.

At the effective time of the Merger, each share of Yumanity common stock will be converted into the right to receive a number of shares of Proteostasis common stock. The final exchange ratio (the “Exchange Ratio”) will be determined pursuant to a formula described in more detail in the Merger Agreement and in this proxy statement/prospectus/information statement which will impact the number of shares issued in the Merger. Immediately after the consummation of the Merger, based solely on the estimated Exchange Ratio as described in this proxy statement/prospectus/information statement, Yumanity securityholders would own approximately 70.9% of the Proteostasis common stock on a fully diluted basis as defined in the Merger Agreement, and Proteostasis securityholders would own approximately 29.1% of the Proteostasis common stock on a fully diluted basis as defined in the Merger Agreement, subject to adjustment of the Exchange Ratio as set forth in the Merger Agreement. Under certain circumstances further described in the Merger Agreement, the ownership percentages are subject to adjustment to the extent that Proteostasis’ “net cash” as of the Anticipated Closing Date is below $32.5 million or above $35.0 million. Proteostasis currently expects to have between $28-29 million of net cash as of Closing.

Selected Unaudited Pro Forma Condensed Combined Statements of Operations Data

 

     Six Months
Ended
June 30,
2020
     Year Ended
December 31,
2019
 
     (in thousands, except per
share data)
 

Revenue

   $ —        $ 5,000  

Research and development expense

     20,070        75,288  

General and administrative expense

     12,199        20,775  

Loss from operations

     (32,269      (91,063

Net loss attributable to common stockholders

   $ (32,823    $ (90,212

Net loss per share, basic and diluted

   $ (0.15    $ (0.52

Selected Unaudited Pro Forma Condensed Combined Balance Sheet Data

 

     As of
June 30,
2020
 
     (in thousands)  

Cash and cash equivalents

   $ 66,073  

Working capital, net

     47,232  

Total assets

     113,077  

Long-term debt, net of discount

     15,825  

Accumulated deficit

     (132,366

Total stockholders’ equity

     35,154  

 

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Comparative Historical and Unaudited Pro Forma Per Share Data

The information below reflects the historical net loss and book value per share of Proteostasis common stock and the historical net loss and book value per share of Yumanity common units in comparison with the unaudited pro forma net loss and book value per share after giving effect to the Pro Forma Events on an asset acquisition basis. You should read the tables below in conjunction with the audited and unaudited consolidated financial statements of Proteostasis included in this proxy statement/prospectus/information statement and the audited and unaudited financial statements of Yumanity included in this proxy statement/prospectus/information statement and the related notes and the unaudited pro forma condensed combined financial information and notes related to such financial statements included elsewhere in this proxy statement/prospectus/information statement.

 

     Six Months
Ended
June 30,
2020
     Year
Ended
December 31,
2019
 

Proteostasis Historical Per Common Share Data:

     

Basic and diluted net loss per share

   $ (0.36    $ (1.16

Book value per share(1)

   $ 0.86      $ 1.22  

Yumanity Historical Per Members’ Unit Data:

     

Basic and diluted net loss per unit

   $ (0.75    $ (3.04

Book value per unit(1)

   $ (9.58    $ (6.06

Combined Unaudited Pro Forma Per Common Share Data:

     

Basic and diluted net loss per share

   $ (0.15    $ (0.52

Book value per share(2)

   $ 0.20                  

Yumanity Pro Forma Equivalent Per Common Share Data:(3)

     

Basic and diluted net loss per share

   $ (0.64    $ (2.23

Book value per share

   $ 0.87                  

 

(1)

Historical book value per share/unit is calculated by taking total stockholders’/Members’ equity (deficit) divided by total outstanding common shares/members’ units.

(2)

Combined pro forma book value per share is calculated by taking pro forma combined total stockholders’ equity divided by pro forma combined total outstanding common shares.

(3)

Yumanity pro forma equivalent data per common share is calculated by applying the Exchange Ratio of 4.3084 to the unaudited pro forma combined per share data.

 

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MARKET PRICE AND DIVIDEND INFORMATION

Proteostasis Common Stock

Proteostasis common stock is listed on The Nasdaq Stock Market under the symbol “PTI.” The closing price of Proteostasis common stock on August 21, 2020, the full trading day immediately prior to the public announcement of the merger on August 24, 2020, as reported on The Nasdaq Stock Market, was $1.30 per share. The closing price of Proteostasis common stock on November 3, 2020, as reported on The Nasdaq Stock Market, was $1.05 per share.

Because the market price of Proteostasis common stock is subject to fluctuation, the market value of the shares of Proteostasis common stock that Yumanity stockholders will be entitled to receive in the Merger may increase or decrease.

Assuming approval of Proteostasis Proposal Nos. 1 and 2 and successful application for initial listing with The Nasdaq Capital Market, following the consummation of the Merger, Proteostasis common stock will be listed on The Nasdaq Capital Market and will trade under Proteostasis’ new name, “Yumanity Therapeutics, Inc.” and new trading symbol, “YMTX.”

As of November 5, 2020, the record date for the Proteostasis special meeting, Proteostasis had approximately 21 holders of record of its common stock. As of November 5, 2020, Holdings was the sole record holder of Yumanity common stock and Yumanity would have had approximately 96 holders of record of its common stock, on an as-converted-basis, after giving effect to the Yumanity Reorganization. For detailed information regarding the beneficial ownership of certain stockholders of Proteostasis upon consummation of the Merger, see the section titled “Principal Stockholders of Combined Organization” in this proxy statement/prospectus/information statement.

Dividends

Proteostasis

Proteostasis has never declared or paid any cash dividends on its capital stock, and it does not currently anticipate declaring or paying cash dividends on its capital stock in the foreseeable future. Proteostasis intends to retain all future earnings, if any, to finance the operation and expansion of Proteostasis’ business, except pursuant to the CVR Agreement. Any future determination relating to Proteostasis’ dividend policy will be made at the discretion of Proteostasis’ board of directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual restrictions and covenants and other factors that Proteostasis’ board of directors may deem relevant.

Yumanity

Neither Yumanity nor Holdings has ever declared or paid any cash dividends on shares of Yumanity capital stock or units of Holdings, respectively. Yumanity anticipates that the combined organization will retain all of its future earnings to advance the clinical trials and preclinical studies for its products, and does not anticipate paying any cash dividends on shares of the combined organization’s capital stock in the foreseeable future. Any future determination to declare cash dividends on shares of the combined organization’s common stock will be made at the discretion of its board of directors, subject to applicable law and contractual restrictions and will depend on its financial condition, results of operations, capital requirements, general business conditions and other factors that its board of directors may deem relevant.

 

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RISK FACTORS

The combined organization will be faced with a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. In addition to the other information contained in this proxy statement/prospectus/information statement, you should carefully consider the material risks described below and those described in the section of this proxy statement/prospectus/information statement titled “Forward-Looking Statements” before deciding how to vote your shares of stock. In addition, you should read and consider the risks associated with the business of Proteostasis because these risks may also affect the combined organization — these risks can be found in Proteostasis’ Annual Report on Form 10-K, as updated by subsequent Quarterly Reports on Form 10-Q, all of which are filed with the SEC and incorporated by reference into this proxy statement/prospectus/information statement. You should also read and consider the other information in this proxy statement/prospectus/information statement and the other documents incorporated by reference into this proxy statement/prospectus/information statement. Please see the sections titled “Where You Can Find More Information” and “Incorporation of Certain Documents by Reference” in this proxy statement/prospectus/information statement.

Risks Related to the Merger

The Exchange Ratio is not adjustable based on the market price of Proteostasis common stock so the Merger consideration at the Closing may have a greater or lesser value than at the time the Merger Agreement was signed.

The estimated Exchange Ratio calculation contained herein is based upon Proteostasis’ and Yumanity’s capitalization immediately prior to the date of this proxy statement/prospectus/information statement, and will be adjusted based on the amount of Proteostasis net cash, and changes in the capitalization of Proteostasis or Yumanity prior to the Closing, not taking into account the Proteostasis Reverse Stock Split but taking into account the Yumanity Reorganization, as described in the section titled “The Merger — Merger Consideration and Adjustment” of this proxy statement/prospectus/information statement. Any changes in the market price of Proteostasis common stock before the completion of the Merger will not affect the number of shares Yumanity securityholders will be entitled to receive pursuant to the Merger Agreement. Therefore, if before the completion of the Merger the market price of Proteostasis common stock declines from the market price on the date of the Merger Agreement, then Yumanity securityholders could receive merger consideration with substantially lower value. Similarly, if before the completion of the Merger the market price of Proteostasis common stock increases from the market price on the date of the Merger Agreement, then, Yumanity securityholders could receive merger consideration with considerably more value for their shares of Yumanity capital stock than the parties had negotiated for in the establishment of the Exchange Ratio. The Merger Agreement does not include a price-based termination right. Because the Exchange Ratio does not adjust as a result of changes in the value of Proteostasis common stock, for each one percentage point that the market value of Proteostasis common stock rises or declines, there is a corresponding one percentage point rise or decline, respectively, in the value of the total merger consideration issued to Yumanity securityholders.

Failure to complete the Merger may result in Proteostasis or Yumanity paying a termination fee or reimbursing expenses to the other party and could harm the common stock price of Proteostasis and future business and operations of each company.

If the Merger is not completed, Proteostasis and Yumanity are subject to the following risks:

 

   

if the Merger Agreement is terminated under certain circumstances, Proteostasis or Yumanity will be required to pay third party expenses incurred by other party, up to a maximum of $1,460,000 (in the case of Yumanity), or up to a maximum of $703,000 (in the case of Proteostasis);

 

   

if the Merger Agreement is terminated under certain circumstances, Proteostasis or Yumanity will be required to pay the other party a termination fee equal to $4,380,000 (in the case of Yumanity) or $2,100,000 (in the case of Proteostasis);

 

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the Merger Agreement contains covenants relating to each party’s solicitation of competing acquisition proposals and the conduct of each company’s respective businesses between the date of signing the Merger Agreement and the completion of the Merger. As a result, significant business decisions and transactions of either Proteostasis or Yumanity before the completion of the Merger require the consent of the other party. Accordingly, each party may be unable to pursue business opportunities that would otherwise be in its respective best interests as standalone companies. If the Merger Agreement is terminated after Proteostasis has invested significant time and resources in the transaction process, Proteostasis will have a limited ability to continue its current operations without obtaining additional financing to fund its operations;

 

   

Some of Proteostasis’ or Yumanity’s suppliers, collaborators and other business partners may seek to change or terminate their relationships with Proteostasis or Yumanity, as applicable, as a result of the Merger;

 

   

Proteostasis’ or Yumanity’s respective management teams may be distracted from day to day operations as a result of the Merger;

 

   

the price of Proteostasis stock may decline and remain volatile; and

 

   

each of Proteostasis and Yumanity have incurred and expect to continue to incur significant expenses related to the Merger, some which must be paid even if the Merger is not completed.

In addition, if the Merger Agreement is terminated and the Proteostasis board of directors or the Yumanity board of directors determines to seek another business combination, there can be no assurance that either Proteostasis or Yumanity 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. Proteostasis’ or Yumanity’s 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 Proteostasis or Yumanity 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 said to have a material adverse effect on Proteostasis or Yumanity, including:

 

   

any effect resulting from the execution, delivery, announcement or performance of obligations under the Merger Agreement or the announcement or pendency or anticipated consummation of the Merger or any related transactions;

 

   

any natural disaster, any public health event (including any epidemic, pandemic, or disease outbreak (including the novel coronavirus (COVID-19) pandemic)) or any act of terrorism, sabotage, military action or war (whether or not declared) or escalation or any worsening thereof;

 

   

any change in United States generally accepted accounting principles (“GAAP”) or any change in applicable laws, rules or regulations or the interpretation thereof;

 

   

any conditions generally affecting the industries in which Yumanity and Proteostasis and their respective subsidiaries participate or the United States or global economy or capital markets as a whole to the extent such conditions do not have a disproportionate impact on Yumanity or Proteostasis and their respective subsidiaries, as applicable;

 

   

any failure by Yumanity or Proteostasis to meet internal projections or forecasts or third-party revenue or earnings predictions for any period ending on or after the date of the Merger Agreement; or

 

   

the resignation or termination of any director or officer of Yumanity or Proteostasis.

 

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If adverse changes occur and Proteostasis and Yumanity still complete the Merger, the combined organization stock price may suffer. This in turn may reduce the value of the Merger to the stockholders of Proteostasis, Yumanity or both.

Some Proteostasis and Yumanity 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 officers and directors of Proteostasis and Yumanity 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 of the combined organization in accordance with Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). For example, Proteostasis has entered into post-employment compensation arrangements with its named executive officers. For additional information, please see the section titled “Employment Arrangements with Proteostasis’ Named Executive Officers” below.

Based on the terms of their respective employment agreements and the Retention Program, Proteostasis’ executive officers will be entitled to receive a total value of approximately $1.7 million (collectively, not individually) in connection with the consummation of the Merger and the associated termination of their employment from Proteostasis, not including the value associated with the acceleration of their outstanding equity awards.

Additionally, the directors and officers of Proteostasis are parties to the Proteostasis support agreements and lock-up agreements with Proteostasis and Yumanity.

The Proteostasis board of directors was aware of these interests and considered them, among other matters, in the decision to approve the Merger Agreement. For more information, please see the section titled “The Merger — Interests of the Proteostasis Directors and Executive Officers in the Merger” of this proxy statement/prospectus/information statement.

All of Yumanity’s executive officers and all of its directors have options, subject to vesting, to purchase units of Holdings that will convert into options to purchase a number of shares of Proteostasis common stock (after giving effect to the Yumanity Reorganization); certain directors of Yumanity have warrants to purchase units of Holdings that will convert into warrants to purchase a number of shares of Proteostasis common stock (after giving effect to the Yumanity Reorganization); all of Yumanity’s directors and all its executive officers are expected to become directors and executive officers of Proteostasis upon the consummation of the Merger; and all of Yumanity’s directors and executive officers are entitled to certain indemnification and liability insurance coverage pursuant to the terms of the Merger Agreement. In addition, certain of Yumanity’s executive officers and directors and affiliates of Holdings’ and Yumanity’s directors currently hold units of Holdings that will convert into shares of Proteostasis common stock (after giving effect to the Yumanity Reorganization).

These interests, among others, may influence the officers and directors of Proteostasis and Yumanity to support or approve the Merger. For more information concerning the interests of Proteostasis and Yumanity executive officers and directors, see the sections titled “The Merger — Interests of the Proteostasis Directors and Executive Officers in the Merger” and “The Merger — Interests of the Yumanity Directors and Executive Officers in the Merger” in this proxy statement/prospectus/information statement.

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 Proteostasis common stock may decline as a result of the Merger for a number of reasons including if:

 

   

investors react negatively to the prospects of the combined organization’s business and prospects from the Merger;

 

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the effect of the Merger on the combined organization’s business and prospects is not consistent with the expectations of financial or industry analysts; or

 

   

the combined organization does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial or industry analysts.

Proteostasis and Yumanity 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, Proteostasis and Yumanity 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, Proteostasis and Yumanity 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 the ability of Proteostasis and Yumanity 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 each of Proteostasis and Yumanity 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 Proteostasis 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, Proteostasis or Yumanity would be required to pay to the other party a termination fee equal to $2,100,000, in the case of Proteostasis, or $4,380,000, in the case of Yumanity. This termination fee may discourage third parties from submitting alternative takeover proposals to Proteostasis or Yumanity or their stockholders, and may cause the respective boards of directors to be less inclined to recommend an alternative proposal.

Proteostasis stockholders may not receive any payment on the CVRs and the CVRs may otherwise expire valueless.

The right of Proteostasis stockholders to receive any future payment for or derive any value from the CVRs will be contingent solely upon Proteostasis’ (or the combined organization’s) ability to monetize all or any part of the CF Assets through a CF Asset Monetization within the time periods specified in the CVR Agreement and the consideration received being greater than the amounts permitted to be reimbursed to Proteostasis under the CVR

 

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Agreement. If a CF Asset Monetization is not achieved within the time periods specified in the CVR Agreement or the consideration received is not greater than the amounts permitted to be reimbursed to Proteostasis, no payments will be made under the CVR Agreement, and the CVRs will expire valueless.

Following the Effective Time, Yumanity (as successor in interest to Proteostasis) 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.

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.

The tax treatment of the CVRs is uncertain.

Proteostasis intends to treat the issuance of the CVRs to the persons who prior to completion of the merger were Proteostasis stockholders as a distribution of property with respect to the Proteostasis 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 issuance of the CVRs may be treated as a distribution of equity with respect to Proteostasis 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. For more information regarding the U.S. federal income tax consequences of the CVRs, see the section titled “Agreements Related to the Merger–Contingent Value Rights Agreement–Material U.S. Federal Income Tax Consequences of the Receipt of CVRs” beginning on page 172 of this proxy statement/prospectus/information statement.

Proteostasis 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, Proteostasis instructed MTS not to assign any value to the CF Assets in light of Proteostasis’ ongoing negotiations with potential purchasers of the CF Assets. Additionally, Proteostasis believes 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 Proteostasis 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 Proteostasis 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, Proteostasis stockholders may not receive any separate consideration for the CF Assets.

Because the lack of a public market for Yumanity shares makes it difficult to know the fair market value of Yumanity, the stockholders of Yumanity may receive consideration in the Merger that is less than the fair market value of the Yumanity shares.

The outstanding capital stock of Yumanity is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Yumanity. Because the percentage of Proteostasis equity to be issued to Yumanity stockholders was determined based on negotiations between the parties, it is possible that the value of the Proteostasis common stock to be received by Yumanity stockholders will be less than the fair market value of Yumanity, or Proteostasis may pay more than the aggregate fair market value for Yumanity.

 

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The combined organization will incur significant transaction costs as a result of the Merger, including investment banking, legal and accounting fees. In addition, the combined organization will incur significant operating expenses which cannot be accurately estimated at this time. Actual transaction costs may substantially exceed Yumanity’s estimates and may have an adverse effect on the combined organization’s financial condition and operating results.

If the conditions to the Merger are not met, the Merger will not occur.

Even if the Merger is approved by the stockholders of Proteostasis and Yumanity, specified conditions must be satisfied or waived to complete the Merger. These conditions are set forth in the Merger Agreement and described in the section titled “The Merger Agreement — Conditions to the Completion of the Merger” in this proxy statement/prospectus/information statement. Proteostasis and Yumanity 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 Proteostasis and Yumanity each may lose some or all of the intended benefits of the Merger.

If the Merger does not qualify as a “reorganization” for U.S. federal income tax purposes, U.S. Holders of Yumanity common stock will be required to recognize gain or loss for U.S. federal income tax purposes upon the exchange of their Yumanity common stock for Proteostasis common stock in the Merger.

The U.S. federal income tax consequences of the Merger to U.S. Holders (as defined in the section titled “The Merger — Certain Material U.S. Federal Income Tax Consequences of the Merger”) will depend on whether the Merger qualifies as a “reorganization” for U.S. federal income tax purposes. If the Merger fails to qualify as a reorganization within the meaning of Section 368(a) of the Code, a U.S. Holder of Yumanity common stock would recognize gain or loss for U.S. federal income tax purposes on each share of Yumanity common stock surrendered in the Merger for Proteostasis common stock and any cash received in lieu of a fractional share. For a more complete discussion of the material U.S. federal income tax consequences of the Merger, please carefully review the information set forth in the section titled “The Merger —Certain Material U.S. Federal Income Tax Consequences of the Merger” in this proxy statement/prospectus/information statement.

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

Proteostasis stockholders may from time-to-time seek to acquire a controlling stake in Proteostasis, 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 Proteostasis’ operations and divert the attention of the Proteostasis board of directors and senior management from the pursuit of the Merger. These actions could adversely affect Proteostasis’ operations, financial condition, ability to consummate the merger and Proteostasis’ common stock value.

Proteostasis and Yumanity are involved in litigation in connection with the Merger, which could divert the attention of Proteostasis and Yumanity 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

 

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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 Proteostasis and Proteostasis’s 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 Proteostasis 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 Proteostasis 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 Proteostasis will be successful.

Proteostasis and Yumanity 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, which could adversely affect the business of Proteostasis, Yumanity and the combined organization. At present, Proteostasis is unable to estimate potential losses, if any, related to the lawsuit.

Risks Related to the Proposed Proteostasis Reverse Stock Split

The proposed Proteostasis Reverse Stock Split may not increase the combined organization’s stock price over the long-term.

Although the principal purpose of the proposed Proteostasis Reverse Stock Split is to provide for sufficient authorized shares of Proteostasis common stock to issue shares of Proteostasis common stock in the Merger, another effect of the share combination is an increase in the per-share market price of Proteostasis common stock. It cannot be assured, however, that the per-share market price of Proteostasis common stock will remain at such increased level for any meaningful period of time. While the reduction in the number of outstanding shares of Proteostasis common stock should proportionally increase the market price of Proteostasis common stock, it cannot be assured that the proposed Proteostasis Reverse Stock Split will increase the market price of Proteostasis common stock by a multiple of the proposed Proteostasis Reverse Stock Split ratio, or result in any permanent or sustained increase in the market price of Proteostasis common stock, which is dependent upon many factors, including the combined organization’s business and financial performance, general market conditions and prospects for future success. Therefore, while the stock price of the combined organization might meet the continued listing requirements for The Nasdaq Stock Market initially, it cannot be assured that it will continue to do so.

The proposed Proteostasis Reverse Stock Split may decrease the liquidity of the combined organization’s common stock.

Although the Proteostasis board of directors believes that the anticipated increase in the market price of the combined organization’s common stock could encourage interest in its common stock and possibly promote greater liquidity for its stockholders, such liquidity could also be adversely affected by the reduced number of shares outstanding after the proposed Proteostasis Reverse Stock Split. The reduction in the number of outstanding shares may lead to reduced trading and a smaller number of market makers for Proteostasis common stock.

The proposed Proteostasis Reverse Stock Split may lead to a decrease in the combined organization’s overall market capitalization.

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it would have been prior to the proposed Proteostasis Reverse Stock Split. A reverse stock split may be viewed negatively by the market and, consequently, can lead to a decrease in the combined organization’s overall market capitalization. If the per share market price does not increase in proportion to the proposed Proteostasis Reverse Stock Split ratio, then the value of the combined organization, as measured by its stock capitalization, will be reduced. In some cases, the per-share stock price of companies that have effected reverse stock splits subsequently declined back to pre-reverse split levels, and accordingly, it cannot be assured that the total market value of Proteostasis common stock will remain the same after the proposed Proteostasis Reverse Stock Split is effected, or that the proposed Proteostasis Reverse Stock Split will not have an adverse effect on the stock price of Proteostasis common stock due to the reduced number of shares outstanding after the proposed Proteostasis Reverse Stock Split.

Risks Related to Proteostasis’ Capital Requirements, Finances and Operations if the Merger is Not Completed

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

The consummation of the Merger between Proteostasis and Yumanity is subject to a number of closing conditions, including approval by Proteostasis’ and Yumanity’s respective stockholders and other customary closing conditions. 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 Proteostasis and Yumanity is not consummated, Proteostasis may be subject to a number of material risks, and its business and stock price could be adversely affected, as follows:

 

   

Proteostasis has incurred and expects to continue to incur significant expenses related to the Merger with Yumanity, even if the Merger is not consummated;

 

   

Proteostasis could be obligated to pay Yumanity a $2,100,000 termination fee and expense reimbursements up to $703,000 in connection with the termination of the Merger Agreement, depending on the reason for the termination;

 

   

The market price of Proteostasis’ common stock may decline to the extent that the current market price reflects a market assumption that the Merger will be completed; and

 

   

Nasdaq could determine to delist Proteostasis’ common stock, which could have an adverse effect on the value of Proteostasis’ common stock and any future ability to raise capital.

If the Merger is not completed, Proteostasis may be unsuccessful in completing an alternative strategic transaction on terms that are as favorable as the terms of the proposed transaction with Yumanity, or at all, and Proteostasis may be unable to reestablish a viable operating business.

Proteostasis has generated limited revenue to date from its collaboration agreements and research grant, and has not generated revenue from any product sales. Its assets currently consist primarily of cash, cash equivalents and short-term investments, its intellectual property portfolio, license and collaboration agreements, its remaining assets, its listing on The Nasdaq Stock Market and the Merger Agreement with Yumanity. While Proteostasis has entered into the Merger Agreement with Yumanity, the consummation of the Merger with Yumanity may be delayed or may not occur at all. If the Merger is not completed, the Proteostasis board of directors may elect 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 the Proteostasis board of directors determines to pursue an alternative transaction, the terms of any such alternative transaction may not be as favorable to Proteostasis and its stockholders as the terms of the Merger with Yumanity, and Proteostasis 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 to redesign its products or pursue the development of products and services pursuant to its

 

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collaboration agreements, it is unlikely that Proteostasis would be able to obtain the funding required to recommence its product development activities on terms favorable to its stockholders, or at all.

If the Merger is not completed, Proteostasis’ board of directors may decide to pursue a dissolution and liquidation of Proteostasis. In such an event, the amount of cash available for distribution to its 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 and contingent liabilities.

There can be no assurance that the Merger will be completed. If the Merger is not completed, the Proteostasis board of directors may decide to pursue a dissolution and liquidation of Proteostasis. 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 Proteostasis continues to fund its operations. In addition, if Proteostasis’ board of directors were to approve and recommend, and its stockholders were to approve, a dissolution and liquidation of Proteostasis, Proteostasis 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 Proteostasis’ remaining cash assets may need to be reserved pending the resolution of such obligations. In addition, Proteostasis may be subject to litigation or other claims related to a dissolution and liquidation of Proteostasis. If a dissolution and liquidation were pursued, Proteostasis’ 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 Proteostasis common stock could lose all or a significant portion of their investment in the event of Proteostasis’ liquidation, dissolution or winding up.

If Proteostasis were to continue to advance its research and development activities and pursue development of any of its 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.

Proteostasis currently does not have any committed external source of funds and does not expect to generate any commercial revenue in the foreseeable future. Proteostasis believes that its existing cash, cash equivalents and marketable securities and interest thereon will be sufficient to fund its projected operating requirements under its current operating plan. Proteostasis has based its 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 Proteostasis’ current operating plans change and it determines to pursue further research and development activities, it will require substantial additional funding to operate, and would expect to finance these cash needs through a combination of equity offerings, debt financings, government or other third-party funding and licensing or collaboration arrangements.

To the extent that Proteostasis raises additional capital through the sale of equity or convertible debt, the ownership interests of its stockholders will be diluted. In addition, the terms of any equity or convertible debt it agrees to issue may include liquidation or other preferences that adversely affect the rights of Proteostasis’ stockholders. Convertible debt financing, if available, may involve agreements that include covenants limiting or restricting Proteostasis’ ability to take specific actions, such as incurring additional debt, making capital expenditures, and declaring dividends, and may impose limitations on its ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact its ability to conduct its business.

Additional funds may not be available when Proteostasis needs them on terms that are acceptable to Proteostasis, or at all. Furthermore, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists and deepens, Proteostasis could experience an inability to access additional capital, when and if needed. If adequate funds are not available to Proteostasis on a timely basis, it may be required to curtail or cease its operations.

 

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If the Merger is not completed, raising additional funding through debt or equity financing could be difficult or not successful at all, would be dilutive and may cause the market price of Proteostasis’ common stock to decline further.

If the Merger is not completed, raising additional funding through debt or equity financing could be difficult or unavailable altogether given the turbulent financial markets. To the extent that Proteostasis raises additional capital through the sale of equity or convertible debt securities, the issuance of those securities would result in substantial dilution for Proteostasis’ current stockholders and the terms may include liquidation or other preferences that adversely affect the rights of its current stockholders. Furthermore, the issuance of additional securities, whether equity or debt, by Proteostasis, or the possibility of such issuance, may cause the market price of its common stock to decline further and existing stockholders may not agree with its financing plans or the terms of such financings.

The issuance of shares of Proteostasis’ common stock to Yumanity’s stockholders in the Merger will dilute substantially the voting power of Proteostasis’ current stockholders.

If the Merger is completed, each outstanding share of Yumanity capital stock will be converted into the right to receive approximately 4.3084 shares of Proteostasis common stock, subject to adjustment to account for the proposed Proteostasis Reverse Stock Split. Immediately following the Merger, Proteostasis’ stockholders and optionholders are expected to own, or hold rights to acquire, approximately 29.1% of the common stock of Proteostasis 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 the common stock of Proteostasis on a fully diluted basis as defined in the Merger Agreement. Accordingly, the issuance of shares of Proteostasis’ common stock to Yumanity’s stockholders in the Merger will reduce significantly the relative voting power of each share of Proteostasis’ common stock held by its current stockholders. Consequently, Proteostasis’ 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.

Proteostasis has incurred and will continue to incur significant transaction costs in connection with the Merger.

Proteostasis has incurred and will continue to incur significant transaction costs in connection with the Merger. Proteostasis estimates that it 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 operation as a public company, which cannot be estimated accurately at this time.

Proteostasis’ ability to use net operating loss (“NOL”) carryforwards and other tax attributes may be limited in connection with the Merger and other ownership changes.

Proteostasis has incurred substantial losses during its history and does not expect to become profitable in the near future, and Proteostasis may never achieve profitability. To the extent that Proteostasis continues 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 June 30, 2020, Proteostasis had federal and state NOL carryforwards of approximately $308.8 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 June 30, 2020, Proteostasis had federal and state research and development credit carryforwards of approximately $11.6 million and $4.1 million, respectively. The federal research and development credit carryforwards will begin expiring in 2027 and 2025, respectively, unless previously utilized.

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 Proteostasis 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

 

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ending after December 31, 2017, may be carried forward indefinitely, but the deductibility of such federal NOLs may be limited to 80% of Proteostasis’ taxable income annually for tax years beginning after December 31, 2020. Proteostasis’ NOL carryforwards are 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, Proteostasis’ 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. Proteostasis’ ability to utilize its NOL carryforwards and other tax attributes to offset future taxable income or tax liabilities may be limited as a result of ownership changes, including in connection with the Merger. Similar rules may apply under state tax laws. Proteostasis has 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. If Proteostasis earns taxable income, such limitations could result in increased future tax liability to Proteostasis and its future cash flows could be adversely affected. Proteostasis has recorded a full valuation allowance related to its NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.

Risks Related to Yumanity’s Business, Financial Position, and Need for Additional Capital

Yumanity is 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 its current business and predict its future success and viability.

Yumanity is a clinical stage biopharmaceutical company with a limited operating history, focused on developing therapeutics for neurodegenerative diseases. Yumanity was initially formed as a limited liability company in 2014 and converted into a corporation in 2015, has no products approved for commercial sale, and has not generated any revenue from product sales to date. Yumanity began human clinical trials for YTX-7739 at the end of 2019, and has not initiated clinical trials for any of its other current product candidates. Yumanity’s operations to date have been limited primarily to organizing and staffing, raising capital, and conducting research and development activities for its product candidates.

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

Yumanity’s historical operating results indicate substantial doubt exists related to its ability to continue as a going concern. Holdings’ financial statements have been prepared assuming that it will continue as a going concern.

Yumanity has incurred net losses and used significant cash in operating activities since inception. Yumanity has an accumulated members’ deficit of approximately $104.8 million and has cash and cash equivalents of $23.2 million as of June 30, 2020. These factors raise substantial doubt about Yumanity’s ability to continue as a going concern and satisfying its estimated liquidity needs 12 months from the issuance of the financial statements.

If Yumanity continues to experience operating losses, and it is not able to generate additional liquidity through a capital raise or other cash infusion, Yumanity might need to secure additional sources of funds, which may or may not be available to it. Additionally, a failure to generate additional liquidity could negatively impact Yumanity’s ability to operate its business.

 

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Yumanity has incurred significant operating losses since its inception and anticipates it will incur continued losses for the foreseeable future.

Yumanity has funded its operations to date through proceeds from collaborations and sales of preferred units. From its inception through June 30, 2020, Yumanity has received gross proceeds of $110.5 million from such transactions. As of June 30, 2020, its cash and cash equivalents were $23.2 million. Yumanity has incurred net losses in each year since its inception, and it has an accumulated members’ deficit of $104.8 million as of June 30, 2020.

Substantially all of Yumanity’s operating losses have resulted from costs incurred in connection with general and administrative costs associated with its operations, and its research and development programs, including for its preclinical and clinical product candidates and its discovery engine platform. Yumanity expects to incur increasing levels of operating losses over the next several years and for the foreseeable future. Yumanity’s prior losses, combined with expected future losses, have had and will continue to have an adverse effect on its stockholders’ deficit and working capital. In any particular quarter or quarters, Yumanity’s operating results could be below the expectations of securities analysts or investors, which could cause its stock price to decline.

Yumanity expects its research and development expenses to significantly increase in connection with its clinical trials of its product candidates. In addition, if Yumanity obtains marketing approval for its product candidates, it will incur significant sales and marketing, legal, and outsourced-manufacturing expenses. As a public company, Yumanity expects 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, Yumanity is also unable to predict the extent of any future losses or when it will become profitable, if at all. Even if Yumanity does become profitable, it may not be able to sustain or increase its profitability on a quarterly or annual basis.

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

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

 

   

successfully completing preclinical and clinical development of its product candidates;

 

   

identifying, assessing, and/or developing new product candidates from its discovery engine platform;

 

   

developing a sustainable and scalable manufacturing process for its product candidates, as well as establishing and maintaining commercially viable supply relationships with third parties that can provide adequate products and services to support clinical activities and commercial demand for its product candidates;

 

   

negotiating favorable terms in any collaboration, licensing, or other arrangements into which it may enter;

 

   

obtaining regulatory approvals for product candidates for which it successfully completes clinical development;

 

   

launching and successfully commercializing product candidates for which it obtains regulatory approval, either by establishing a sales, marketing, and distribution infrastructure or collaborating with a partner;

 

   

negotiating and maintaining an adequate price for its product candidates, both in the United States and in foreign countries where its products are commercialized;

 

   

obtaining market acceptance of its product candidates as viable treatment options;

 

   

building out new facilities or expanding existing facilities to support its ongoing development activity;

 

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addressing any competing technological and market developments;

 

   

maintaining, protecting, expanding, and enforcing its portfolio of intellectual property rights, including patents, trade secrets, and know-how; and

 

   

attracting, hiring, and retaining qualified personnel.

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

Even if Yumanity is able to generate revenue from the sale of any approved products, it may not become profitable and may need to obtain additional funding to 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 Yumanity gains regulatory approval, the accepted price for the product, the ability to get reimbursement at any price, and whether Yumanity owns 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. Yumanity 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 its product candidates, are based on estimates. If the number of addressable patients is not as significant as Yumanity anticipates, the indication approved by regulatory authorities is narrower than Yumanity expects, or the reasonably accepted population for treatment is narrowed by competition, physician choice, or treatment guidelines, Yumanity may not generate significant revenue from sales of its product candidates, even if approved. Even if Yumanity does achieve profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis.

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

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

Yumanity’s current portfolio consists of two programs and two additional potential programs. Yumanity’s lead product candidate, YTX-7739, is in Phase 1 clinical development. Yumanity seeks 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 its portfolio.

Due to the significant resources required for the development of its product candidates, Yumanity 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. Yumanity’s 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 Yumanity makes incorrect determinations regarding the viability or market potential of any of its product candidates or misread trends in the biopharmaceutical industry, in particular for neurodegenerative diseases, its business, financial condition, and results of operations could be materially

 

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adversely affected. As a result, Yumanity 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 Yumanity 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 Yumanity to invest additional resources to retain sole development and commercialization rights.

Even if this Merger is successful, Yumanity 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 Yumanity to delay, limit, or terminate its product development efforts or other operations.

As of June 30, 2020, Yumanity’s cash and cash equivalents were $23.2 million. Yumanity will require additional funding to advance YTX-7739 beyond Phase 1 clinical trials and other planned early development of other programs generated by its discovery engine platform. Yumanity’s ability to secure this additional funding may be adversely impacted by negative or ambiguous results in its Phase 1 clinical trial for YTX-7739. Developing small-molecule products is expensive, and Yumanity expects its discovery, research, and development expenses to increase substantially in connection with its ongoing activities, particularly as Yumanity advances its product candidates in clinical trials. Yumanity may also need additional funds sooner if Yumanity chooses to pursue additional indications and/or geographies for its product candidates or otherwise expand more rapidly than Yumanity presently anticipates.

In addition, Yumanity has identified conditions and events that raise substantial doubt as to its ability to continue as a going concern.

Yumanity’s operating plan may also change as a result of many factors currently unknown, and Yumanity may need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements, or a combination of these approaches. In any event, Yumanity will require additional capital to obtain regulatory approval for, and, if approved, to commercialize its product candidates. Raising funds in the current economic environment may present additional challenges. Even if Yumanity believes that is has sufficient funds for its current or future operating plans, Yumanity may seek additional capital if market conditions are favorable or if Yumanity has specific strategic considerations.

Any additional fundraising efforts may divert its management from their day-to-day activities, which may adversely affect its ability to develop and, if approved, commercialize its product candidates. In addition, Yumanity cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to it, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of its stockholders and the issuance of additional securities, whether equity or debt, by Yumanity, or the possibility of such issuance, may cause the market price of its shares to decline. The sale of additional equity or convertible securities would dilute all of its stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and Yumanity may be required to agree to certain restrictive covenants, such as limitations on its ability to incur additional debt, limitations on its ability to acquire, sell or license intellectual property rights, and other operating restrictions that could adversely impact its ability to conduct its business. Yumanity could also be required to seek funds through arrangements with collaborative partners or otherwise at an earlier stage than otherwise would be desirable and Yumanity may be required to relinquish rights to some of its technologies or product candidates or otherwise agree to terms unfavorable to it, any of which may have a material adverse effect on its business, operating results, and prospects.

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

 

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Risks Related to Yumanity’s Product Development and Commercialization

Research and development of biopharmaceutical products is inherently risky.

Yumanity is at an early stage of development of the product candidates currently in its pipeline and is continuing to discover additional potential product candidates leveraging its discovery engine platform. To date, Yumanity has devoted substantially all of its efforts and financial resources to identify, secure intellectual property for, and develop its discovery engine platform and its product candidates, including conducting multiple preclinical studies, and providing general and administrative support for these operations. Its business depends heavily on the successful clinical development, regulatory approval, and commercialization of its lead product candidate, YTX-7739 which is in clinical development. None of its 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 Yumanity is permitted to commence its commercialization. Further, Yumanity cannot be certain that any of its product candidates will be successful in clinical trials or obtain regulatory approval.

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

 

   

its product candidates may not successfully complete preclinical studies or clinical trials;

 

   

a product candidate may, upon further study, be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;

 

   

its competitors may develop therapeutics that render its product candidates obsolete or less attractive;

 

   

its competitors may develop platform technologies that render its platform technology obsolete or less attractive;

 

   

the product candidates that Yumanity develops and its discovery engine platform may not be sufficiently covered by intellectual property for which Yumanity holds exclusive rights;

 

   

the market for a product candidate may change so that the continued development of that product candidate is no longer reasonable or commercially attractive;

 

   

a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all;

 

   

Yumanity may not be able to establish manufacturing capabilities or arrangements with third-party manufacturers for clinical and, if approved, commercial study;

 

   

even if a product candidate obtains regulatory approval, Yumanity may be unable to establish sales and marketing capabilities, or successfully market such approved product candidate, to gain market acceptance; and

 

   

a product candidate may not be accepted as safe or effective by patients, the medical community or third-party payors, if applicable.

If any of these events occur, Yumanity may be forced to abandon its development efforts for a product candidate or candidates, which would have a material adverse effect on its business and could potentially cause Yumanity to cease operations. For instance, if Yumanity observes 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.

Yumanity may not be successful in its efforts to further develop its discovery engine platform technology and current product candidates. Yumanity is not permitted to market or promote any of its product candidates before Yumanity receives regulatory approval from the FDA or comparable foreign regulatory authorities, and Yumanity may never receive such regulatory approval for any of its product candidates. Each of its product

 

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candidates is 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 Yumanity 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 its 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 Yumanity intends to test and, if approved, market any product candidate. Before obtaining regulatory approvals for the commercial sale of any product candidate, Yumanity 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 its 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 Yumanity is able to obtain the requisite financing to continue to fund its development and preclinical studies and clinical trials, Yumanity cannot assure you that any of its product candidates will be successfully developed or commercialized.

If any of its product candidates successfully complete clinical trials, Yumanity generally plans to seek regulatory approval to market its product candidates in the United States, the European Union (“EU”), and in additional foreign countries where Yumanity believes there is a viable commercial opportunity and significant patient need. Yumanity has never commenced, compiled, or submitted an application seeking regulatory approval to market any product candidate. Yumanity may never receive regulatory approval to market any product candidates even if such product candidates successfully complete clinical trials, which would adversely affect its viability. To obtain regulatory approval in countries outside the United States, Yumanity 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 its product candidates. Yumanity 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 its product candidates. Yumanity cannot be sure that any collaborators or partners will conduct these activities or do so within the timeframe Yumanity desires. Even if Yumanity (or any collaborators or partners) are successful in obtaining approval in one jurisdiction, Yumanity cannot ensure that Yumanity (or any collaborators or partners) will obtain approval in any other jurisdictions. If Yumanity is unable to obtain approval for its product candidates in multiple jurisdictions, its revenue and results of operations could be negatively affected.

Even if Yumanity receives regulatory approval to market any of its product candidates, Yumanity 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. Yumanity cannot provide any assurance that Yumanity will be able to successfully advance any of its product candidates through the development process or, if approved, successfully commercialize any of its product candidates.

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

One of Yumanity’s strategies is to identify and pursue clinical development of additional product candidates. Its 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

 

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require substantial additional funding and is prone to the risks of failure inherent in drug development. Yumanity cannot provide you any assurance that Yumanity 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 Yumanity is unable to successfully identify, acquire, develop, and commercialize additional product candidates, its commercial opportunity may be limited.

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

Certain laws and regulations relating to drug development require Yumanity to test its 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, Yumanity’s research and development activities may be interrupted or delayed.

Yumanity has concentrated its research and development efforts on the treatment of neurodegenerative diseases, a field that has seen limited success in drug development. Further, its 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.

Yumanity has focused its 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. Yumanity’s future success is highly dependent on the successful development of its discovery engine platform technology and its product candidates for treating neurodegenerative diseases. Developing and, if approved, commercializing its product candidates for treatment of neurodegenerative diseases subjects Yumanity 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.

Yumanity’s 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. Yumanity cannot be sure that its 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 Yumanity’s products.

Yumanity may encounter difficulties in enrolling subjects in its clinical trials, thereby delaying or preventing development of its 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 Yumanity believes, Yumanity may experience difficulty in enrolling subjects in its clinical trials, thereby delaying development of its product candidates. Furthermore, Yumanity may experience difficulties in subject enrollment in its clinical trials for a variety of other reasons, including:

 

   

the subject eligibility criteria defined in the protocol, including biomarker-driven identification and/or certain highly-specific criteria related to stage of disease progression, which may limit the patient

 

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populations eligible for its clinical trials to a greater extent than competing clinical trials for the same indication that do not have biomarker-driven patient eligibility criteria;

 

   

eligibility requirements mandated by regulatory agencies which may limit the number of eligible patients in a given disorder;

 

   

the size of the study population required for analysis of the study’s primary endpoints;

 

   

the proximity of subjects to a study site;

 

   

the design of the study;

 

   

its use of academic sites, which may be less accustomed to running clinical trials and managing enrollment;

 

   

public perception of drug safety issues;

 

   

its ability to recruit clinical study investigators with the appropriate competencies and experience;

 

   

competing clinical trials for similar therapies or targeting patient populations meeting its patient eligibility criteria;

 

   

clinicians’ and patients’ perceptions as to the potential advantages and side effects of the product candidate being studied in relation to other available therapies and product candidates;

 

   

its ability to obtain and maintain patient consents;

 

   

the risk that subjects enrolled in clinical trials will not complete such studies, for any reason; and

 

   

the impact of the COVID-19 pandemic on patient enrollment and retention.

Yumanity’s clinical trials may fail to demonstrate adequate safety and efficacy of its 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 its product candidates, Yumanity must, among other requirements, demonstrate through lengthy, complex, and expensive preclinical studies and clinical trials that its 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 its intended patient population and for its intended use.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical study process. The results of preclinical studies of Yumanity’s 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 its 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 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.

Yumanity has limited experience in designing clinical trials and may be unable to design and execute a clinical study to support marketing approval. Yumanity cannot be certain that its current clinical trials or any other future clinical trials will be successful. Additionally, any safety concerns observed in any one of its clinical trials in its

 

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targeted indications could limit the prospects for regulatory approval of its product candidates in those, and other indications, which could have a material adverse effect on its business, financial condition, and results of operations.

In addition, even if such clinical trials are successfully completed, Yumanity cannot guarantee that the FDA or foreign regulatory authorities will interpret the results as Yumanity does, and more studies could be required before Yumanity submits its 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, Yumanity may be required to expend significant resources, which may not be available to it, to conduct additional studies in support of potential approval of its product candidates. Even if regulatory approval is secured for any of its product candidates, the terms of such approval may limit the scope and use of its product candidates, which may also limit their commercial potential.

Yumanity’s 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 its product candidates could cause Yumanity 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 its product candidates receive marketing approval and Yumanity 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:

 

   

regulatory authorities may suspend, withdraw, or limit their approval of such products;

 

   

regulatory authorities may require the addition of labeling statements, such as a “boxed” warning or a contraindication;

 

   

Yumanity may be required to change the way such products are distributed or administered;

 

   

Yumanity may be required to conduct additional post-marketing studies and surveillance;

 

   

Yumanity may be required to implement a risk evaluation and mitigation strategy (“REMS”), or create a medication guide outlining the risks of such side effects for distribution to patients;

 

   

Yumanity may be subject to regulatory investigations and government enforcement actions;

 

   

subjects in a clinical study may experience severe or unexpected drug-related side effects;

 

   

Yumanity may decide, or regulatory authorities may require it, to conduct additional clinical trials or abandon product development programs;

 

   

Yumanity may decide to remove such products from the marketplace;

 

   

Yumanity could be sued and held liable for injury caused to individuals exposed to or taking its products;

 

   

the product may become less competitive; and

 

   

its reputation may suffer.

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

 

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

Yumanity does not know whether any of its planned 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:

 

   

the FDA or other regulatory bodies may not authorize Yumanity or its investigators to commence its planned clinical trials or any other clinical trials Yumanity may initiate, or may suspend its clinical trials, for example, through imposition of a clinical hold;

 

   

delays in filing or receiving approvals of additional investigational new drug (“IND”) applications that may be required;

 

   

lack of adequate funding to continue its clinical trials and preclinical studies;

 

   

negative results from its ongoing preclinical studies and clinical trials;

 

   

delays in reaching or failing to reach agreement on acceptable terms with prospective contract research organizations (“CROs”) and clinical study sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and study sites;

 

   

inadequate quantity or quality of a product candidate or other materials necessary to conduct clinical trials, for example delays in the manufacturing of sufficient supply of finished drug product;

 

   

difficulties obtaining ethics committee or Institutional Review Board (“IRB”) approval to conduct a clinical study at a prospective site or sites;

 

   

challenges in recruiting and enrolling subjects to participate in clinical trials, the proximity of subjects to study sites, eligibility criteria for the clinical study, the nature of the clinical study protocol, the availability of approved effective treatments for the relevant disease, and competition from other clinical study programs for similar indications;

 

   

severe or unexpected drug-related side effects experienced by subjects in a clinical study;

 

   

Yumanity may decide, or regulatory authorities may require it, to conduct additional clinical trials or abandon product development programs;

 

   

delays in validating, or inability to validate, any endpoints utilized in a clinical study;

 

   

the FDA may disagree with its clinical study design and its interpretation of data from clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for its clinical trials;

 

   

reports from preclinical or clinical testing of other alpha-synuclein-dependent therapies that raise safety or efficacy concerns; and

 

   

difficulties retaining subjects who have enrolled in a clinical study but may be prone to withdraw due to rigors of the clinical trial, lack of efficacy, side effects, personal issues, or loss of interest.

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 Yumanity, the FDA, the IRBs at the sites where the IRBs are overseeing a clinical study, 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:

 

   

failure to conduct the clinical study in accordance with regulatory requirements or its clinical protocols;

 

   

inspection of the clinical study operations or study sites by the FDA or other regulatory authorities that reveals deficiencies or violations that require Yumanity to undertake corrective action, including in response to the imposition of a clinical hold;

 

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unforeseen safety issues, including any that could be identified in its ongoing preclinical studies or clinical trials, adverse side effects or lack of effectiveness;

 

   

changes in government regulations or administrative actions;

 

   

problems with clinical supply materials; and

 

   

lack of adequate funding to continue clinical trials.

Changes in regulatory requirements, FDA guidance, or unanticipated events during Yumanity’s preclinical studies and clinical trials of its 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 Yumanity and could delay its development timeline.

Changes in regulatory requirements, FDA guidance, or unanticipated events during its preclinical studies and clinical trials may force Yumanity to amend preclinical studies and clinical trial protocols or the FDA may impose additional preclinical studies and clinical trial requirements. Amendments or changes to its 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 its preclinical studies may adversely impact the cost, timing, or successful completion of those preclinical studies. If Yumanity experiences delays completing, or if Yumanity terminates, any of its preclinical studies or clinical trials, or if Yumanity is required to conduct additional preclinical studies or clinical trials, the commercial prospects for its product candidates may be harmed and its ability to generate product revenue will be delayed.

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

Yumanity does not currently have an infrastructure for the sales, marketing, and distribution of pharmaceutical products. In order to market its product candidates, if approved by the FDA or any other regulatory body, Yumanity must build its 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 its 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 Yumanity recruits a sales force and establish marketing and other commercialization capabilities is delayed or does not occur for any reason, Yumanity would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and its investment would be lost if Yumanity cannot retain or reposition its commercialization personnel.

If Yumanity enters into arrangements with third parties to perform sales, marketing, commercial support, and distribution services, its product revenue or the profitability of product revenue may be lower than if Yumanity were to market and sell any products Yumanity may develop itself. In addition, Yumanity may not be successful in entering into arrangements with third parties to commercialize its product candidates or may be unable to do so on terms that are favorable to us. Yumanity 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 its products effectively. If Yumanity does not establish commercialization capabilities successfully, either on its own or in collaboration with third parties, Yumanity will not be successful in commercializing its product candidates if approved.

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

 

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Even if Yumanity receives marketing approval for its product candidates, its 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 Yumanity generate from their sales.

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

 

   

the safety, efficacy, and other potential advantages of its approved product candidates compared to other available therapies;

 

   

limitations or warnings contained in the labeling approved for its product candidates by the FDA or other applicable regulatory authorities;

 

   

any restrictions on the use of its products together with other medications;

 

   

the prevalence and severity of any adverse effects associated with its products;

 

   

inability of certain types of patients to take its products;

 

   

the clinical indications for which its product candidates are approved;

 

   

availability of alternative treatments already approved or expected to be commercially launched in the near future;

 

   

the potential and perceived advantages of its approved product candidates over current treatment options or alternative treatments, including future alternative treatments;

 

   

the size of the target patient population, and the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

   

the strength of marketing and distribution support and timing of market introduction of competitive products;

 

   

publicity concerning its products or competing products and treatments;

 

   

pricing and cost effectiveness;

 

   

the effectiveness of its sales and marketing strategies;

 

   

its ability to increase awareness of its products through sales and marketing efforts;

 

   

its ability to obtain sufficient third-party payor coverage or reimbursement; or

 

   

the willingness of patients to pay out-of-pocket in the absence of third-party payor coverage.

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

Yumanity faces significant competition in an environment of rapid technological and scientific change, and there is a possibility that its competitors may achieve regulatory approval before it does or develop therapies that are safer, more advanced, or more effective, which may negatively impact its ability to successfully market or commercialize any product candidates Yumanity may develop and ultimately harm its 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

 

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intellectual property. Yumanity may face competition with respect to any product candidates that Yumanity seeks 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 Yumanity has research programs, including Parkinson’s disease, ALS and Alzheimer’s disease. Companies that Yumanity is 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 Yumanity may develop may also face competition from other types of therapies, such as gene-editing therapies.

Many of its 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 Yumanity does. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of its 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 Yumanity 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, its programs. Its commercial opportunity could be reduced or eliminated if its 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 Yumanity 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 its product candidates. Its competitors also may obtain FDA or other regulatory approval for their products more rapidly than Yumanity may obtain approval for its product candidates and may obtain orphan product exclusivity from the FDA for indications its product candidates are targeting, which could result in its competitors establishing a strong market position before Yumanity is able to enter the market. Additionally, products or technologies developed by its competitors may render its potential product candidates uneconomical or obsolete, and Yumanity may not be successful in marketing any product candidates Yumanity may develop against competitors.

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

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

Broad-based business or economic disruptions could adversely affect Yumanity’s 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

 

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contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak is continually evolving and, as additional cases 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 Yumanity or the third parties with whom it engages 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 Yumanity’s 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 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 Yumanity’s preclinical studies or clinical trial operations in the United States, including Yumanity’s 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 Yumanity relies upon to carry out its clinical trials. Any negative impact COVID-19 has to patient enrollment or treatment or the execution of Yumanity’s current product candidates and any future product candidates could cause costly delays to clinical trial activities, which could adversely affect Yumanity’s ability to obtain regulatory approval for and to commercialize its current product candidate and any future product candidates, increase its operating expenses, and have a material adverse effect on its financial results.

Further, the COVID-19 outbreak caused delays in Yumanity’s Phase 1 single ascending dose trial of YTX-7739 and may cause delays in Yumanity’s 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 Yumanity’s 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 Yumanity’s 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 Yumanity’s third-party manufacturers, which could result in delays or disruptions in the supply of Yumanity’s current product candidates and any future product candidates. In addition, Yumanity may take temporary precautionary measures intended to help minimize the risk of the virus to its employees, including temporarily requiring all employees to work remotely, suspending all non-essential travel worldwide for its employees, and discouraging employee attendance at industry events and in-person work-related meetings, which could negatively affect Yumanity’s business.

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

Risks Related to Yumanity’s Regulatory Approval and Other Legal Compliance Matters

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

 

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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 its data are insufficient for approval and require additional preclinical, clinical or other studies. Moreover, the FDA or other regulatory authorities may fail to clear or approve companion diagnostics that Yumanity contemplates using with its therapeutic product candidates. Yumanity has not submitted for, or obtained regulatory approval for any product candidate, and it is possible that none of its existing product candidates or any product candidates Yumanity may seek to develop in the future will ever obtain regulatory approval.

Applications for its product candidates could fail to receive regulatory approval for many reasons, including but not limited to the following:

 

   

the FDA or comparable foreign regulatory authorities may disagree with the design, implementation, or results of its clinical trials;

 

   

the FDA or comparable foreign regulatory authorities may determine that its product candidates are not safe and effective, only moderately effective, or have undesirable or unintended side effects, toxicities, or other characteristics that preclude its obtaining marketing approval or prevent or limit commercial use;

 

   

the population studied in the clinical program may not be sufficiently broad or representative to assure efficacy and safety in the full population for which Yumanity seek approval;

 

   

the FDA or comparable foreign regulatory authorities may disagree with its interpretation of data from preclinical studies or clinical trials;

 

   

the data collected from clinical trials of its product candidates may not be sufficient to support the submission of an NDA or other submission, or to obtain regulatory approval in the United States or elsewhere;

 

   

Yumanity may be unable to demonstrate to the FDA or comparable foreign regulatory authorities that a product candidate’s risk-benefit ratio for its proposed indication is acceptable;

 

   

the FDA or comparable foreign regulatory authorities may find deficiencies with or fail to approve the manufacturing processes, test procedures and specifications, or facilities of third-party manufacturers with which Yumanity contract for clinical and commercial supplies; and

 

   

the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering its clinical data insufficient for approval.

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

Even if Yumanity obtains regulatory approval for its product candidates, its products will remain subject to extensive regulatory scrutiny.

Even if Yumanity receives marketing approval for its product candidates, regulatory authorities may still impose significant restrictions on its product candidates, indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies. If any of its 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

 

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manufacturing procedures conform to current Good Manufacturing Practice (“cGMP”) regulations. As such, Yumanity and its 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, Yumanity and others with whom Yumanity works 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 Yumanity receives for its 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. Yumanity 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. Yumanity will have to comply with requirements concerning advertising and promotion for its 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, Yumanity may not promote its 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. Yumanity could also be asked to conduct post-marketing studies or clinical trials to verify the safety and efficacy of its 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 Yumanity fails to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may, among other things:

 

   

issue warning or untitled letters that would result in adverse publicity;

 

   

impose civil or criminal penalties;

 

   

suspend or withdraw regulatory approvals;

 

   

suspend any of its ongoing clinical trials;

 

   

refuse to approve pending applications or supplements to approved applications submitted by Yumanity;

 

   

impose restrictions on its operations, including closing its contract manufacturers’ facilities;

 

   

seize or detain products; or

 

   

request that Yumanity initiate a product recall.

Any government investigation of alleged violations of law could require Yumanity to expend significant time and resources in response, and could generate negative publicity. Any failure to comply with ongoing regulatory

 

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requirements may significantly and adversely affect its ability to commercialize and generate revenue from its products, if approved. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of the company and its operating results will be adversely affected.

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

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

 

   

the federal Anti-Kickback Statute (“AKS”) prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving, or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order, or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid. The term “remuneration” has been broadly interpreted to include anything of value. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. A person or entity does not need to have actual knowledge of the federal AKS or specific intent to violate it to have committed a violation. The AKS has been interpreted to apply to arrangements between biopharmaceutical manufacturers on the one hand and prescribers, purchasers, and formulary managers, among others, on the other;

 

   

the federal False Claims Act imposes criminal and civil penalties, including those from civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government. Manufacturers can be held liable under the False Claims Act even when they do not submit claims directly to government payors if they are deemed to “cause” the submission of false or fraudulent claims. When an entity is determined to have violated the False Claims Act, the government may impose civil fines and penalties for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs;

 

   

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or making false or fraudulent statements relating to healthcare matters; similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;

 

   

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, which also impose obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security, and transmission of individually identifiable health information on health plans, healthcare clearing houses, and certain healthcare providers and their business associates, defined as independent contractors or agents of covered entities that create, receive or obtain protected health information in connection with providing a service for or

 

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on behalf of a covered entity. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, there may be additional federal, state and non-U.S. laws which govern the privacy and security of health and other personal information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts;

 

   

the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact, or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items, or services;

 

   

the federal transparency requirements, sometimes referred to as the “Sunshine Act,” under the Patient Protection and Affordable Care Act (the “ACA”) require manufacturers of drugs, devices, biologics, and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to the CMS information related to payments and other transfers of value to physicians, as defined by the law, and teaching hospitals and physician ownership and investment interests, and requires applicable manufacturers and group purchasing organizations to report annually the ownership and investment interests held by such physicians and their immediate family members and payments or other “transfers of value” to such physician owners. Effective January 1, 2022, these reporting obligations will extend to include transfers of value made in the previous year to certain non-physician providers such as physician assistants and nurse practitioners; and

 

   

analogous state laws and regulations, such as state anti-kickback and false claims laws and transparency laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures and drug pricing.

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 Yumanity’s 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 its 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 its operations, including anticipated activities to be conducted by its sales team, were found to be in violation of any of these laws or any other governmental regulations that may apply to us, Yumanity 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 its operations, any of which could substantially disrupt its operations. If any of the physicians or other providers or entities with whom Yumanity 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.

 

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If any of Yumanity’s 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 its 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 its 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 Yumanity’s product candidates are approved, competitors could file ANDAs for generic versions of its small-molecule drug products or 505(b)(2) NDAs that reference its small-molecule drug products, respectively. If there are patents listed for its 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. Yumanity cannot predict which, if any, patents in its current portfolio or patents Yumanity may obtain in the future will be eligible for listing in the Orange Book, how any generic competitor would address such patents, whether Yumanity would sue on any such patents, or the outcome of any such suit.

Yumanity may not be successful in securing or maintaining proprietary patent protection for products and technologies Yumanity develops or licenses. Moreover, if any of its 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 its sales would likely decline rapidly and materially. See “Risks Related to Yumanity’s Intellectual Property Rights.”

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

The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products, such as YTX-7739, if approved. 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 Yumanity receives 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 Yumanity is found to have promoted such off-label uses, Yumanity may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for

 

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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 Yumanity cannot successfully manage the promotion of its product candidates, if approved, Yumanity could become subject to significant liability, which would materially adversely affect its business and financial condition.

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

Sales of Yumanity’s drugs will depend, in part, on the extent to which Yumanity’s 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 Yumanity may obtain regulatory approval.

Market acceptance and sales of its 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 Yumanity’s 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:

 

   

a covered benefit under its health plan;

 

   

safe, effective and medically necessary;

 

   

appropriate for the specific patient;

 

   

cost-effective; and

 

   

neither experimental nor investigational.

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. Yumanity cannot be sure that reimbursement will be available for its product candidates and, if reimbursement is available, the level of such reimbursement. Reimbursement may impact the demand for, or the price of, its product candidates. If reimbursement is not available or is available only at limited levels, Yumanity may not be able to successfully commercialize its product candidates. Limited coverage and less than adequate reimbursement may reduce the demand for, or the price of, any product for which Yumanity obtains 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, Yumanity may be required to conduct a clinical study that compares the cost-effectiveness of its product candidates with other available therapies. If reimbursement for its product candidates is unavailable in any country in which Yumanity seeks reimbursement, if it is limited in scope or amount, if it is conditioned upon its completion of additional clinical trials, or if pricing is set at unsatisfactory levels, its operating results could be materially adversely affected.

 

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Recently enacted and future legislation may increase the difficulty and cost for Yumanity to obtain marketing approval of and commercialize its product candidates and affect the prices Yumanity 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 its product candidates, restrict or regulate post-approval activities, and affect its ability to profitably sell any product candidates for which Yumanity obtains 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 its product candidates are the following:

 

   

an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs;

 

   

a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted, or injected;

 

   

an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13.0% of the average manufacturer price for branded and generic drugs, respectively;

 

   

expansion of healthcare fraud and abuse laws, including the False Claims Act and the AKS, which include, among other things, new government investigative powers and enhanced penalties for non-compliance;

 

   

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% (increased to 70% in 2019 pursuant to subsequent legislation) point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D;

 

   

extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

 

   

expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals, thereby potentially increasing manufacturers’ Medicaid rebate liability;

 

   

expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

 

   

the requirements under the federal open payments program and its implementing regulations;

 

   

a requirement to annually report drug samples that manufacturers and distributors provide to physicians; and

 

   

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

Since its enactment, some of the provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial, congressional, and executive challenges. As a result, there have been

 

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delays in the implementation of, and action taken to repeal or replace, certain aspects of the ACA. The U.S. Supreme Court has upheld certain key aspects of the legislation, including a tax-based shared responsibility payment imposed on certain individuals who fail to maintain qualifying health coverage for all or part of a year, which is commonly known as the requirement that all individuals maintain health insurance coverage or pay a penalty, referred to as the “individual mandate.” However, as a result of tax reform legislation passed in late December 2017, the Tax Cuts and Jobs Act of 2017, or the TCJA, 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 TCJA, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit ruled that the individual mandate was unconstitutional but 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 U.S. Supreme Court granted the petitions for writs of certiorari to review the case, although it is unclear when a decision will be made or how the Supreme Court will rule. According to the Congressional Budget Office, the repeal of the individual mandate will cause 13 million fewer Americans to be insured in 2027 and premiums in insurance markets may rise.

Since January 2017, President Trump has signed various Executive Orders designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. One Executive Order directs federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Another Executive Order terminates the cost-sharing subsidies (“CSR”) that reimburse insurers under the ACA. Several state Attorneys General filed suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25, 2017. The loss of the CSR payments is expected to increase premiums on certain policies issued by qualified health plans under the ACA. In addition, the CMS has recently published a final rule that would give states greater flexibility, starting in 2020, in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. Litigation and legislation over the ACA are likely to continue, with unpredictable and uncertain results. Yumanity continues to evaluate the effect that the ACA and its possible repeal and replacement has on its 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, 2020 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. Yumanity expects 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 Yumanity receives 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 Yumanity from being able to generate revenue, attain profitability, or commercialize its products.

Yumanity 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 its 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 Yumanity to more stringent labeling and post-marketing testing and other requirements.

 

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It is likely that federal and state legislatures within the United States and foreign governments will continue to consider changes to existing healthcare legislation. Yumanity 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 Yumanity may obtain regulatory approval, its ability to set a price that Yumanity believes is fair for its products, its ability to obtain coverage and reimbursement approval for a product, its ability to generate revenue and achieve or maintain profitability; and the level of taxes that Yumanity is required to pay.

Yumanity’s future growth may depend, in part, on its ability to commercialize its product candidates in foreign markets, where Yumanity would be subject to additional regulatory burdens and other risks and uncertainties.

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

 

   

its customers’ ability to obtain reimbursement for its product candidates in foreign markets;

 

   

its inability to directly control commercial activities because Yumanity is relying on third parties;

 

   

the burden of complying with complex and changing foreign regulatory, tax, accounting, and legal requirements;

 

   

different medical practices and customs in foreign countries affecting acceptance in the marketplace;

 

   

import or export licensing requirements;

 

   

longer accounts receivable collection times;

 

   

longer lead times for shipping;

 

   

language barriers for technical training;

 

   

reduced protection of intellectual property rights in some foreign countries;

 

   

the existence of additional potentially relevant third-party intellectual property rights;

 

   

foreign currency exchange rate fluctuations; and

 

   

the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.

Foreign sales of its 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 Yumanity’s product candidates in one jurisdiction does not mean that Yumanity will be successful in obtaining regulatory approval of its product candidates in other jurisdictions.

In order to market any product outside of the United States, however, Yumanity must establish and comply with the numerous and varying safety, efficacy, and other regulatory requirements of other countries. Obtaining and maintaining regulatory approval of its product candidates in one jurisdiction does not guarantee that Yumanity 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

 

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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 Yumanity intends to charge for its 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 Yumanity and could delay or prevent the introduction of its products in certain countries. Failure to obtain marketing approval in other countries or any delay or other setback in obtaining such approval would impair its ability to market its product candidates in such foreign markets. Any such impairment would reduce the size of its potential market, which could have a material adverse impact on its business, results of operations, and prospects.

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

Yumanity is exposed to the risk of fraud, misconduct, or other illegal activity by its 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 Yumanity has 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 Yumanity obtains FDA approval of any of its product candidates and begins commercializing those products in the United States, its potential exposure under such laws will increase significantly, and its 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 its reputation. Yumanity has 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 Yumanity take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting Yumanity 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 Yumanity is not successful in defending itself or asserting its rights, those actions could have a significant impact on its business, including the imposition of significant fines or other sanctions.

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

Yumanity and any contract manufacturers and suppliers Yumanity engages 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, Yumanity could be held responsible for costs relating to any contamination at its current or past facilities and at third-party facilities. Yumanity also could incur significant costs associated with civil or criminal fines and penalties.

 

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

Its business activities may be subject to the FCPA and similar anti-bribery or anti-corruption laws, regulations or rules of other countries in which Yumanity operates, 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. Its 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, its 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 its employees, agents, contractors, or collaborators, or those of its 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, its officers, or its employees, the closing down of its facilities, requirements to obtain export licenses, cessation of business activities in sanctioned countries, implementation of compliance programs, and prohibitions on the conduct of its business. Any such violations could include prohibitions on its ability to offer its products in one or more countries and could materially damage its reputation, its brand, its international expansion efforts, its ability to attract and retain employees, and its business, prospects, operating results, and financial condition.

Risks Related to Yumanity’s Reliance on Third Parties

Yumanity depends on its 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 Yumanity may develop. If any such collaborations are not successful, Yumanity may not be able to realize the market potential of those product candidates.

Yumanity has 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 Yumanity may develop. Its 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 its collaboration with Merck, Yumanity has, and if Yumanity enters into any such arrangements with any other third parties, Yumanity will likely have, shared or limited control over the amount and timing of resources that its collaborators dedicate to the development or potential commercialization of any product candidates Yumanity may seek to develop with them. Yumanity’s ability to generate revenue from these arrangements with commercial entities will depend on its collaborators’ abilities to successfully perform the functions assigned to them in these arrangements. Yumanity cannot predict the success of any collaboration that Yumanity enters into.

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

 

   

collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations;

 

   

collaborators may not properly obtain, maintain, enforce, or defend intellectual property or proprietary rights relating to its product candidates or research programs or may use its proprietary information in such a way as to expose Yumanity to potential litigation or other intellectual property related proceedings, including proceedings challenging the scope, ownership, validity and enforceability of its intellectual property;

 

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collaborators may own or co-own intellectual property covering its product candidates or research programs that results from its collaboration with them, and in such cases, Yumanity may not have the exclusive right to commercialize such intellectual property or such product candidates or research programs;

 

   

Yumanity may need the cooperation of its collaborators to enforce or defend any intellectual property Yumanity contribute to or that arises out of its collaborations, which may not be provided to us;

 

   

disputes may arise between the collaborators and Yumanity that result in the delay or termination of the research, development, or commercialization of its product candidates or research programs or that result in costly litigation or arbitration that diverts management attention and resources;

 

   

collaborators may decide to not pursue development and commercialization of any product candidates Yumanity develops or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborator’s strategic focus or available funding or external factors such as an acquisition that diverts resources or creates competing priorities;

 

   

collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials, or require a new formulation of a product candidate for clinical testing;

 

   

collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with its product candidates or research programs if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than Yumanity’s;

 

   

collaborators with marketing and distribution rights to one or more product candidates may not commit sufficient resources to the marketing and distribution of such product candidates;

 

   

Yumanity may lose certain valuable rights under circumstances identified in its collaborations, including if Yumanity undergoes a change of control;

 

   

collaborators may undergo a change of control and the new owners may decide to take the collaboration in a direction which is not in its best interest;

 

   

collaborators may become bankrupt, which may significantly delay its research or development programs, or may cause Yumanity to lose access to valuable technology, know-how or intellectual property of the collaborator relating to its products, product candidates or research programs;

 

   

key personnel at its collaborators may leave, which could negatively impact its ability to productively work with its collaborators;

 

   

collaborations may require Yumanity to incur short and long-term expenditures, issue securities that dilute its stockholders, or disrupt its management and business;

 

   

collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates or its discovery engine platform; and

 

   

collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If a present or future collaborator of Yumanity were to be involved in a business combination, the continued pursuit and emphasis on its development or commercialization program under such collaboration could be delayed, diminished, or terminated.

Yumanity may face significant competition in seeking appropriate collaborations. Recent business combinations among biotechnology and pharmaceutical companies have resulted in a reduced number of potential collaborators. In addition, the negotiation process is time-consuming and complex, and Yumanity may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If Yumanity is unable to do so,

 

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Yumanity may have to curtail the development of the product candidate for which Yumanity is seeking to collaborate, reduce or delay its development program or one or more of its other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase its expenditures and undertake development or commercialization activities at its own expense. If Yumanity elects to increase its expenditures to fund development or commercialization activities on its own, Yumanity may need to obtain additional capital, which may not be available to it on acceptable terms or at all. If Yumanity does not have sufficient funds, Yumanity may not be able to further develop product candidates or bring them to market and generate product revenue.

Under its collaboration with Merck, and if Yumanity enters into other collaborations to develop and potentially commercialize any product candidates, Yumanity may not be able to realize the benefit of such transactions if Yumanity or its collaborator elects not to exercise the rights granted under the agreement or if Yumanity or its collaborator are unable to successfully integrate a product candidate into existing operations and company culture. In addition, if Yumanity’s agreement with any of its collaborators terminates, its access to technology and intellectual property licensed to Yumanity by that collaborator may be restricted or terminate entirely, which may delay its continued development of its product candidates utilizing the collaborator’s technology or intellectual property or require Yumanity to stop development of those product candidates completely. Yumanity may also find it more difficult to find a suitable replacement collaborator or attract new collaborators, and its development programs may be delayed or the perception of Yumanity 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 its collaborators and any negative impact on its collaborators may adversely affect Yumanity.

Yumanity’s drug development programs and the potential commercialization of its product candidates will require substantial additional cash to fund expenses. For some of its product candidates, Yumanity 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 its collaboration with Merck.

Whether Yumanity reaches a definitive agreement for a collaboration will depend, among other things, upon its 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 its 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 Yumanity for its product candidate. The terms of any collaborations or other arrangements that Yumanity may establish may not be favorable to it.

In addition, Yumanity’s collaboration with Merck and any future collaborations that Yumanity enters into may not be successful. The success of its collaboration arrangements will depend heavily on the efforts and activities of its 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 Yumanity’s collaboration with Merck or any such termination or expiration of future collaborations would adversely affect Yumanity financially and could harm its business reputation.

 

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

Yumanity does not have the ability to independently conduct preclinical studies and clinical trials. Yumanity relies on medical institutions, clinical investigators, contract laboratories, and other third parties, such as CROs, to conduct preclinical studies and clinical trials on its product candidates. Yumanity enters into agreements with third-party CROs to provide monitors for and to manage data for its ongoing clinical trials. Yumanity will rely heavily on these parties for execution of clinical trials for its product candidates and control only certain aspects of their activities. As a result, Yumanity 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 Yumanity were relying entirely upon its own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties may:

 

   

have staffing difficulties;

 

   

fail to comply with contractual obligations;

 

   

experience regulatory compliance issues;

 

   

undergo changes in priorities or become financially distressed; or

 

   

form relationships with other entities, some of which may be its competitors.

These factors may materially adversely affect the willingness or ability of third parties to conduct its clinical trials and may subject Yumanity to unexpected cost increases that are beyond its control. Nevertheless, Yumanity is responsible for ensuring that each of its clinical trials is conducted in accordance with the applicable protocol, legal, regulatory, and scientific requirements and standards, and its reliance on CROs does not relieve Yumanity of its regulatory responsibilities. Yumanity and its 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 Yumanity or its CROs fail to comply with applicable GCPs, the clinical data generated in its clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require Yumanity to perform additional clinical trials before approving its marketing applications. Yumanity cannot assure you that, upon inspection, the FDA will determine that any of its clinical trials comply with GCPs. In addition, its clinical trials must be conducted with product candidates produced under cGMP regulations and will require a large number of test patients. Its failure or the failure of its CROs to comply with these regulations may require Yumanity 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 Yumanity does design its clinical trials for its product candidates, CROs conduct all of the clinical trials. As a result, many important aspects of its drug development programs are outside of its direct control. In addition, the CROs may not perform all of their obligations under arrangements with Yumanity or in compliance with regulatory requirements, but Yumanity remains responsible and is subject to enforcement action that may include civil penalties and criminal prosecution for any violations of FDA laws and regulations during the conduct of its clinical trials. If the CROs do not perform clinical trials in a satisfactory manner, breach their obligations to Yumanity, or fail to comply with regulatory requirements, the development and commercialization of its product candidates may be delayed or its development program materially and irreversibly harmed. Yumanity cannot control the amount and timing of resources these CROs devote to its program or its clinical products. If Yumanity is unable to rely on clinical data collected by its CROs, Yumanity could be required to

 

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repeat, extend the duration of, or increase the size of its clinical trials and this could significantly delay commercialization and require significantly greater expenditures.

If any of its relationships with these third-party CROs terminate, Yumanity 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 its collaboration is delayed or terminated or its ability to continue to use the current research space is terminated as a result of conflicts of interest, Yumanity may not be able to continue its 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 its clinical protocols, regulatory requirements or for other reasons, any clinical trials such CROs are associated with may be extended, delayed, or terminated, and Yumanity may not be able to obtain regulatory approval for or successfully commercialize its product candidates. As a result, Yumanity believes that its financial results and the commercial prospects for its product candidates in the subject indication would be harmed, its costs could increase and its ability to generate revenue could be delayed.

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

The processes involved in manufacturing its drug product candidates, particularly those that utilize its 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 its 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 Yumanity may develop is subject to FDA and other comparable foreign regulatory authority approval processes and continuous oversight, and Yumanity 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 Yumanity or its third-party manufacturers are unable to reliably produce products to specifications acceptable to the FDA or other regulatory authorities, Yumanity may not obtain or maintain the approvals Yumanity needs to commercialize such products. Even if Yumanity obtains regulatory approval for any of its product candidates, there is no assurance that either Yumanity or its 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 its product candidate, impair commercialization efforts, increase its cost of goods, and have an adverse effect on its business, financial condition, results of operations, and growth prospects.

Yumanity relies completely on third-party suppliers to manufacture its clinical drug supplies for its product candidates, and Yumanity intends to rely on third parties to produce preclinical, clinical, and commercial supplies of any future product candidates.

Yumanity does not currently have, nor does Yumanity plan to acquire, the infrastructure or capability to internally manufacture its clinical drug supply of its product candidates, or any future product candidates, for use

 

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in the conduct of its preclinical studies and clinical trials, and Yumanity lacks the internal resources and the capability to manufacture any product candidates on a clinical or commercial scale. The facilities used by its 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 Yumanity submits its NDA or relevant foreign regulatory submission to the applicable regulatory agency.

Yumanity does not control the manufacturing process of, and is completely dependent on, its contract manufacturers to comply with cGMPs for manufacture of both active drug substances and finished drug products. If its contract manufacturers cannot successfully manufacture material that conforms to its 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 or secure and/or maintain regulatory approval for their manufacturing facilities. In addition, Yumanity has no direct control over its contract manufacturers’ ability to maintain adequate quality control, quality assurance, and qualified personnel. Furthermore, all of its contract manufacturers are engaged with other companies to supply and/or manufacture materials or products for such companies, which exposes its 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 its contract manufacturers’ facilities generally. If the FDA or an applicable foreign regulatory agency determines now or in the future that these facilities for the manufacture of its product candidates are noncompliant, Yumanity may need to find alternative manufacturing facilities, which would adversely impact its ability to develop, obtain regulatory approval for or market its product candidates. Its reliance on contract manufacturers also exposes Yumanity to the possibility that they, or third parties with access to their facilities, will have access to and may appropriate its trade secrets or other proprietary information.

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

Risks Related to Yumanity’s Intellectual Property Rights

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

Yumanity’s success will depend significantly on its 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 its business, defend and enforce its patents, should they issue, preserve the confidentiality of its trade secrets, and operate without infringing the valid and enforceable patents and proprietary rights of third parties. Yumanity strives to protect and enhance the proprietary technologies that Yumanity believes are important to its business, including seeking patents intended to cover its products and compositions, their methods of use, and any other inventions that are important to the development of its business. Yumanity also relies on trade secrets to protect aspects of its business that are not amenable to, or that Yumanity does not consider appropriate for, patent protection.

Yumanity does not currently have any issued patents covering its clinical-stage product candidate YTX-7739. Yumanity cannot provide any assurances that any of its 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 its product candidates or otherwise provide any competitive advantage. The patent application and

 

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approval process is expensive, complex, and time-consuming. Yumanity 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 Yumanity will fail to identify patentable aspects of its research and development output in time to obtain patent protection. If Yumanity is unable to obtain or maintain patent protection with respect to any of its proprietary products and technology Yumanity develops, its business, financial condition, results of operations, and prospects could be materially harmed.

If the scope of any patent protection Yumanity obtains is not sufficiently broad, or if Yumanity lose any of its patent protection, its ability to prevent its competitors from commercializing similar or identical technology and product candidates would be adversely affected.

The patent positions of biotechnology and pharmaceutical companies, including its 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 Yumanity 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 its patents or narrow the scope of its patent protection. The laws of some foreign countries do not protect its proprietary rights to the same extent as the laws of the United States, and Yumanity may encounter significant problems in protecting its 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, Yumanity cannot be certain that Yumanity were the first to file patent applications on its product candidates. There is also no assurance that all of the potentially relevant prior art relating to its patents and patent applications has been found, which could be used by a third party to challenge the validity of its patents, should they issue, or prevent a patent from issuing from a pending patent application. Any of the foregoing could harm its competitive position, business, financial condition, results of operations, and prospects.

Moreover, its 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, ex parte 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 its ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of its technology and products. In addition, such proceedings may be costly. Thus, any patents, should they issue, that Yumanity 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 its ability to develop, market, or otherwise commercialize its product candidates.

Furthermore, though a patent, if it were to issue, is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide Yumanity 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 its 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 its business, financial condition, results of operations, and prospects.

 

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Its ability to enforce its patent rights depends on its 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 its patent rights, even if Yumanity were to prevail, could be costly and time-consuming and would divert the attention of its management and key personnel from its business operations. Yumanity may not prevail in any lawsuits that Yumanity initiate and the damages or other remedies awarded if Yumanity were to prevail may not be commercially meaningful.

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

Yumanity may in the future co-own patent rights relating to future product candidates and its discovery engine platform with third parties. Some of its in-licensed patent rights are, and may in the future be, co-owned with third parties. In addition, its licensors may co-own the patent rights Yumanity in-licenses with other third parties with whom Yumanity does not have a direct relationship. Its 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 its license agreements. If its licensors do not have exclusive control of the grant of licenses under any such third-party co-owners’ interest in such patent rights or Yumanity is otherwise unable to secure such exclusive rights, such co-owners may be able to license their rights to other third parties, including its competitors, and its competitors could market competing products and technology. In addition, Yumanity may need the cooperation of any such co-owners of its patent rights in order to 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 Yumanity’s competitive position, business, financial conditions, results of operations, and prospects.

Intellectual property rights do not necessarily address all potential threats.

The degree of future protection afforded by Yumanity’s intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect its business or permit it to maintain its competitive advantage. For example, Yumanity does not know whether:

 

   

any of its pending patent applications, if issued, will include claims having a scope sufficient to protect its product candidates or any other products or product candidates;

 

   

any of its pending patent applications will issue as patents at all;

 

   

Yumanity will be able to successfully commercialize its product candidates, if approved, before its relevant patents expire;

 

   

Yumanity will be the first to make the inventions covered by each of its patents and pending patent applications;

 

   

Yumanity will be the first to file patent applications for these inventions;

 

   

others will not develop similar or alternative technologies that do not infringe its patents;

 

   

others will not use pre-existing technology to effectively compete against it;

 

   

any of its patents, if issued, will be found to ultimately be valid and enforceable;

 

   

any patents issued to it will provide a basis for an exclusive market for its commercially viable products, will provide it with any competitive advantages or will not be challenged by third parties;

 

   

Yumanity will develop additional proprietary technologies or product candidates that are separately patentable; or

 

   

that its commercial activities or products will not infringe upon the patents or proprietary rights of others.

 

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

If Yumanity fails to comply with its obligations in the agreements under which Yumanity licenses intellectual property rights from third parties or otherwise experience disruptions to its business relationships with its licensors, Yumanity could lose license rights that are important to its business.

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

In addition, each of its license agreements, and Yumanity expects its future agreements, will impose various development, diligence, commercialization, and other obligations on it. Certain of its license agreements also require Yumanity to meet development timelines, or to exercise commercially reasonable efforts to develop and commercialize licensed products, in order to maintain the licenses. In spite of its efforts, its licensors might conclude that Yumanity has materially breached its obligations under such license agreements and might therefore terminate the license agreements, thereby removing or limiting its ability to develop and commercialize products and technology covered by these license agreements. If these in-licenses are terminated, or if the underlying patents fail to provide the intended exclusivity, competitors or other third parties would have the freedom to seek regulatory approval of, and to market, products identical to Yumanity’s and Yumanity may be required to cease its development and commercialization of certain of its product candidates or of its current discovery engine platform technology. Any of the foregoing could have a material adverse effect on Yumanity’s competitive position, business, financial conditions, results of operations, and prospects.

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

 

   

the scope of rights granted under the license agreement and other interpretation-related issues;

 

   

the extent to which its technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

 

   

the sublicensing of patent and other rights under its collaborative development relationships;

 

   

its diligence obligations under the license agreement and what activities satisfy those diligence obligations;

 

   

the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by its licensors and Yumanity and its partners; and

 

   

the priority of invention of patented technology.

In addition, the agreements under which Yumanity currently licenses 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 Yumanity believes to be the scope of its rights to the relevant intellectual property or technology, or increase

 

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what Yumanity believes to be its financial or other obligations under the relevant agreement, either of which could have a material adverse effect on its business, financial condition, results of operations, and prospects. Moreover, if disputes over intellectual property that Yumanity has licensed prevent or impair its ability to maintain its current licensing arrangements on commercially acceptable terms, Yumanity may be unable to successfully develop and commercialize the affected product candidates, which could have a material adverse effect on its business, financial conditions, results of operations, and prospects.

If Yumanity is unable to protect the confidentiality of its trade secrets, its business and competitive position may be harmed.

Yumanity may also rely on trade secrets to protect aspects of its business that are not amenable to, or that Yumanity does not consider appropriate for, patent protection. Additionally, Yumanity relies on unpatented know-how, continuing technological innovation to develop, strengthen, and maintain the proprietary and competitive position of its product candidates, which Yumanity seeks to protect, in part, by confidentiality agreements with its employees and its collaborators and consultants. However, trade secrets are difficult to protect. For example, Yumanity may be required to share its trade secrets with third-party licensees, collaborators, consultants, contractors, or other advisors and Yumanity has limited control over the protection of trade secrets used by such third parties. Although Yumanity uses reasonable efforts to protect its trade secrets, including by entering into confidentiality agreements, its employees, consultants, contractors, outside scientific collaborators, and other advisors may unintentionally or willfully disclose its trade secrets and proprietary information to competitors and Yumanity may not have adequate remedies for any such disclosure. Enforcing a claim that a third party illegally obtained and used, disclosed, or misappropriated any of its trade secrets is difficult, expensive, and time-consuming, and the outcome is unpredictable. Furthermore, Yumanity 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 Yumanity may not have adequate remedies for any such breach or violation, and Yumanity could lose its 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 its business will be independently developed by a person that is not a party to such an agreement. Further, its trade secrets could otherwise become known or be independently discovered by its competitors or other third parties. Yumanity may not be able to prevent the unauthorized disclosure or use of its technical knowledge or trade secrets by consultants, vendors, former employees, and current employees. If its trade secrets or confidential or proprietary information is divulged to or acquired by third parties, including its competitors, its competitive position in the marketplace, business, financial condition, results of operations, and prospects may be materially adversely affected.

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

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

The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may allege that its product candidates or the use of its technologies infringes or otherwise violates patent claims or other intellectual property rights held by them or that Yumanity is employing their proprietary technology without authorization. As Yumanity continues to develop and, if approved, commercialize its current product candidates and future product candidates, competitors may claim that its

 

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technology infringes their intellectual property rights as part of business strategies designed to impede its 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 its product candidates. 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 its product candidates may infringe, or which such third parties claim are infringed by its technologies. If a patent holder believes one or more of its product candidates infringes its patent rights, the patent holder may sue Yumanity even if Yumanity has received patent protection for its technology. Moreover, Yumanity may face patent infringement claims from non-practicing entities that have no relevant drug revenue and against whom its 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 Yumanity is sued for patent infringement, Yumanity would need to demonstrate that its 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 Yumanity may not be able to do this. Even if Yumanity is successful in these proceedings, Yumanity may incur substantial costs and the time and attention of its management and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on its business and operating results. In addition, Yumanity 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 Yumanity is found to infringe a third party’s intellectual property rights, Yumanity could be required to obtain a license from such third party to continue developing and marketing its product candidates and technology. However, Yumanity may not be able to obtain any required license on commercially reasonable terms or at all. Even if Yumanity were to obtain a license, it could be granted on non-exclusive terms, thereby providing its competitors and other third parties access to the same technologies licensed to it. In addition, if any such claim were successfully asserted against Yumanity and it could not obtain such a license, Yumanity may be forced to stop or delay developing, manufacturing, selling or otherwise commercializing its product candidates. Any claim relating to intellectual property infringement that is successfully asserted against it may require Yumanity to pay substantial damages, including treble damages and attorney’s fees if Yumanity is 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 Yumanity is forced to take a license.

Even if Yumanity is successful in these proceedings, Yumanity 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 its common stock to decline. If Yumanity is unable to avoid infringing the patent rights of others, Yumanity may be required to seek a license, defend an infringement action, or challenge the validity of the patents in court, or redesign its products. Patent litigation is costly and time-consuming. Yumanity may not have sufficient resources to bring these actions to a successful conclusion. In addition, intellectual property litigation or claims could force Yumanity to do one or more of the following:

 

   

cease developing, selling or otherwise commercializing its product candidates;

 

   

pay substantial damages for past use of the asserted intellectual property;

 

   

obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; and

 

   

in the case of trademark claims, redesign, or rename, some or all of its product candidates to avoid infringing the intellectual property rights of third parties, which may not be possible and, even if possible, could be costly and time-consuming.

 

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

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

Yumanity enters into confidentiality and intellectual property assignment agreements with its 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 Yumanity will be its exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to Yumanity. 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 Yumanity may be forced to bring claims against third parties, or defend claims that they may bring against it, to determine the ownership of what Yumanity regards as its intellectual property. For example, even if Yumanity has 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 Yumanity, 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 Yumanity fails in defending any such claims, in addition to paying monetary damages, Yumanity 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 its business. Even if Yumanity is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Obtaining and maintaining Yumanity’s patent protection depends on compliance with various procedural, document submission, fee payment, and other requirements imposed by governmental patent agencies, and its 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 its 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 Yumanity may own or license in the future. Yumanity has systems in place to remind it to pay these fees, and Yumanity employs outside firms to remind it or its licensors to pay annuity fees due to foreign patent agencies on its 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 its 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 its business, financial condition, results of operations, and prospects.

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

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

 

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Furthermore, many of its adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than Yumanity can. Its ability to enforce its patent rights also depends on its 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 its allegations and refuse to stop the other party from using the technology at issue on the grounds that its patents do not cover the technology in question, or may decide that a patent of Yumanity’s is invalid, unenforceable or not infringed. An adverse result in any litigation, defense or post-grant proceedings could result in one or more of its patents being invalidated or interpreted narrowly and could put its patent applications at risk of not issuing. If any of its patents, if and when issued, covering its product candidates are invalidated or found unenforceable, Yumanity’s financial position and results of operations would be materially and adversely impacted. Yumanity may not prevail in any lawsuits that Yumanity initiates and the damages or other remedies awarded if Yumanity were to prevail may not be commercially meaningful.

Interference proceedings provoked by third parties or brought by Yumanity may be necessary to determine the priority of inventions with respect to its patents or patent applications. An unfavorable outcome could require Yumanity to cease using the related technology or to attempt to license rights to it from the prevailing party. Yumanity’s business could be harmed if the prevailing party does not offer it a license on commercially reasonable terms. Yumanity’s involvement in litigation or interference proceedings may fail and, even if successful, may result in substantial costs, and distract its management and other employees. Yumanity may not be able to prevent infringement, misappropriation of, or other violations of its 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 its 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 its common stock. Such litigation or proceedings could substantially increase its operating losses and reduce the resources available for development activities or any future sales, marketing, or distribution activities. Yumanity may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of its competitors may be able to sustain the costs of such litigation or proceedings more effectively than Yumanity 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 its ability to compete in the marketplace.

Issued patents covering Yumanity’s discovery engine platform and its product candidates could be found invalid or unenforceable if challenged.

If Yumanity initiated legal proceedings against a third party to enforce a patent, if and when issued, covering its discovery engine platform or one of its product candidates, the defendant could counterclaim that the patent covering its 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

 

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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 its patents in such a way that they no longer cover its product candidates or competitive products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, Yumanity cannot be certain that there is no invalidating prior art, of which Yumanity and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, Yumanity would lose at least part, and perhaps all, of the patent protection on its product candidates. Such a loss of patent protection would have a material adverse impact on its business.

Yumanity may not seek to protect its intellectual property rights in all jurisdictions throughout the world and Yumanity may not be able to adequately enforce its intellectual property rights even in the jurisdictions where Yumanity seeks protection.

Filing and prosecuting patent applications, and defending patents on its discovery engine platform and product candidates in all countries and jurisdictions throughout the world would be prohibitively expensive, and Yumanity’s 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, Yumanity may not be able to prevent third parties from practicing its inventions in all countries outside the United States, or from selling or importing products made using its 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 its patent applications and Yumanity 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 Yumanity owns, the relevant statutory deadlines have not yet expired. Thus, for each of the patent families that Yumanity believes provides coverage for its lead product candidate, Yumanity will need to decide whether and where to pursue protection outside the United States.

Competitors may use its technologies in jurisdictions where Yumanity does not pursue and obtain patent protection to develop their own products and further, may export otherwise infringing products to territories where Yumanity has patent protection, but enforcement is not as strong as that in the United States. These products may compete with its products and its patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if Yumanity pursues and obtains issued patents in particular jurisdictions, its 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 Yumanity to stop the infringement of its patents, if obtained, or the misappropriation of or marketing of competing products in violation of its 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, Yumanity may choose not to seek patent protection in certain countries, and Yumanity will not have the benefit of patent protection in such countries.

Proceedings to enforce its patent rights in foreign jurisdictions could result in substantial costs and divert Yumanity’s efforts and attention from other aspects of its business, could put its patents at risk of being

 

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invalidated or interpreted narrowly, could put its patent applications at risk of not issuing, and could provoke third parties to assert claims against it. Yumanity may not prevail in any lawsuits that it initiates and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, Yumanity’s efforts to enforce its intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that Yumanity develops or license.

If Yumanity does not obtain additional protection under the Hatch-Waxman Act and similar foreign legislation by extending the patent terms and obtaining data exclusivity for its product candidates, its 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 its earliest U.S. non-provisional filing date in its 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 its product candidates are obtained, once the patent life has expired for a product candidate, Yumanity 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, Yumanity’s patent portfolio may not provide it with sufficient rights to exclude others from commercializing product candidates similar or identical to Yumanity’s.

Depending upon the timing, duration, and specifics of FDA marketing approval of its product candidates, one or more of the U.S. patents Yumanity owns 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, Yumanity 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 Yumanity requests. If Yumanity is unable to obtain a patent term extension or the term of any such extension is less than Yumanity requests, the duration of patent protection Yumanity obtains for its product candidates may not provide it with any meaningful commercial or competitive advantage, its competitors may obtain approval of competing products earlier than they would otherwise be able to do so, and its 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 Yumanity’s ability to protect its products.

As is the case with other biotechnology companies, Yumanity’s 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 Yumanity’s business. However, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of Yumanity’s patent applications and the enforcement or defense of any patents that may issue from its patent applications, all of which could have a material adverse effect on Yumanity’s business and financial condition.

 

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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 Yumanity’s 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 Yumanity’s ability to obtain new patents or to enforce any patents that may issue in the future.

Yumanity may be subject to damages resulting from claims that Yumanity or its employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers.

Yumanity’s employees have been previously employed at other biotechnology or pharmaceutical companies, including its competitors or potential competitors. Yumanity also engages advisors and consultants who are concurrently employed at universities or who perform services for other entities.

Although Yumanity tries to ensure that its employees, consultants, and advisors do not use the proprietary information or know-how of others in their work for it, and although Yumanity is not aware of any claims currently pending against it, Yumanity may be subject to claims that Yumanity or its 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. Yumanity has and may in the future also be subject to claims that an employee, advisor, or consultant performed work for it 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 Yumanity is successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If Yumanity fails in defending such claims, in addition to paying money claims, Yumanity may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent its ability to commercialize its product candidates, which would materially adversely affect its commercial development efforts.

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

Yumanity currently has rights to intellectual property, through licenses from third parties, to identify and develop its 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 its business. In order to avoid infringing these third party patents, Yumanity 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 Yumanity co-owns with third parties, Yumanity may require licenses to such

 

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co-owners’ interest to such patents. However, Yumanity 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 Yumanity identifies as necessary for its current or future product candidates and its 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 Yumanity 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 Yumanity to be a competitor may be unwilling to assign or license rights to it. Yumanity also may be unable to license or acquire third party intellectual property rights on terms that would allow it to make an appropriate return on its investment or at all. If Yumanity is unable to successfully obtain rights to required third party intellectual property rights or maintain the existing intellectual property rights Yumanity has, Yumanity may have to abandon development of the relevant program or product candidate, which could have a material adverse effect on its business, financial condition, results of operations and prospects.

Numerous factors may limit any potential competitive advantage provided by Yumanity’s intellectual property rights.

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

 

   

others may be able to make products that are similar to its product candidates or utilize similar technology but that are not covered by the claims of the patents that Yumanity licenses or may own;

 

   

Yumanity, or its current or future licensors or collaborators, might not have been the first to make the inventions covered by the issued patent or pending patent application that Yumanity licenses or owns now or in the future;

 

   

Yumanity, or its current or future licensors or collaborators, might not have been the first to file patent applications covering certain of its or their inventions;

 

   

others may independently develop similar or alternative technologies or duplicate any of its technologies without infringing its owned or licensed intellectual property rights;

 

   

it is possible that its current or future pending owned or licensed patent applications will not lead to issued patents;

 

   

issued patents that Yumanity holds rights to may be held invalid or unenforceable, including as a result of legal challenges by its competitors or other third parties;

 

   

its competitors or other third parties might conduct research and development activities in countries where Yumanity does not have patent rights and then use the information learned from such activities to develop competitive products for sale in its major commercial markets;

 

   

Yumanity may not develop additional proprietary technologies that are patentable;

 

   

the patents of others may harm its business; and

 

   

Yumanity may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property.

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

 

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Risks Related to Yumanity’s Indebtedness

Yumanity’s level of indebtedness and debt service obligations could adversely affect its financial condition and may make it more difficult for Yumanity to fund its operations.

In December 2019, Yumanity entered into a loan and security agreement with Hercules Capital, Inc. (“Hercules”) (the “Term Loan”), which was most recently amended in June 2020. 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, Yumanity is obligated to make payments that will include equal installments of principal and interest through the maturity date of January 1, 2024. As of August 31, 2020, $15.0 million was outstanding under the Term Loan. In April 2020, Yumanity incurred additional indebtedness consisting of a $1.1 million loan (the “PPP Loan”) under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act.

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

 

   

Yumanity will need to repay its indebtedness by making payments of interest and principal, which will reduce the amount of money available to finance its operations, its research and development efforts and other general corporate activities; and

 

   

Yumanity’s failure to comply with the restrictive covenants in the Term Loan could result in an event of default that, if not cured or waived, would accelerate its obligation to repay this indebtedness, and Hercules could seek to enforce its security interest in the assets securing such indebtedness.

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

In addition, while all or a portion of the PPP Loan may be forgiven if the PPP Loan is used for qualifying expenses as described in the CARES Act, there is no assurance that Yumanity will be able to obtain forgiveness, notwithstanding that it believes it has used the PPP Loan for qualifying expenses. The U.S. Department of the Treasury, Small Business Administration and members of Congress have indicated an intention to provide strong oversight of loans granted under the Paycheck Protection Program. If Yumanity is audited or reviewed or its records are subpoenaed by the government as a result of entering into the PPP Loan, it could divert management’s time and attention and Yumanity could incur legal and reputational costs, and an adverse finding could lead to the requirement to return the PPP Loan, which could reduce Yumanity’s liquidity, or could subject Yumanity to fines and penalties.

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

Failure to satisfy its 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 Yumanity’s control, such as the occurrence of a material adverse event on its 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, Yumanity may not have sufficient funds or may be unable to arrange for additional financing to repay its indebtedness. In addition, Hercules could seek to enforce its security interests in the assets securing such indebtedness. If Yumanity is unable to pay amounts due to Hercules upon

 

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acceleration of the Term Loan or if Hercules enforces its security interest against its assets securing its indebtedness to Hercules, Yumanity’s ability to continue to operate its business may be jeopardized.

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

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

 

   

dispose of certain assets;

 

   

engage in mergers or acquisitions;

 

   

encumber its intellectual property;

 

   

incur indebtedness or liens;

 

   

pay dividends;

 

   

make certain investments; and

 

   

engage in certain other business transactions.

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

Risks Related to Yumanity’s Business Operations, Employee Matters and Managing Growth

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

As of September 1, 2020, Yumanity had 41 full-time employees and three part-time employees, and in connection with becoming a public company, Yumanity expects to increase its number of employees and the scope of its operations. To manage its anticipated development and expansion, Yumanity must continue to implement and improve its managerial, operational, and financial systems, expand its facilities, and continue to recruit and train additional qualified personnel. Also, its 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 its limited resources, Yumanity may not be able to effectively manage the expansion of its operations or recruit and train additional qualified personnel. This may result in weaknesses in its infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees, and reduced productivity among remaining employees. The physical expansion of its operations may lead to significant costs and may divert financial resources from other projects, such as the development of its product candidates. If Yumanity’s management is unable to effectively manage its expected development and expansion, its expenses may increase more than expected, its ability to generate or increase its revenue could be reduced and Yumanity may not be able to implement its business strategy. Yumanity’s future financial performance and its ability to commercialize its product candidates, if approved, and compete effectively will depend, in part, on its ability to effectively manage the future development and expansion of its company.

Yumanity’s future success depends on its ability to retain its management team and to attract, retain, and motivate qualified personnel.

Its ability to compete in the highly competitive biotechnology and biopharmaceuticals industries depends upon its ability to attract and retain highly qualified managerial, scientific, and medical personnel. In order to induce valuable employees to continue their employment with Yumanity, Yumanity has provided stock options that vest

 

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over time. The value to employees of stock options that vest over time is significantly affected by movements in its stock price that are beyond its control, and may at any time be insufficient to counteract more lucrative offers from other companies.

Yumanity is highly dependent on its management, scientific and medical personnel, including its Chief Executive Officer, Richard Peters, M.D., Ph.D. Despite its efforts to retain valuable employees, members of its management, scientific, and development teams may terminate their employment with Yumanity on short notice. The loss of the services of any of its 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 Yumanity’s business. Pursuant to their employment arrangements, each of its executive officers, and other employees may voluntarily terminate their employment at any time, with or without notice. Yumanity’s success also depends on its 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.

Yumanity 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 Yumanity compete against for qualified personnel have greater financial and other resources, different risk profiles, and a longer history in the industry than Yumanity does. 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 Yumanity may be able to offer. Yumanity also experiences competition for the hiring of scientific personnel from universities and research institutions. If Yumanity is unable to continue to attract and retain high quality personnel, the rate and success at which Yumanity can develop and commercialize product candidates will be limited.

Yumanity faces potential product liability exposure, and, if claims are brought against it, Yumanity may incur substantial liability.

The use of Yumanity’s product candidates in clinical trials and the sale of its product candidates, if approved, exposes it to the risk of product liability claims. Product liability claims might be brought against Yumanity by patients, healthcare providers, or others selling or otherwise coming into contact with its product candidates. For example, Yumanity may be sued if any product Yumanity develops 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 Yumanity becomes subject to product liability claims and cannot successfully defend itself against them, Yumanity could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in, among other things:

 

   

withdrawal of subjects from Yumanity’s clinical trials;

 

   

substantial monetary awards to patients or other claimants;

 

   

decreased demand for Yumanity’s product candidates or any future product candidates following marketing approval, if obtained;

 

   

damage to Yumanity’s reputation and exposure to adverse publicity;

 

   

increased FDA warnings on product labels;

 

   

litigation costs;

 

   

distraction of management’s attention from Yumanity’s primary business;

 

   

loss of revenue; and

 

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the inability to successfully commercialize Yumanity’s product candidates or any future product candidates, if approved.

Yumanity maintains product liability insurance coverage for its clinical trials with a €5 million annual aggregate coverage limit. Nevertheless, Yumanity’s insurance coverage may be insufficient to reimburse it for any expenses or losses Yumanity may suffer. Moreover, in the future, Yumanity may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect it against losses, including if insurance coverage becomes increasingly expensive. If and when Yumanity obtains marketing approval for its product candidates, Yumanity intends to expand its insurance coverage to include the sale of commercial products; however, Yumanity 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 its favor, could be substantial, particularly in light of the size of its business and financial resources. A product liability claim or series of claims brought against Yumanity could cause its stock price to decline and, if Yumanity is unsuccessful in defending such a claim or claims and the resulting judgments exceed its insurance coverage, its financial condition, business, and prospects could be materially adversely affected.

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

As a public company, and particularly after Yumanity is no longer an “emerging growth company,” Yumanity will incur significant legal, accounting, and other expenses that Yumanity 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. Its management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase its 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”), Yumanity will be required to furnish a report by its management on its internal control over financial reporting, which may include an attestation report on internal control over financial reporting issued by its independent registered public accounting firm. While Yumanity remains an “emerging growth company” or a “smaller reporting company” with less than $100 million in annual revenues, Yumanity will not be required to include an attestation report on internal control over financial reporting issued by its independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, Yumanity will be engaged in a process to document and evaluate its internal control over financial reporting, which is both costly and challenging. In this regard, Yumanity 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 its efforts, there is a risk that neither Yumanity nor its independent registered public accounting firm will be able to conclude within the prescribed timeframe that its 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 its financial statements.

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

After the completion of the Merger, Yumanity will be 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

 

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

Yumanity may discover weaknesses in its system of internal financial and accounting controls and procedures that could result in a material misstatement of its financial statements. Its 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 met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

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

In order to satisfy its obligations as a public company, Yumanity will need to hire additional qualified accounting and financial personnel with appropriate public company experience.

As a newly public company, Yumanity will need to establish and maintain effective disclosure and financial controls and make changes in its corporate governance practices. Yumanity 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 Yumanity is able to hire appropriate personnel, its 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.

Changes in tax law, including the recently passed comprehensive tax reform bill, could adversely affect Yumanity’s business and financial condition.

The rules dealing with U.S. federal, state, and local income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive application) could adversely affect Yumanity or holders of its common stock. In recent years, many such changes have been made and changes are likely to continue to occur in the future. On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “TCJA”), which significantly reforms the Internal Revenue Code of 1986, as amended, or the Code. The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for net interest expense to 30% of adjusted earnings (except for certain small businesses), and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”). Yumanity continues to examine the impact this tax reform legislation may have on its business. However, the effect of the TCJA on its business, whether adverse or favorable, is uncertain, and may not become

 

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evident for some period of time. Furthermore, Yumanity’s implementation of new practices and processes designed to comply with changing tax laws and regulations could require Yumanity to make substantial changes to its business practices, allocate additional resources, and increase its costs, which could negatively affect its business, results of operations and financial condition. Yumanity urges investors to consult with their legal and tax advisers regarding the implications of the TCJA and other changes in tax laws on an investment in its common stock.

Yumanity’s ability to use its net operating loss carryforwards and certain tax credit carryforwards may be subject to limitation.

As of December 31, 2019, Yumanity had federal and state net operating loss (“NOL”) carryforwards of $84.7 million and $84.8 million, respectively, which begin to expire in 2035. Under Section 382 of the Code changes in its ownership may limit the amount of its net operating loss carryforwards and research and development tax credit carryforwards that could be utilized annually to offset its future taxable income, if any. This limitation would generally apply in the event of a cumulative change in ownership of its company of more than 50% within a three-year period. Any such limitation may significantly reduce its ability to utilize its net operating loss carryforwards and research and development tax credit carryforwards before they expire. The completion of the Merger, together with private placements and other transactions that have occurred since its inception, may trigger such an ownership change pursuant to Section 382. Any such limitation, whether as the result of the Merger, prior private placements, sales of its common stock by its existing stockholders, or additional sales of its common stock by Yumanity after the Merger, could have a material adverse effect on its results of operations in future years. Yumanity has not yet completed a Section 382 analysis, and therefore, there can be no assurances that the NOL is already not limited.

In addition, the reduction of the corporate tax rate under the TCJA may cause a reduction in the economic benefit of its NOL carryforwards and other deferred tax assets available to it. For example, while the TCJA allows for federal NOLs incurred in tax years beginning after December 31, 2017 to be carried forward indefinitely, the TCJA also imposes an 80% limitation on the use of NOLs that are generated in tax years beginning after December 31, 2017. Net operating losses generated prior to December 31, 2017, however, will still have a 20-year carryforward period, but are not subject to the 80% limitation.

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) modifies, among other things, the rules governing NOLs. NOLs arising in tax years 2018, 2019, and 2020 are subject to a five year carryback and indefinite carryforward, while NOLs arising in tax years beginning after December 31, 2020 also are subject to indefinite carryforward but cannot be carried back. The CARES Act also suspends the 80% limitation mentioned above for NOLs generated in taxable years ending after December 31, 2017 that are used in taxable years ending on or prior to December 31, 2020. In future years, if and when a net deferred tax asset is recognized related to Yumanity’s NOLs, the changes in the carryforward/carryback periods as well as the new limitation on use of NOLs may significantly impact its valuation allowance assessments for NOLs generated after December 31, 2017.

Furthermore, Yumanity’s ability to utilize NOLs is conditioned upon its maintaining profitability in the future and generating U.S. federal taxable income. Since Yumanity does not know whether or when it will generate the U.S. federal taxable income necessary to utilize its remaining NOLs, these NOL carryforwards generated prior to December 31, 2017 could expire unused. Notwithstanding the foregoing discussion of NOLs, Yumanity has recorded a full valuation allowance related to its NOLs due to the uncertainty of the ultimate realization of the future benefits of such NOLs.

Yumanity may acquire businesses or products, or form strategic alliances, in the future, and Yumanity may not realize the benefits of such acquisitions.

Yumanity may acquire additional businesses or products, form strategic alliances, or create joint ventures with third parties that Yumanity believes will complement or augment its existing business. If Yumanity acquire

 

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businesses with promising markets or technologies, Yumanity may not be able to realize the benefit of acquiring such businesses if Yumanity is unable to successfully integrate them with its existing operations and company culture. Yumanity may encounter numerous difficulties in developing, manufacturing, and marketing any new products resulting from a strategic alliance or acquisition that delay or prevent it from realizing their expected benefits or enhancing its business. Yumanity cannot provide assurance that, following any such acquisition, Yumanity will achieve the synergies expected in order to justify the transaction.

General Risk Factors

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

Its results of operations could be adversely affected by general conditions in the global economy and in 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 result in a variety of risks to its business, including, weakened demand for Yumanity’s product candidates and its ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain its suppliers, possibly resulting in supply disruption, or cause its customers to delay making payments for its services. Any of the foregoing could harm its business and Yumanity cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact its business.

Yumanity, or the third parties upon whom Yumanity depend, may be adversely affected by earthquakes or other natural disasters and its business continuity and disaster recovery plans may not adequately protect Yumanity from a serious disaster.

Earthquakes or other natural disasters could severely disrupt its operations, and have a material adverse effect on its business, results of operations, financial condition, and prospects. If a natural disaster, power outage, or other event occurred that prevented Yumanity from using all or a significant portion of its headquarters, that damaged critical infrastructure, such as the manufacturing facilities of its third-party contract manufacturers and suppliers, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for Yumanity to continue its business for a substantial period of time. The disaster recovery and business continuity plans Yumanity has in place may prove inadequate in the event of a serious disaster or similar event. Yumanity may incur substantial expenses as a result of the limited nature of its disaster recovery and business continuity plans, which, particularly when taken together with its lack of earthquake insurance, could have a material adverse effect on its business.

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

Despite the implementation of security measures, Yumanity’s internal computer systems and those of its 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 Yumanity has not experienced any such system failure, accident, or security breach to date, if such an event were to occur and cause interruptions in its operations, it could result in a material disruption of its programs. For example, the loss of clinical study data for its product candidates could result in delays in its regulatory approval efforts and significantly increase its costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to its data or applications or other data or applications relating to its technology or product candidates, or inappropriate disclosure of confidential or proprietary information, Yumanity could incur liabilities and the further development of its product candidates could be delayed.

Risks Related to the Combined Organization

In determining whether you should approve the Merger, the issuance of shares of Proteostasis common stock and other matters related to the Merger, as the case may be, you should carefully read the following risk factors in

 

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addition to the risks described under “Risk Factors — Risks Related to the Merger,” “Risk Factors — Risks Related to the Proposed Proteostasis Reverse Stock Split,” “Risk Factors — Risks Related to Proteostasis” and “Risk Factors — Risks Related to Yumanity,” which will also apply to the combined organization.

The combined organization’s stock price is expected to be volatile, and the market price of its common stock may drop following the Merger.

The market price of the combined organization’s common stock following the Merger could be subject to significant fluctuations following the Merger. Market prices for securities of healthcare and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of the combined organization’s common stock to fluctuate include:

 

   

a slowdown in the healthcare industry or the general economy;

 

   

inability to obtain adequate supply of the components for any of the combined organization’s products, or inability to do so at acceptable prices;

 

   

failure to successfully develop and commercialize the combined organization’s product candidates;

 

   

failure to obtain additional funding;

 

   

performance of third parties on whom the combined organization may rely, including for the manufacture of the components for its product, including their ability to comply with regulatory requirements;

 

   

the results of the combined organization’s current and any future clinical trials of its product candidates;

 

   

unanticipated or serious safety concerns related to the use of any of the combined organization’s products;

 

   

adverse regulatory decisions;

 

   

the entry into, or termination of, key agreements, including key commercial partner agreements;

 

   

the initiation of, material developments in or conclusion of litigation to enforce or defend any of the combined organization’s intellectual property rights or defend against the intellectual property rights of others;

 

   

announcements by the combined organization, commercial partners or competitors of new products or product enhancements, clinical progress or the lack thereof, significant contracts, commercial relationships or capital commitments;

 

   

competition from existing technologies and products or new technologies and products that may emerge;

 

   

the loss of key employees;

 

   

disputes or other developments relating to proprietary rights, including patents, litigation matters and the combined organization’s ability to obtain patent protection for the combined organization’s licensed and owned technologies;

 

   

changes in estimates or recommendations by securities analysts, if any, who cover the combined organization’s common stock;

 

   

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

 

   

sales of the combined organization’s common stock by the combined organization or its stockholders in the future;

 

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general and industry-specific economic conditions that may affect the combined organization’s research and development expenditures;

 

   

the low trading volume and the high proportion of shares held by affiliates;

 

   

changes in the structure of health care payment systems; and

 

   

period-to-period fluctuations in the combined organization’s financial results.

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of the combined organization’s common stock.

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm the combined organization’s profitability and reputation.

The combined organization will need to raise additional financing in the future to fund its operations, which may not be available to it on favorable terms or at all.

The combined organization will require substantial additional funds to conduct the costly and time-consuming clinical efficacy trials necessary to pursue regulatory approval of each potential product candidate and to continue the development of YTX-7739 and YTX-9184. The combined organization’s future capital requirements will depend upon a number of factors, including: the number and timing of future product candidates in the pipeline; progress with and results from preclinical testing and clinical trials; the ability to manufacture sufficient drug supplies to complete preclinical and clinical trials; the costs involved in preparing, filing, acquiring, prosecuting, maintaining and enforcing patent and other intellectual property claims; and the time and costs involved in obtaining regulatory approvals and favorable reimbursement or formulary acceptance. Raising additional capital may be costly or difficult to obtain and could significantly dilute stockholders’ ownership interests or inhibit the combined organization’s ability to achieve its business objectives. If the combined organization raises additional funds through public or private equity offerings, the terms of these securities may include liquidation or other preferences that adversely affect the rights of its common stockholders. Further, to the extent that the combined organization raises additional capital through the sale of common stock or securities convertible or exchangeable into common stock, its stockholder’s ownership interest in the combined organization will be diluted. In addition, any debt financing may subject the combined organization to fixed payment obligations and covenants limiting or restricting its ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If the combined organization raises additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, the combined organization may have to relinquish certain valuable intellectual property or other rights to its product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to it. Even if the combined organization were to obtain sufficient funding, there can be no assurance that it will be available on terms acceptable to the combined organization or its stockholders.

The combined organization will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.

The combined organization will incur significant legal, accounting, and other expenses that Yumanity did not incur as a private company, including costs associated with public company reporting requirements. The combined organization will also incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as new rules implemented by the SEC and Nasdaq. These rules and regulations are expected to increase the combined organization’s legal and financial compliance costs

 

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and to make some activities more time-consuming and costly. For example, the combined organization’s management team will consist of the executive officers of Yumanity prior to the Merger, some of whom may not have previously managed and operated a public company. These executive officers and other personnel will need to devote substantial time to gaining expertise regarding operations as a public company and compliance with applicable laws and regulations. These rules and regulations may also make it difficult and expensive for the combined organization to obtain directors and officers liability insurance. As a result, it may be more difficult for the combined organization to attract and retain qualified individuals to serve on the combined organization’s board of directors or as executive officers of the combined organization, which may adversely affect investor confidence in the combined organization and could cause the combined organization’s business or stock price to suffer. Further, the combined organization may need to add additional experience and personnel to support its public company operations. The loss of any existing personnel in these areas or the combined organization’s inability to achieve or manage such expansion effectively may result in weaknesses in its infrastructure and the combined organization’s business, financial condition and results of operations may be materially adversely affected.

Anti-takeover provisions in the combined organization’s charter documents and under Delaware law could make an acquisition of the combined organization more difficult and may prevent attempts by the combined organization’s stockholders to replace or remove the combined organization’s management.

Provisions in the combined organization’s certificate of incorporation and bylaws may delay or prevent an acquisition or a change in management. These provisions include a prohibition on actions by written consent of the combined organization’s stockholders and the ability of the board of directors to issue preferred stock without stockholder approval. In addition, because the combined organization will be incorporated in Delaware, it is governed by the provisions of Section 203 of the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding combined organization voting stock from merging or combining with the combined organization. Although Proteostasis and Yumanity believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirors to negotiate with the combined organization’s board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by the combined organization’s stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.

Proteostasis and Yumanity do not anticipate that the combined organization will pay any cash dividends in the foreseeable future.

The current expectation is that the combined organization will retain its future earnings to fund the development and growth of the combined organization’s business. As a result, capital appreciation, if any, of the common stock of the combined organization will be your sole source of gain, if any, for the foreseeable future.

An active trading market for the combined organization’s common stock may not develop and its stockholders may not be able to resell their shares of common stock for a profit, if at all.

Prior to the Merger, there had been no public market for Yumanity’s capital stock. Although Proteostasis’ common stock is listed on Nasdaq, and Proteostasis and Yumanity will apply to have the combined organization’s common stock listed on Nasdaq, an active trading market for the combined organization’s shares of common stock may never develop or be sustained. Proteostasis, Yumanity and their financial advisors will set the final reverse split ratio to target a trading price to provide for sufficient liquidity. The price that the combined organization trades at immediately after the Merger may not necessarily reflect the price at which investors in the market will be willing to buy and sell the shares on a sustained basis. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. An inactive market may also impair the combined organization’s ability to raise capital by selling shares and may impair the combined organization’s ability to acquire other businesses or technologies using the combined

 

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organization’s shares as consideration, which, in turn, could materially adversely affect the combined organization’s business.

If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about the combined organization, its business or its market, its stock price and trading volume could decline.

The trading market for the combined organization’s common stock will be influenced by the research and reports that equity research analysts publish about it and its business. Equity research analysts may elect not to provide research coverage of the combined organization’s common stock after the completion of this offering, and such lack of research coverage may adversely affect the market price of its common stock. In the event it does have equity research analyst coverage, the combined organization will not have any control over the analysts or the content and opinions included in their reports. The price of the combined organization’s common stock could decline if one or more equity research analysts downgrade its stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of the combined organization or fails to publish reports on it regularly, demand for its common stock could decrease, which in turn could cause its stock price or trading volume to decline.

Future sales of shares by existing stockholders could cause the combined organization stock price to decline.

If existing stockholders of Proteostasis and Yumanity sell, or indicate an intention to sell, substantial amounts of the combined organization’s common stock in the public market after the post-Merger legal restrictions on resale discussed in this proxy statement/prospectus/information statement lapse, the trading price of the common stock of the combined organization could decline. Based on shares outstanding as of October 31, 2020 and shares expected to be issued upon completion of the Merger, the combined organization is expected to have outstanding a total of approximately 177.3 million shares of common stock (without giving effect to the proposed Proteostasis Reverse Stock Split) immediately following the completion of the Merger. Approximately 94.8 million of such shares of common stock will be freely tradable, without restriction, in the public market. Approximately 32.3 million of such shares will be held by directors, executive officers of the combined organization and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act. In addition, shares of common stock that are subject to outstanding options of Yumanity will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of the combined organization common stock could decline.

The ownership of the combined organization common stock will be initially highly concentrated, and may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause the combined organization stock price to decline. Furthermore, seven of the combined organization’s anticipated directors will be appointed by Yumanity pursuant to the terms of the Merger Agreement.

Executive officers, directors of the combined organization and their affiliates are expected to beneficially own or control approximately 18.2% of the outstanding shares of the combined organization common stock following the completion of the Merger (after giving effect to the exercise of all outstanding vested and unvested options and warrants). Furthermore, seven of the combined organization’s anticipated directors will be appointed by Yumanity pursuant to the terms of the Merger Agreement. Accordingly, these executive officers, directors and their affiliates, acting as a group, will have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of the combined organization assets or any other significant corporate transactions. These stockholders may also delay or prevent a change of control of the combined organization, impede a merger, consolidation, takeover or other business combination involving the combined organization, or discourage a potential acquiror from making a tender offer or otherwise attempting to obtain control of the combined organization’s business, even if

 

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such a change of control would benefit the other stockholders of the combined organization. The significant concentration of stock ownership may adversely affect the trading price of the combined organization’s common stock due to investors’ perception that conflicts of interest may exist or arise.

The combined organization is expected to take advantage of reduced disclosure and governance requirements applicable to smaller reporting companies, which could result in its common stock being less attractive to investors.

Following the Merger, the combined organization is expected to have annual revenues below $100 million and a public float of less than $700 million and therefore will qualify as a smaller reporting company under the rules of the SEC. As a smaller reporting company, the combined organization will be able to take advantage of reduced disclosure requirements, such as simplified executive compensation disclosures and reduced financial statement disclosure requirements in its SEC filings. Decreased disclosures in the combined organization’s SEC filings due to its status as a smaller reporting company may make it harder for investors to analyze its results of operations and financial prospects. Proteostasis and Yumanity cannot predict if investors will find the combined organization’s common stock less attractive if it relies on these exemptions. If some investors find its common stock less attractive as a result, there may be a less active trading market for its common stock and its stock price may be more volatile. The combined organization may take advantage of the reporting exemptions applicable to a smaller reporting company until it is no longer a smaller reporting company. The combined organization would continue to be a smaller reporting company if the combined organization has (i) less than $250 million in market value of its shares held by non-affiliates as of the last business day of its second fiscal quarter or (ii) less than $100 million of annual revenues in its most recent fiscal year completed before the last business day of its second fiscal quarter and a market value of its shares held by non-affiliates of less than $700 million as of the last business day of its second fiscal quarter.

The pre-Merger net operating loss carryforwards and certain other tax attributes of Proteostasis and Yumanity may be subject to limitations.

In general, a corporation that undergoes an “ownership change,” as defined in Section 382 of the Code, is subject to limitations on its ability to utilize its pre-change net operating loss carryforwards to offset future taxable income. Proteostasis and Yumanity may have experienced ownership changes in the past and the combined organization may experience ownership changes in the future. In addition, the closing of the Merger is expected to result in an ownership change for Proteostasis, and may result in an ownership change for Yumanity. Consequently, even if the combined organization achieves profitability, it may not be able to utilize a material portion of Proteostasis’, Yumanity’s or the combined organization’s net operating loss carryforwards and certain other tax attributes.

For a more complete discussion of the risks related to the respective net operating loss carryforwards and certain other tax attributes of Proteostasis and Yumanity, please see the discussions under “Risk Factors — Risks Related to Yumanity — Yumanity’s ability to use its net operating loss carryforwards and certain tax credit carryforwards may be subject to limitation” and “Risk Factors — Risks Related to Proteostasis’ Capital Requirements, Finances and Operations if the Merger is Not Completed — Proteostasis’ ability to use net operating loss (“NOL”) carryforwards and other tax attributes may be limited in connection with the Merger and other ownership changes”, respectively.

Changes in tax law could adversely affect the combined organization’s business and financial condition.

The rules dealing with U.S. federal, state, and local income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive application) could adversely affect the combined organization or the combined organization’s stockholders. In recent years, many such changes have been made and changes are likely to continue to occur in the future. For example, the Tax Cuts and Jobs Act (referred to as the “TCJA”) was enacted

 

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in 2017 and significantly reformed the Internal Revenue Code of 1986, as amended (the “Code”). The TCJA, among other things, contained significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, a limitation of the tax deduction for net interest expense to 30% of adjusted earnings (except for certain small businesses), a limitation of the deduction for net operating losses to 80% of current year taxable income for losses generated in taxable years beginning after December 31, 2017 and an elimination of net operating loss carrybacks for losses generated in taxable years ending after December 31, 2017 (though any such net operating losses may be carried forward indefinitely), and the modification or repeal of many business deductions and credits.

Additionally, on March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act, which, among other things, suspends the 80% limitation on the deduction for net operating losses in taxable years beginning before January 1, 2021, permits a 5-year carryback of net operating losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021, and generally caps the limitation on the deduction for net interest expense at 50% of adjusted taxable income for taxable years beginning in 2019 and 2020.

It cannot be predicted whether, when, in what form, or with what effective dates, new tax laws may be enacted, or regulations and rulings may be enacted, promulgated or issued under existing or new tax laws, which could result in an increase in the combined organization’s or the combined organization’s stockholders’ tax liability or require changes in the manner in which the combined organization operates in order to minimize or mitigate any adverse effects of changes in tax law or in the interpretation thereof.

The combined organization’s failure to meet the continued listing requirements of the Nasdaq could result in a delisting of the combined organization’s common stock.

If, after listing, the combined organization fails to satisfy the continued listing requirements of the Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to delist the combined organization’s common stock. Such a delisting would likely have a negative effect on the price of the combined organization’s common stock and would impair your ability to sell or purchase the combined organization’s common stock when you wish to do so. In the event of a delisting, the combined organization can provide no assurance that any action taken by the combined organization to restore compliance with listing requirements would allow the combined organization’s common stock to become listed again, stabilize the market price or improve the liquidity of the combined organization’s common stock, prevent the combined organization’s common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.

The combined organization’s internal control over financial reporting may not meet the standards required by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, could have a material adverse effect on the combined organization’s business and share price.

As a privately held company, Yumanity was not required to evaluate its internal control over financial reporting in a manner that meets the standards of publicly traded companies required by Section 404. Commencing with the combined organization’s Annual Report on Form 10-K for the fiscal year that the Merger is completed, the combined organization’s management will be required to report on the effectiveness of the combined organization’s internal control over financial reporting. The rules governing the standards that must be met for the combined organization’s management to assess the combined organization’s internal control over financial reporting are complex and require significant documentation, testing and possible remediation.

The combined organization cannot assure you that there will not be material weaknesses in the combined organization’s internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit the combined organization’s ability to accurately report its financial

 

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condition, results of operations or cash flows. If the combined organization is unable to conclude that its internal control over financial reporting is effective, or if the combined organization’s independent registered public accounting firm determines the combined organization has a material weakness in the combined organization’s internal control over financial reporting once that firm begin its Section 404 reviews, investors may lose confidence in the accuracy and completeness of the combined organization’s financial reports, the market price of the combined organization’s common stock could decline, and the combined organization could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities. Failure to remedy any material weakness in the combined organization’s internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict the combined organization’s future access to the capital markets.

The combined organization could be subject to securities class action litigation.

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 the combined organization, because biotechnology and pharmaceutical companies have experienced significant stock price volatility in recent years. If the combined organization faces such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm the combined organization’s business.

The integration of the operations of Yumanity and Proteostasis may be more difficult, costly or time-consuming than expected.

The success of the Merger will depend, in part, on the combined organization’s ability to successfully combine and integrate the operations of Yumanity and Proteostasis into the combined organization. There are a large number of processes, policies, procedures, operations, technologies and systems that must be integrated, including accounting and finance, payroll and benefits. A number of factors could affect the combined organization’s ability to successfully combine the two companies’ operations, including the following:

 

   

the potential for unexpected costs, delays and challenges that may arise in integrating the operations of the two companies;

 

   

any departures of key employees in connection with the Merger;

 

   

the combined organization’s ability to retain key employees and maintain relationships; and

 

   

diversion of management’s attention and resources during integration efforts.

If the combined organization is unable to successfully integrate the operations of the two companies, the combined organization’s business, financial condition and results of operations may be materially adversely affected.

 

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FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus/information statement and information incorporated by reference herein contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding future financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “design,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “seek,” “should,” “will” or the negative of these terms or other similar expressions.

All statements other than statements of historical fact are statements that could be deemed forward-looking statements. For example, forward-looking statements include any statements of the plans, strategies and objectives of management for future operations, including the execution of integration and restructuring plans and the anticipated timing of filings; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. Forward-looking statements may also include any statements of the plans, strategies and objectives of management with respect to the approval and consummation of the Merger, Proteostasis’ ability to solicit a sufficient number of proxies to approve the Merger and other matters related to the expected timing and consummation of the Merger.

For a discussion of the factors that may cause Proteostasis, Yumanity or the combined organization’s actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied in such forward-looking statements, or for a discussion of risk associated with the ability of Proteostasis and Yumanity to complete the Merger and the effect of the Merger on the business of Proteostasis, Yumanity and the combined organization, see the section titled “Risk Factors” in this proxy statement/prospectus/information statement.

These forward-looking statements include, but are not limited to, statements concerning the following:

 

   

the expected benefits of and potential value created by the Merger for the stockholders of Proteostasis and Yumanity;

 

   

the likelihood of the satisfaction of certain conditions to the completion of the Merger and whether and when the Merger will be consummated;

 

   

Proteostasis’ ability to control and correctly estimate its operating expenses and its expenses associated with the Merger;

 

   

conditions to payment under the CVRs may not be met and the CVRs may never deliver any value to the Proteostasis stockholders;

 

   

any statements of the plans, strategies and objectives of management for future operations, including the execution of integration plans and the anticipated timing of filings;

 

   

the combined organization’s future financial performance, results of operations or sufficiency of capital resources to fund operating requirements;

 

   

future Nasdaq listing;

 

   

expectations regarding the combined organization’s focus, operations, resources and development plan, including future product development and regulatory strategies, including with respect to specific indications;

 

   

any statements of plans to develop and commercialize additional products and projected timelines for the initiation and completion of preclinical studies and clinical trials of product candidates;

 

   

the potential for the results of ongoing preclinical studies or clinical trials and the efficacy of either party’s drug candidates and the potential market opportunities and value of drug candidates;

 

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any statements concerning the attraction and retention of highly qualified personnel;

 

   

any statements concerning the ability to protect and enhance the combined organization’s products, product candidates and intellectual property;

 

   

any statements regarding expectations concerning Yumanity’s relationships and actions with third parties; and

 

   

future regulatory, judicial and legislative changes in Yumanity’s industry.

You should not rely upon forward-looking statements as predictions of future events. Neither Proteostasis nor Yumanity can assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Except as required by law, neither Proteostasis nor Yumanity undertakes any obligation to update publicly any forward-looking statements for any reason after the date of this proxy statement/prospectus/information statement or to conform these statements to actual results or to changes in expectations.

In addition, statements that “we believe” and similar statements reflect the beliefs and opinions on the relevant subject of Proteostasis, Yumanity or the combined organization, as applicable. These statements are based upon information available as of the date of this proxy statement/prospectus/information statement, and while Proteostasis, Yumanity or the combined organization, as applicable, believes such information forms a reasonable basis for such statements, such information may be limited or incomplete, and such statements should not be read to indicate that Proteostasis, Yumanity or the combined organization has conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

If any of these risks or uncertainties materializes or any of these assumptions proves incorrect, the results of Proteostasis, Yumanity or the combined organization could differ materially from the forward-looking statements. All forward-looking statements in this proxy statement/prospectus/information statement are current only as of the date on which the statements were made. Proteostasis and Yumanity do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any statement is made or to reflect the occurrence of unanticipated events, except as required by applicable law.

 

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THE SPECIAL MEETING OF PROTEOSTASIS STOCKHOLDERS

Date, Time and Place

The special meeting of Proteostasis stockholders will be held in a virtual-only webcast at 9:00 a.m., Eastern Time, on December 16, 2020 at www.proxydocs.com/PTI, unless postponed or adjourned to a later date. Proteostasis is sending this proxy statement/prospectus/information statement to its stockholders in connection with the solicitation of proxies by the Proteostasis board of directors for use at the Proteostasis special meeting and any adjournments or postponements of the special meeting. This proxy statement/prospectus/information statement is first being furnished to stockholders of Proteostasis on or about November 12, 2020.

Purposes of the Proteostasis Special Meeting

 

  1.

To approve the issuance of shares of Proteostasis common stock to the Yumanity stockholders in accordance with the terms of the Merger Agreement, a copy of which is attached as Annex A to the accompanying proxy statement/prospectus/information statement, and the change of control resulting from the Merger.

 

  2.

To approve the amendment to the certificate of incorporation of Proteostasis to effect the Proteostasis Reverse Stock Split, in the form attached as Annex B to the accompanying proxy statement/prospectus/information statement.

 

  3.

To consider and vote upon a proposal to approve, on a non-binding advisory vote basis, compensation that will or may become payable by Proteostasis to its named executive officers in connection with the Merger.

 

  4.

To approve the amendment to the certificate of incorporation of Proteostasis to effect the Proteostasis Name Change, in the form attached as Annex C to the accompanying proxy statement/prospectus/information statement.

 

  5.

To consider and vote upon an adjournment of the Proteostasis special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proteostasis Proposal Nos. 1, 2, 3, or 4.

 

  6.

To transact such other business as may properly come before the Proteostasis special meeting or any adjournment or postponement thereof.

Recommendation of the Proteostasis Board of Directors

 

   

The Proteostasis board of directors has determined and believes that the Merger Agreement and the transactions contemplated thereby, including the issuance of shares of Proteostasis common stock pursuant to the Merger and the change of control resulting from the Merger, is in the best interests of Proteostasis and its stockholders and has approved such items. The Proteostasis board of directors recommends that Proteostasis stockholders vote “FOR” Proteostasis Proposal No. 1 to approve the issuance of shares of Proteostasis common stock in the Merger in accordance with the terms of the Merger Agreement, and the change of control resulting from the Merger.

 

   

The Proteostasis board of directors has determined and believes that it is advisable to, and in the best interests of, Proteostasis and its stockholders to approve the amendment to the certificate of incorporation of Proteostasis effecting the proposed Proteostasis Reverse Stock Split, as described in this proxy statement/prospectus/information statement. The Proteostasis board of directors recommends that Proteostasis stockholders vote “FOR” Proteostasis Proposal No. 2 to approve the amendment to the certificate of incorporation of Proteostasis effecting the proposed Proteostasis Reverse Stock Split, as described in this proxy statement/prospectus/information statement.

 

   

The Proteostasis board of directors has determined and believes that the compensation that will or may become payable by Proteostasis to its named executive officers in connection with the Merger is

 

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appropriate, and accordingly recommends that the Proteostasis stockholders vote “FOR” Proteostasis Proposal No. 3 to approve, on a non-binding advisory vote basis, such compensation.

 

   

The Proteostasis board of directors has determined and believes that it is advisable to, and in the best interests of, Proteostasis and its stockholders to approve the amendment to the certificate of incorporation of Proteostasis effecting the Proteostasis Name Change, as described in this proxy statement/prospectus/information statement. The Proteostasis board of directors recommends that the Proteostasis stockholders vote “FOR” Proteostasis Proposal No. 4 to approve the amendment to the certificate of incorporation of Proteostasis effecting the Proteostasis Name Change, as described in this proxy statement/prospectus/information statement.

 

   

The Proteostasis board of directors has determined and believes that adjourning the Proteostasis special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proteostasis Proposal Nos. 1, 2, 3, or 4 is advisable to, and in the best interests of, Proteostasis and its stockholders and has approved and adopted the proposal. The Proteostasis board of directors recommends that Proteostasis stockholders vote “FOR” Proteostasis Proposal No. 5 to adjourn the Proteostasis special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proteostasis Proposal Nos. 1, 2, 3, or 4.

Record Date and Voting Power

Only holders of record of Proteostasis common stock at the close of business on the record date, November 5, 2020 are entitled to notice of, and to vote at, the Proteostasis special meeting. There were approximately 21 holders of record of Proteostasis common stock at the close of business on the record date. At the close of business on the record date, 52,180,380 shares of Proteostasis common stock were issued and outstanding. Each share of Proteostasis common stock entitles the holder thereof to one vote on each matter submitted for stockholder approval at the Proteostasis special meeting. See the section titled “Principal Stockholders of Proteostasis” in this proxy statement/prospectus/information statement for information regarding persons known to the management of Proteostasis to be the beneficial owners of more than 5% of the outstanding shares of Proteostasis common stock.

Voting and Revocation of Proxies

The proxy accompanying this proxy statement/prospectus/information statement is solicited on behalf of the Proteostasis board of directors for use at the Proteostasis special meeting.

If you are a stockholder of record of Proteostasis as of the record date referred to above, you may vote your shares during the live audio webcast Proteostasis special meeting or you may vote in advance by proxy using the enclosed proxy card. Whether or not you plan to attend the live audio webcast Proteostasis special meeting, Proteostasis urges you to vote by proxy to ensure your vote is counted. You may still attend the Proteostasis special meeting and vote in person if you have already voted by proxy.

If you are a Proteostasis stockholder of record, you may register to attend the Proteostasis special meeting and by accessing the meeting center at www.proxydocs.com/PTI and entering the control number on the proxy card previously received. See “Questions and Answers About the Merger — May I vote in person at the special meeting of stockholders of Proteostasis — Stockholders of Record” elsewhere in this proxy statement/prospectus/information statement for the procedures to be followed. You must register in advance to attend and vote your shares during the live audio webcast. Even if you plan to attend the Proteostasis special meeting via live audio webcast, Proteostasis requests that you sign and return the enclosed proxy to ensure that your shares will be represented at the Proteostasis special meeting if you are unable to attend.

If your Proteostasis shares are held by your broker as your nominee, that is, in “street name,” the enclosed voting instruction card is sent by the institution that holds your shares. Please follow the instructions included on that

 

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proxy card regarding how to instruct your broker to vote your Proteostasis shares. If you do not give instructions to your broker, your broker can vote your Proteostasis shares with respect to “discretionary” items but not with respect to “non-discretionary” items. Discretionary items are proposals considered routine under the rules of Nasdaq on which your broker may vote shares held in “street name” in the absence of your voting instructions. On non-discretionary items for which you do not give your broker instructions, the Proteostasis shares will be treated as broker non-votes. It is anticipated that Proteostasis Proposal Nos. 1 and 3 will be non-discretionary items. Please also see “Questions and Answers About the Merger — May I vote in person at the special meeting of stockholders of Proteostasis — Beneficial Owners” elsewhere in this proxy statement/prospectus/information statement for the procedures to be followed to attend and vote at the special meeting.

All properly executed proxies that are not revoked will be voted at the Proteostasis special meeting and at any adjournments or postponements of the Proteostasis special meeting in accordance with the instructions contained in the proxy. If a holder of Proteostasis common stock executes and returns a proxy and does not specify otherwise, the shares represented by that proxy will be voted “FOR” Proteostasis Proposal No. 1 to approve the issuance of shares of Proteostasis common stock in the Merger in accordance with the terms of the Merger Agreement and the change of control resulting from the Merger; “FOR” Proteostasis Proposal No. 2 to approve the amendment to the certificate of incorporation of Proteostasis effecting the proposed Proteostasis Reverse Stock Split described in this proxy statement/prospectus/information statement; “FOR” Proteostasis Proposal No. 3 to approve, on a non-binding advisory vote basis, compensation that will or may become payable by Proteostasis to its named executive officers in connection with the Merger; and “FOR” Proteostasis Proposal No. 5 to adjourn the Proteostasis special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proteostasis Proposal Nos. 1, 2, 3 or 4 in accordance with the recommendation of the Proteostasis board of directors.

Proteostasis stockholders of record, other than those Proteostasis stockholders who have executed support agreements, may change their vote at any time before their proxy is voted at the Proteostasis special meeting in one of three ways. First, a stockholder of record of Proteostasis can send a written notice to the Secretary of Proteostasis stating that the stockholder would like to revoke its proxy. Second, a stockholder of record of Proteostasis can submit new proxy instructions either on a new proxy card or via the Internet. Third, a stockholder of record of Proteostasis can attend the Proteostasis special meeting via live audio Webcast and vote per the procedures describe under “Questions and Answers About the Merger —May I vote in person at the special meeting of stockholders of Proteostasis” elsewhere in this proxy statement/prospectus/information statement. Attendance alone will not revoke a proxy. If a Proteostasis stockholder of record or a stockholder who owns Proteostasis shares in “street name” has instructed a broker to vote its shares of Proteostasis common stock, the stockholder must follow directions received from its broker to change those instructions.

Required Vote

The presence, via live audio webcast or represented by proxy, at the Proteostasis special meeting of the holders of a majority of the shares of Proteostasis common stock outstanding and entitled to vote at the Proteostasis special meeting is necessary to constitute a quorum at the meeting. Abstentions and broker non-votes will be counted towards a quorum. Approval of Proteostasis Proposal Nos. 1, 3, and 5 requires the affirmative vote of a majority of the votes cast at the Proteostasis special meeting, whether present or represented by proxy at the Proteostasis special meeting. Approval of Proteostasis Proposal No. 2 requires the affirmative vote of holders of a majority of the outstanding Proteostasis common stock having voting power on the record date for the Proteostasis special meeting.

Votes will be counted by the inspector of election appointed for the meeting, who will separately count “FOR” and “AGAINST” votes, abstentions and broker non-votes. Abstentions will be counted towards the vote total and will have the same effect as “AGAINST” votes with respect to Proteostasis Proposal No. 2 and 4, and will have no effect and will not be counted towards the vote total with respect to Proteostasis Proposal Nos. 1, 3, and 5. For Proteostasis Proposal Nos. 1 and 3, broker non-votes will have no effect and will not be counted towards the vote total, but will be used to determine whether a quorum is present at the Proteostasis special meeting.

 

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As of October 31, 2020, the directors and executive officers of Proteostasis owned approximately 1% of the outstanding voting shares of Proteostasis common stock entitled to vote at the Proteostasis special meeting. The directors and executive officers of Proteostasis are subject to support agreements. Each stockholder that entered into a support agreement has agreed to vote all shares of Proteostasis common stock owned by the stockholder as of the record date (a) in favor of the Proteostasis stockholder Proposals and any other matter necessary to consummate the transactions contemplated by the Merger Agreement, and (b) to vote against any “acquisition proposal,” as defined in the Merger Agreement. As of November 10, 2020, other than Dr. Jeffery W. Kelly, Proteostasis is not aware of any affiliate of Yumanity owning any shares of Proteostasis common stock entitled to vote at the Proteostasis special meeting.

Solicitation of Proxies

In addition to solicitation by mail, the directors, officers, employees and agents of Proteostasis may solicit proxies from Proteostasis stockholders by personal interview, telephone, telegram or otherwise. Proteostasis has also retained Innisfree M&A Incorporated to assist with the solicitation of proxies for a fee of $15,000 plus reasonable expenses. Proteostasis and Yumanity will share equally the costs of printing and filing this proxy statement/prospectus/information statement and proxy card. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of Proteostasis common stock for the forwarding of solicitation materials to the beneficial owners of Proteostasis common stock. Proteostasis will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.

Other Matters

As of the date of this proxy statement/prospectus/information statement, the Proteostasis board of directors does not know of any business to be presented at the Proteostasis special meeting other than as set forth in the notice accompanying this proxy statement/prospectus/information statement. If any other matters should properly come before the Proteostasis special meeting, it is intended that the shares represented by proxies will be voted with respect to such matters in accordance with the judgment of the persons voting the proxies.

 

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THE MERGER

This section and the section titled “The Merger Agreement” in this proxy statement/prospectus/information statement describe the material aspects of the Merger, including the Merger Agreement. While Proteostasis and Yumanity believe that this description covers the material terms of the Merger and the Merger Agreement, it may not contain all of the information that is important to you. You should read carefully this entire proxy statement/prospectus/information statement for a more complete understanding of the Merger and the Merger Agreement, including the Merger Agreement attached to this proxy statement/prospectus/information statement as Annex A, the opinion of MTS Securities, LLC attached as Annex D, and the other documents to which you are referred herein. See the section titled “Where You Can Find More Information” in this proxy statement/prospectus/information statement.

Background of the Merger

The terms of the Merger Agreement are the result of extensive arm’s-length negotiations among members of the Proteostasis Transaction Committee, Proteostasis’ management team, and the management team of Yumanity, along with their respective advisors and under the guidance of each company’s board of directors. Proteostasis followed a careful process assisted by experienced outside financial and legal advisors to rigorously examine potential transactions and transaction candidates through broad outreach to life sciences companies and a thorough process of evaluation of prospective strategic partners.

The following is a summary of the background of the events leading up to the decision by Proteostasis to engage in a strategic transaction, the process undertaken by Proteostasis to identify and evaluate prospective merger partners, and the negotiation of the Merger Agreement with Yumanity. The following chronology summarizes the key meetings and events that led to the signing of the Merger Agreement. The following chronology does not purport to catalogue every conversation among the Proteostasis board of directors, the Yumanity board of directors, the Transaction Committee (as defined below), members of Proteostasis management or Yumanity management, MTS Health Partners, L.P. (“MTS”), Proteostasis’ or Yumanity’s representatives or other parties.

On March 25, 2019, Proteostasis announced results from its Phase 1 study with the proprietary triple combination of its investigational CFTR modulators (PTI-801, or posenacaftor, a third generation CFTR corrector; PTI-808, or dirocaftor, a CFTR potentiator; and PTI-428, or nesolicaftor, a CFTR amplifier) in patients with CF. Despite clinical signals that further confirmed the safety of the investigational agents and potential efficacy that enabled the selection of doses for the subsequent Phase 2 trial, the Proteostasis Phase 1 data was viewed as suboptimal in comparison to the historical Phase 2 data from Vertex Pharmaceuticals Inc. (“Vertex”) published in February 2018 and Phase 3 data that followed in May 2019. Many investors anticipated that Vertex was going to receive marketing authorization for a new product in 2019, which would impact the likelihood of Proteostasis’ combination to achieve meaningful share of the future commercial market.

Following the completion of the Phase 1 study, Proteostasis initiated the planned Phase 2 study, which was designed to assess the clinical benefit of combinations of all three of its investigational CFTR modulators (PTI-801, or posenacaftor, a third generation CFTR corrector; PTI-808, or dirocaftor, a CFTR potentiator; and PTI-428, or nesolicaftor, a CFTR amplifier) in patients with the most common F508del mutations. The study was conducted in Europe and the United States from June to December 2019.

Starting in June 2019, and continuing through the Fall of 2019, Proteostasis’ management and board of directors engaged in multiple discussions relating to potential measures to preserve its cash while also seeking to maximize stockholder value by initiating and completing the planned Phase 2 study. In order to preserve cash, certain activities, such as drug manufacturing campaigns and preclinical studies, needed to support the registrational Phase 3 study and subsequent NDA submission, were postponed.

In October 2019, the FDA authorized TRIKAFTA®, the CFTR modulator combination therapy from Vertex that had completed Phase 3 development earlier that year, for CF patients with one or both F508del alleles aged 12

 

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and above. The product became commercially available shortly thereafter. The approval of TRIKAFTA® impacted the commercial opportunity for Proteostasis’ combination therapy and over time, was expected to reduce the availability of CF patients who were not on modulator therapies that could be enrolled in future Proteostasis clinical trials.

In October 2019, Proteostasis resumed confidential partnering discussions and diligence with a global pharmaceutical company, Party A, who had expressed interest in Proteostasis’ CF investigational drugs. Party A executed an amended confidentiality and non-disclosure agreement with Proteostasis on November 13, 2019, which agreement did not contain a standstill provision.

On November 4, 2019, the Proteostasis board of directors voted to establish a Transaction Committee, consisting of directors Franklin Berger, Kim Drapkin, Jeffery Kelly and Meenu Chhabra. The purpose of the Transaction Committee was to provide additional board oversight and assistance in completing a review of Proteostasis’ strategic options.

In November 2019, Proteostasis entered into confidential partnering discussions and diligence with a large pharmaceutical company, Party B, around Proteostasis’ CF investigational drugs and CF program. Party B executed a confidentiality and non-disclosure agreement with Proteostasis on November 12, 2019, which agreement did not contain a standstill provision.

In December 2019, Proteostasis resumed confidential discussions with a large pharmaceutical company, Party C, around its CF program. Proteostasis and Party C explored a possible partnership that would leverage Party C’s existing presence in CF and rare diseases and focus on personalized medicine approach. Party C had previously executed a confidentiality and non-disclosure agreement with Proteostasis on April 25, 2018, which agreement did not contain a standstill provision.

On December 17, 2019, Proteostasis announced topline data from its Phase 2, double blind, randomized, placebo-controlled study with the combination of all three of Proteostasis’ investigational CFTR modulators (PTI-801, or posenacaftor, a third generation CFTR corrector; PTI-808, or dirocaftor, a CFTR potentiator; and PTI-428, or nesolicaftor, a CFTR amplifier) in patients with the most common F508del mutations. Clinical data from patients with CF showed a statistically significant improvement in the lung function and reduction in sweat chloride concentration in subjects who received a combination of dirocaftor, posenacaftor and nesolicaftor compared to placebo.

Given the recent approval of Vertex’s novel triple CFTR modulator therapy TRIKAFTA® and the increasing access to the existing modulator therapies in major markets, further clinical development of Proteostasis’ investigational CFTR modulators (dirocaftor, posenacaftor and nesolicaftor) would likely have to rely on trial design strategies such as open label design, active control with emerging standard of care, real world evidence and historical patient records comparisons. All options under consideration were seen as challenging from the regulatory, execution and cost points of view. As a result, Proteostasis’ board of directors decided to explore the possibility of entering into a strategic partnership with a larger pharmaceutical company that would be able to provide sufficient resources for the next stages of clinical development.

Following the data announcement in December 2019, Proteostasis management attended the JPMorgan healthcare conference in January 2020 with the main objective of presenting its latest clinical data to potential pharmaceutical company partners and identifying parties that manifested interest to continue the partnering dialogue. Proteostasis’ management team in consultation with the members of the board of directors identified a total of 14 pharmaceutical companies, including Party A, Party B, and Party C, as potential partners based on their historical presence in CF and previous interactions with Proteostasis or ongoing confidential dialogue. The Proteostasis management team provided MTS with the list of 14 pharmaceutical companies identified at the 2020 J.P. Morgan Healthcare Conference.

With the expectation that a potential development and commercial partner could be identified leading to a transaction to monetize the CF Assets and with no other clinical stage programs in Proteostasis’ pipeline, the

 

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Proteostasis board of directors also recommended exploring additional strategic initiatives to create value for Proteostasis stockholders as well as continuing to preserve cash through various cost containment initiatives.

On February 4, 2020, Proteostasis held its quarterly board of directors meeting, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley LLP (“Cooley”), outside legal counsel to Proteostasis, attended. At this meeting, Proteostasis management and board of directors engaged in a discussion of strategic alternatives and potential measures to preserve its cash while seeking to maximize stockholder value. With the expectation that a potential development and commercial partner could be identified leading to a transaction to monetize the CF Assets and with no other clinical stage programs in Proteostasis’ pipeline, the Proteostasis board of directors also recommended exploring additional strategic initiatives to create value for Proteostasis stockholders as well as continuing to preserve cash through various cost containment initiatives. The Proteostasis board of directors also authorized Proteostasis to engage MTS in connection with the exploration of strategic alternatives. The Proteostasis board of directors provided such authorization due to, among other things, MTS’ qualifications, experience and reputation, its knowledge of and involvement in recent transactions in the life sciences industry and its familiarity with Proteostasis.

During the February 4, 2020 meeting, the board of directors discussed various strategic alternatives and all reasonable options to maximize value, including: a merger with a private or public company; a transaction to monetize clinical stage assets for the treatment of CF through a partnering agreement with a pharmaceutical company (including those previously identified at the 2020 J.P. Morgan Healthcare Conference); the liquidation of Proteostasis and distribution of any remaining cash to stockholders; and additional fundraising through public and private markets through sales of securities. Representatives from MTS presented to the Proteostasis board of directors regarding strategic alternatives for Proteostasis.

The attractiveness of a potential reverse merger option was supported by the value that Proteostasis’ non-cash assets, public listing and cash might have to a high-quality private company seeking to advance its own clinical programs. Further, a reverse merger transaction could provide Proteostasis stockholders with a meaningful stake in a combined organization possessing both promising clinical prospects and the means to pursue them, establishing the opportunity for long-term value creation for Proteostasis stockholders.

On March 13, 2020, a telephonic meeting of the Proteostasis board of directors was held, which representatives from MTS, Proteostasis management, a Proteostasis consultant, and Cooley attended. At this meeting, Proteostasis management updated the board of directors on the state of Proteostasis’ business, including progress related to its ongoing discussions with three of the potential pharmaceutical company partners, Party A and Party C, which were already in confidential discussions, and one additional company, Party D, which expressed interest to enter into confidential dialogue. An update on investor meetings and preliminary interest to participate in a financing transaction was also provided.

On March 17, 2020, a telephonic meeting of the Proteostasis board of directors was held, which representatives from MTS, Proteostasis management, Proteostasis consultants, and Cooley attended. At this meeting, Proteostasis management updated the board of directors on the state of Proteostasis’ confidential partnering discussions for its CF Assets with three companies (Party A, Party B and Party C) and to advance the effort to seek strategic alternatives, including a merger. On the same date, Proteostasis entered into a confidentiality and non-disclosure agreement with Party D, which agreement did not contain a standstill provision.

On March 20, 2020, a telephonic meeting of the Proteostasis board of directors was held, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley attended. At this meeting, Proteostasis management provided an update on the status of Proteostasis’ partnering discussions and diligence activities with three potential partners for its CF Assets (Party A, Party B, and Party C), the recent execution of a confidentiality agreement and initiation of scientific diligence with Party D, Proteostasis management also provided a summary of management’s and MTS’ efforts with respect to other potential strategic alternatives.

 

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On March 26, 2020, a telephonic meeting of the Proteostasis board of directors was held, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley attended. At this meeting, Proteostasis management provided an update on the status of partnering discussions. At that time, the most active discussions and scientific diligence were ongoing with two potential pharmaceutical company partners (Party C and Party D), while other parties (Party A and Party B) were in less advanced stages of discussions. Proteostasis management also requested authorization to provide names to MTS to assist in their identifying suitable counterparties for consideration in an alternative strategic transactions.

On March 30, 2020, Proteostasis formally engaged MTS pursuant to an engagement letter to assist the Proteostasis board of directors in exploring and evaluating a broad range of strategic and financial alternatives. The Proteostasis board of directors had considered engaging another financial advisor as well, but ultimately selected MTS because of a belief that MTS had access to a larger number of potential candidates for an alternative strategic transaction. MTS had previously discussed a number of strategies to review strategic alternatives available to Proteostasis with the Proteostasis board of directors. Following such discussions, as suggested by MTS, the Proteostasis board of directors agreed to follow a two-step strategic review process. In the initial phase, MTS would issue a process letter to parties to solicit non-binding initial indications of interest, with such indications of interest summarizing the counterparty’s business plan, proposed ownership split of the combined organization, estimated financing needs and other matters relevant to the consideration of a potential transaction with such counterparty. Following the receipt of indications of interest, the Transaction Committee would then review the indications of interest to focus on selecting a subset of candidates to progress to the second round of consideration. This second round would include in-person presentations by the management teams of the semi-finalists to members of the Transaction Committee, due diligence reviews of each party’s business, and refinement of the indications of interest. Thereafter, the Proteostasis board of directors could select a finalist with which to negotiate a definitive merger agreement.

On April 1, 2020, a telephonic meeting of the Proteostasis board of directors was held, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley attended. At this meeting, MTS provided an update regarding the two most active partnering dialogues ongoing with the potential pharmaceutical company partners (Party C and Party D) that were in confidential discussions and diligence with Proteostasis. Party C had provided MTS with an assessment of their initial view of the opportunity, including process and timeline. Party D was in the process of conducting its scientific and technical due diligence that would take a few additional weeks. MTS also indicated it was preparing a list of potential merger candidates that were most likely to be suitable for strategic alternatives to partnering.

On April 5, 2020, at the direction of the Proteostasis board of directors, MTS initiated its outreach to potential merger candidates. The process involved presenting to Proteostasis’ board of directors and management a list of potential candidates compiled from a pool of companies that, to MTS’ knowledge, were seeking to complete a similar transaction and approaching companies that board members and advisors suggested as potentially of interest based on their industry knowledge.

On April 7, 2020, Proteostasis was informed by Party A that there was no further interest in the CF program at that time.

On April 10, 2020, a telephonic meeting of the Proteostasis board of directors was held, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley attended. At this meeting, MTS provided an update regarding the status of due diligence reviews and progress with Party C and Party D, which were still in discussions with Proteostasis. Party C had completed its due diligence and was preparing for internal meetings. Party D continued to request technical and scientific data in its ongoing diligence. MTS indicated that, at the direction of the Proteostasis board of directors, it was preparing to contact additional counterparties for strategic alternatives.

Between April 5 and April 20, 2020, MTS presented 75 different candidate companies to Proteostasis management and the Proteostasis board of directors for consideration. Based on several criteria including, but not limited to, therapeutic area of focus, stage of development, likelihood of near-term milestones, and strength of clinical and preclinical data. Using this analysis, Proteostasis management and the Proteostasis board of directors

 

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eliminated 53 companies from the initial pool of candidates from further assessments. Proteostasis management team and advisors reviewed the remaining 22 companies and evaluated them further on the above-mentioned factors while also expanding the analysis to include the candidate companies’ business model, scientific quality and/or technical approach to drug discovery and development, potential future value inflection points (catalysts), strategic fit, market opportunity, financing needs to next catalyst, proposed valuation, actionability and motivation to transact, readiness to be public, and management team.

On April 20, 2020, Proteostasis was informed by Party C that there was no further interest in the CF program at that time. Party C clarified that the internal position was subject to change upon review of additional clinical and ex vivo data from the patient derived organoids when such data were made available.

On April 21, 2020, a telephonic meeting of the Proteostasis board of directors was held, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley attended. At this meeting, MTS provided an update regarding Party D, including their internal evaluation process and expected timelines for further activities. MTS facilitated a discussion of the strategic process and the progress made since the previous board meeting.

On April 24, 2020, Richard Peters reached out to Meenu Chhabra to introduce Yumanity as a company that shares the scientific focus on diseases caused by protein misfolding and practices a similar approach to drug discovery to explore potential synergies through a collaboration. Ms. Chhabra advised Dr. Peters to reach out to MTS to coordinate future dialogue. As a result, Yumanity joined the ongoing merger process on April 24, 2020, bringing the total number of companies to evaluate to 23.

Between April 21, 2020 and May 5, 2020, a total of 16 companies, including Yumanity, made non-confidential presentations to Proteostasis’ management and advisors. The 16 companies, including Yumanity, were invited to submit preliminary non-binding proposals and 13 of those companies, including Yumanity, submitted bids. From May 13 to May 21, 2020, Proteostasis entered into confidential agreements without standstill provisions with seven companies, including Yumanity, that made confidential presentations to the Proteostasis board of directors, management and advisors.

On May 12, 2020, a telephonic meeting of the Proteostasis board of directors was held, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley attended. At this meeting, MTS provided an update on their efforts regarding a strategic alternative to partnering, including reverse mergers, and updated the board of directors on the outcome of recent outreach efforts to multiple counterparties and status of proposals received from each such counterparty. MTS then facilitated a more in-depth discussion about each party. The Proteostasis board of directors and members of management discussed each of the companies and their proposals at length. MTS made a preliminary presentation to the Proteostasis board of directors of information regarding methods to evaluate the relative value to Proteostasis’ stockholders of each of the proposals. After the discussion, the Proteostasis board of directors directed MTS and management to focus on five companies, which were Parties E, F, G, H and Yumanity. The companies selected were deemed by the Proteostasis board of directors to meet criteria that would provide the highest value to existing stockholders through a merger transaction based on its assessment criteria discussed above. Yumanity’s bid included a request for a 30-day exclusivity due diligence period during which neither party would enter discussions with third parties for the purpose of a reverse merger transaction. If such exclusivity period were granted, Yumanity would grant an additional 5% equity to Proteostasis’ stockholders. Separately, MTS representatives provided an update on the status of the internal review process, diligence activities of and possible deal structures being discussed with Party D regarding the CF Assets.

Dr. Kelly, who is also a director on the Yumanity board of directors, did not participate in any discussions relating to potential reverse merger candidates once discussions with Yumanity advanced, either as a member of the Proteostasis board of directors, or as a member of the Proteostasis Transaction Committee. For Proteostasis board of directors meetings, Dr. Kelly either did not attend or departed the meeting prior to discussion of, or voting on matters, related to potential merger candidates.

 

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On May 26, 2020, a telephonic meeting of the Proteostasis board of directors was held, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley attended. Proteostasis management presented the outcome of its extensive diligence on five companies, Parties E, F, G, H and Yumanity, to the board of directors. Board members and advisors provided feedback on each of the potential candidates and discussed the valuation of both Proteostasis and potential candidates, additional financing needed to reach the next inflection point, each potential candidate’s technology and clinical stage, and the current competitive landscape. After discussions between Proteostasis board of directors, advisors and management, four companies, Parties E, F, G and Yumanity, were selected for the next round of evaluation. Ms. Chhabra provided an update on the status of diligence activities of and communications, including a proposed timeline to receipt of a term sheet with Party D in regard to the CF Assets.

Between May 27 and June 6, 2020, the four companies selected, Parties E, F, G and Yumanity, each entered into a new confidentiality agreement with a standstill clause. Such agreements did not include a “don’t ask/don’t waive” provision, and two agreements (those with Yumanity and Party F) had a fallaway provision. As of mid-June, Proteostasis and the four selected companies, including Yumanity, conducted mutual due diligence.

Proteostasis was conducting diligence on Parties E, F, G and Yumanity. Proteostasis management, advisors and board of directors identified certain aspects of the technology and business of Parties F and G that required further assessment. On June 5, 2020, Party E received a draft merger agreement for review, and on June 9, 2020, Yumanity received a draft merger agreement for review.

On June 17, 2020, a telephonic meeting of the Proteostasis Transaction Committee was held, which representatives from MTS, Proteostasis management, Proteostasis consultants, Mr. Arkowitz, a member of Proteostasis’ board of directors, and Cooley attended. At this meeting, Proteostasis management provided the Proteostasis Transaction Committee with an update of the diligence activities with the four selected companies, Parties E, F, G, and Yumanity, including providing an assessment of the clinical programs for each, the proposed valuation of Proteostasis as suggested by the counterparties, the potential of their pipeline programs, and their ability to execute the proposed merger transaction. MTS then provided more detailed information regarding Party E and Yumanity, which had provided the most attractive valuations. The Proteostasis Transaction Committee directed management and MTS to narrow the selection to these two companies, Yumanity and Party E. Ms. Chhabra then provided an update on the diligence activities with respect to Party D, its interest in the CF Assets and the expectation of receiving a term sheet at the end of June.

On June 19, 2020, Yumanity submitted its comments to the bid draft merger agreement, which included a proposed valuation of $146 million for Yumanity and $69 million for Proteostasis, representing an equity split of 68%/32% between the parties for the combined organization, assuming that Proteostasis had $35 million in net cash as of the closing of the merger. Such draft also included as a closing condition the requirement that Proteostasis have net cash as of the closing of at least $35 million. Finally, the draft also included comments to other sections of the merger agreement including representations and warranties, covenants, closing conditions, non-solicitation and termination rights.

On June 22, 2020, a telephonic meeting of the Proteostasis Transaction Committee was held, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley attended. At this meeting, MTS provided summaries of the status of discussions with Yumanity and Party E. The Proteostasis Transaction Committee recommended that the Proteostasis board of directors direct Proteostasis to enter into a 14-day exclusivity period with Yumanity to continue diligence and negotiation of the draft merger agreement because it identified Yumanity as the one most suited to enable Proteostasis to generate value for stockholders through a merger. Ms. Chhabra provided an update on the continued diligence activities with respect to Party D, and the proposed timeline for delivery of a term sheet.

On June 23, 2020, a telephonic meeting of the Proteostasis board of directors was held, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley attended. At this meeting, Proteostasis

 

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management and members of the Proteostasis Transaction Committee. Mr. Arkowitz provided an update on the deliberations of the Proteostasis Transaction Committee on June 22, 2020, including its recommendation to narrow the merger candidates to Yumanity and Party E, progress related to the ongoing strategic alternative evaluations and status of strategic partnering discussions, and the two remaining potential merger partners, Parties F and G. The advisors provided feedback on each of the four potential candidates, Parties E, F, G and Yumanity, discussing, amongst other things, the proposed valuation of both Proteostasis and potential candidates, diligence efforts, treatment of the CF Assets, time to close of transaction, and other business terms, including equity splits and availability of contingent value rights (“CVRs”) for legacy Proteostasis stockholders for any partnering deal for the CF Assets.

The Proteostasis board of directors discussed Yumanity’s interest to enter into an exclusivity arrangement for the purpose of negotiating the draft of the merger agreement, which exclusivity arrangement would be entered into in exchange for the Proteostasis stockholders receiving a greater equity ownership percentage in the combined organization. The Proteostasis board of directors also noted that in the view of the Proteostasis Transaction Committee, Yumanity was the one most suited to enable Proteostasis to generate value to stockholders through a merger. The Proteostasis board of directors discussed the desirability of doing so and the term of exclusivity and authorized Proteostasis to enter into an exclusivity arrangement with Yumanity. Ms. Chhabra provided an update on the status of continued diligence activities of and communications, including the proposed timeline for receipt of a term sheet from Party D, with regard to the CF Assets.

On June 24, 2020, Yumanity presented revised terms, including an increase in the valuation of Proteostasis to approximately $70.3 million, representing a revised equity split of 67.5%/32.5%, and Yumanity also offered the Proteostasis stockholders the ability to benefit from the monetization of the CF Assets through a contingent value right, or CVR, with the amount payable under the CVR to be subject to the timing of such CF Asset monetization transaction. Such revised terms also provided that every one dollar shortfall below $32.5 million in net cash at closing would be counted as two dollars for purposes of the equity split adjustment. In addition, such revised terms also included as a closing condition a requirement that Proteostasis have net cash as of the closing of at least $30 million. Proteostasis and Yumanity entered into an Exclusivity Agreement, which was effective through July 14, 2020. On June 24, 2020, the Proteostasis board of directors approved via unanimous written consent the appointment of David Arkowitz to the Proteostasis Transaction Committee to replace Dr. Kelly.

On June 29, 2020, a telephonic meeting of the Proteostasis board of directors was held, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley attended. At this meeting there was a discussion of the key terms and progress of the negotiations of the draft merger agreement with Yumanity during the exclusivity period. The Proteostasis board of directors and other attendees discussed the business terms of a potential merger including status of ongoing diligence efforts, time to close of transaction, allocation of transaction costs, treatment of stock options, equity splits and availability of and CVRs for legacy Proteostasis stockholders for any partnering deal for the CF Assets or sale of the CF Assets.

On July 2, 2020, Cooley sent a draft of the merger agreement to Yumanity’s outside counsel, Goodwin Procter LLP (“Goodwin”) contemplating the CVR, introducing an undefined per diem dollar credit to Proteostasis’ net cash in the event that Yumanity did not deliver the audited and unaudited financial statements required in the Registration Statement on Form S-4 by a certain date, a separate per diem dollar credit to Proteostasis’ net cash in the event that Yumanity caused other delays in the transaction, and a dollar floor for the two-for-one dollar adjustment to Proteostasis’ net cash shortfalls of $30 million. Such draft also provided additional general comments on other sections of the merger agreement, including representations and warranties, covenants, closing conditions, non-solicitation and termination rights. On July 2, 2020, Cooley also sent the initial draft of the CVR Agreement to Goodwin, which contained the economic terms for the CVRs, including the applicable payment allocations for the sale of any CF Assets, the types of transactions covered by the CVR Agreement, the timing for payments under the CVR Agreement, survival period for the CVR Agreement and certain indemnity obligations that would be owed to the representative of the CVR Holders.

 

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On July 7, 2020, a telephonic meeting of the Proteostasis Transaction Committee was held, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley attended. At this meeting, MTS and advisors updated the Proteostasis Transaction Committee on the status of the business discussions and negotiation of the merger agreement. MTS provided an update on the internal discussions, diligence activities and proposed timeline for receipt of a term sheet from Party D, with respect to their continued interest in the CF Assets. Yumanity’s ability to continue as a going concern was not considered when evaluating the Merger. Even though Yumanity’s required financial statements had not yet been received, it is very common for pre-commercial biotechnology companies to require additional funding to continue as a going concern, therefore the conclusion that there is substantial doubt related to its ability to continue as a going concern would not have impacted Proteostasis’ decision as to the selection of Yumanity.

On July 8, 2020, Goodwin sent a revised draft of the merger agreement to Cooley, which limited the CF Asset sale to certain counterparties, set July 31, 2020 as the deadline to deliver the required Yumanity financial statements, and removed the per diem net cash credits. Such draft also reflected general comments on other portions of the merger agreement including representations and warranties, covenants, closing conditions, non-solicitation and termination rights. Goodwin also delivered a revised draft of the CVR Agreement on such date, reflecting comments on the transactions covered by the CVR Agreement, the timing for payments under the CVR Agreement, survival period for the CVR Agreement and the responsible party for indemnity obligations that would be owed to the representative of the CVR Holders.

From July 8 through August 22, 2020, representatives of Cooley, at the direction of the Proteostasis board of directors, and with input from Proteostasis management, and with the benefit of the views of the directors provided at the Proteostasis board and Transaction Committee meetings, exchanged drafts and participated in discussions with Goodwin, regarding the terms of the merger agreement and related documents, including the CVR Agreement. The items negotiated with respect to the merger agreement and related documents included, among other things: the representations and warranties to be made by the parties; the restrictions on the conduct of the parties’ businesses until completion of the transaction; the definitions of material adverse effect; the conditions to completion of the merger, including the required minimum net cash balances of Proteostasis; the calculation of Proteostasis’ net cash balance at closing; the manner by which Proteostasis would issue shares of its common stock to Yumanity’s stockholder as consideration for the merger; the provisions regarding Proteostasis’ employee benefit plans, severance and other compensation matters; the composition of the board of directors of the combined organization; the remedies available to each party under the merger agreement, including the circumstances upon which the termination fee and expense reimbursement payable to each of the parties would be triggered; the amounts of the termination fees and expense reimbursements; and the identities of the equityholders of each party that would be required to execute support agreements concurrent with the execution of the merger agreement. The items negotiated with respect to the CVR Agreement included, among other things: the mechanics by which payments would be made to the holders of CVRs (including payment timelines); the expenses that would serve as deductions to any payments arising from the CVRs; the transactions that would trigger payments under the CVR Agreement; Yumanity’s obligations with respect to the maintenance and development of the CF Assets and the term of the CVR Agreement. The parties did not alter the equity split as agreed to by the parties on June 24, 2020.

On July 14, 2020, a telephonic meeting of the Proteostasis Transaction Committee was held, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley attended. Ms. Chhabra provided an update on merger agreement negotiations, including Proteostasis’ negotiations with Yumanity regarding the CVR Agreement for Proteostasis’ legacy stockholders for the CF Assets. The members of the Proteostasis Transaction Committee were informed that Yumanity requested an extension of the exclusivity period to allow further time for preparation of audited financial statements. The Proteostasis Transaction Committee approved of the extension. Later on July 14, 2020, Proteostasis and Yumanity signed an amendment to the Exclusivity Agreement extending exclusivity through August 14, 2020. Ms. Chhabra provided an update on the ongoing evaluation and revised timeline for the expected receipt of a term sheet from Party D, with respect to their interest in the CF Assets based on Party D’s internal discussions.

 

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On July 23, 2020, a telephonic meeting of the Proteostasis Transaction Committee was held, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley attended. At this meeting, MTS and management provided an update on continuing discussions and a potential delay on the timing of receipt of certain deliverables from Yumanity. Ms. Chhabra provided an update on the internal activities and communications with Party D and the expected timeline for delivery of a term sheet, with respect to their interest in a transaction involving the CF Assets.

On July 28, 2020, a telephonic meeting of the Proteostasis Transaction Committee was held, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley attended. At this meeting Proteostasis management, MTS and Cooley updated the committee on the negotiation of the merger agreement and the CVR Agreement and discussed the expected timing of the transaction. The status of diligence with the potential pharmaceutical company partner, Party D, their internal evaluation and expected delivery of a term sheet for the CF Assets was also discussed.

On August 4, 2020, a telephonic meeting of the Proteostasis Transaction Committee was held, which representatives from MTS, Proteostasis management, Proteostasis consultants and Cooley attended. At this meeting MTS, Proteostasis management, and Proteostasis consultants presented the outstanding business issues between the parties, which included timing around the delivery of Yumanity’s audited financial statements, calculation of Proteostasis net cash, CVR payment mechanics, and the treatment of Proteostasis net operating losses. Ms. Chhabra provided an update on the evaluation activities and communications with Party D, regarding possible deal structure and anticipated delivery of a term sheet.

On August 12, 2020, a telephonic meeting of the Proteostasis board of directors was held and the board received a telephonic update as to the process of discussions and negotiations with Yumanity. Participants included all members of the Proteostasis board of directors except Dr. Kelly, and representatives from Proteostasis management, MTS, Proteostasis consultants and Cooley. At this meeting, there was continued discussion regarding the status of the merger agreement negotiations and the desire to extend the exclusivity period to allow further diligence. Ms. Chhabra then provided the board with an update on continuing interactions with Party D in regards to their interest in the CF Assets, including requests for additional scientific and technical data and the anticipated timeline for delivery of a term sheet.

On August 14, 2020, Proteostasis and Yumanity signed a second amendment to the Exclusivity Agreement extending exclusivity through August 19, 2020.

On August 18, 2020, the Proteostasis board of directors received a copy of the draft Merger Agreement, the draft CVR Agreement, and a summary of transaction terms. On August 19, 2020, the Proteostasis board of directors held a telephonic meeting for the purpose of receiving an update as to timing of the proposed merger and open items. Participants included all members of the Proteostasis board of directors except Dr. Kelly, and representatives from Proteostasis management, Proteostasis consultants, MTS and Cooley. Later in the evening, members of the Proteostasis board of directors discussed open items with members of Yumanity’s board and management.

On August 20, 2020, the Proteostasis board of directors held a telephonic meeting for the purpose of reviewing and discussing the final terms of the draft Merger Agreement, including receiving an update as to timing of the proposed merger and open items. Participants included all members of the Proteostasis board of directors except Dr. Kelly, and representatives from Proteostasis management, MTS, Proteostasis consultants and Cooley.

At this August 20, 2020 meeting, the Cooley representative provided a detailed review of the material terms of the draft Merger Agreement and ancillary agreements. Representatives of Cooley also reviewed with the Proteostasis board of directors present the final forms of the voting agreement and lock-up agreement to be entered into by the directors and officers and certain significant stockholders of Holdings, as the sole holder of

 

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Yumanity. During this presentation, questions from the directors were addressed, including a detailed discussion about the minimum cash closing requirement and Proteostasis’ comfort level of satisfying that condition under various scenarios.

At this August 20, 2020 meeting, Proteostasis’ management provided the final due diligence report on Yumanity, noting no issues outstanding. During this presentation, directors’ questions were asked and answered. The Cooley representative provided a review of the Proteostasis board’s fiduciary duties and other legal aspects of the transaction. The Proteostasis board expressed consensus and satisfaction that a full and complete process had been run and that the appropriate corporate governance steps had been taken. The Proteostasis board reiterated its view that the proposed transaction was the best opportunity for maximizing Proteostasis stockholder value, noting the objective merits of both the process that had been engaged in, the ultimate selection of Yumanity based on scientific, clinical, and probability-of-success grounds, and the deal terms. The Proteostasis board of directors did not deem viable the pursuit of standalone strategy given that the company did not have sufficient financial resources to support the cost of clinical development required to submit an application for marketing authorization and did not view a private or public financing as a viable option based on investor feedback collected to date. In addition to the lack of financial resources, the additional regulatory and commercial risk was deemed to be substantial given the recent approval of Vertex Pharmaceuticals’ novel triple combination therapy.

In addition, at the August 20, 2020 meeting, MTS Securities, LLC, an affiliate of MTS, orally presented its fairness opinion, which was confirmed by delivery of a written opinion dated August 20, 2020, that, as of that date, and based upon the assumptions, qualifications and limitations set forth in its opinion, the Exchange Ratio (as set forth in the draft merger agreement reviewed by MTS Securities, LLC as of such date) was fair, from a financial point of view, to Proteostasis. For further information on the opinion of MTS Securities, LLC, please see “The Merger—Opinion of Proteostasis’ Financial Advisor” beginning on page 120 of this proxy statement/prospectus/information statement.

Following these presentations and discussions, representatives of Cooley reviewed with the Proteostasis board of directors the proposed resolutions that had been provided in advance of the meeting. Following review and discussion among the participants, the Proteostasis board of directors members (other than Dr. Kelly) unanimously determined that the transactions contemplated by the Merger Agreement, including the Merger and the issuance of shares of Proteostasis common stock to the Yumanity stockholders pursuant to the Merger Agreement, were fair to, advisable and in the best interests of, Proteostasis and the Proteostasis stockholders; approved and declared advisable the Merger Agreement and the transactions contemplated therein, including the Merger and the issuance of shares of Proteostasis common stock to the Yumanity stockholders; and determined to recommend, upon the terms and subject to the conditions of the Merger Agreement, that the Proteostasis stockholders vote to approve the Merger Agreement and the transactions contemplated therein, including the Merger and the issuance of shares of Proteostasis common stock to the Yumanity stockholders, and, if deemed necessary, the Proteostasis Reverse Stock Split. Management was directed to sign the Merger Agreement once the final open items were resolved.

On August 22, 2020, the parties finalized and executed the Merger Agreement and the support agreements and the lock-up agreements.

On the morning of August 24, 2020, prior to the opening of trading on the Nasdaq market, Proteostasis and Yumanity issued a joint press release announcing their entry into the Merger Agreement and held an investor call regarding the proposed Merger.

On September 10, 2020, Party D informed Proteostasis that it was no longer interested in the CF program. Confidential discussions are ongoing with Party B.

 

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Proteostasis Reasons for the Merger

The Proteostasis board of directors considered the following factors, among others, in reaching its conclusion to approve and adopt the Merger Agreement, the Merger, the issuance of shares of Proteostasis common stock in the Merger and the other transactions contemplated thereby and to recommend that the Proteostasis stockholders approve the issuance of shares of Proteostasis common stock in the Merger and the other transactions contemplated by the Merger Agreement:

 

   

the Proteostasis board of directors believes, based in part on the judgment, advice and analysis of Proteostasis management with respect to the potential benefits of the Merger (which judgment, advice and analysis was informed in part on the business, intellectual property, regulatory, financial, accounting and legal due diligence investigation performed with respect to Yumanity), that:

 

   

Yumanity’s pipeline has potential to create value for the current Proteostasis and Yumanity stockholders;

 

   

Yumanity’s platform has the potential to advance one new clinical candidate into human trials each year;

 

   

Yumanity has the potential to create value through additional corporate partnerships;

 

   

Yumanity’s executive leadership team, which has extensive experience in neuroscience, rare disease, and oncology drug development, as well as considerable transaction experience, will give the combined organization the opportunity to reach significant value inflection points;

 

   

Yumanity and Proteostasis share a scientific legacy and approach to drug discovery in indications that are caused by protein misfolding and could potentially extract additional value from existing Proteostasis assets that include compound library, drug candidates, and intellectual property portfolio to further enhance its proprietary platform and pipeline;

 

   

Yumanity has delivered support agreements from its officers, directors and all but one of 5% or greater equityholders of Holdings, that will represent approximately 75% of Yumanity’s outstanding capital stock following the Yumanity Reorganization, in which each such individual or entity has agreed to vote in favor of the Merger Agreement, the Yumanity Reorganization and the related transactions. In addition, Yumanity has agreed to submit written consents from a sufficient number of stockholders to approve the Merger Agreement and the related transactions, including the Yumanity Reorganization, within ten business days of the effectiveness of this Registration Statement;

 

   

the combined organization will be able to satisfy the initial listing application requirements of Nasdaq and to maintain Proteostasis’ Nasdaq listing; and

 

   

Yumanity has the ability to enter into an agreement for a business combination with Proteostasis and thereafter proceed in an orderly manner toward implementing the proposed Merger;

 

   

The terms of the Merger Agreement allow Proteostasis to continue to attempt to monetize the CF assets though a parallel transaction with a pharmaceutical company partner and Proteostasis stockholders would benefit through either an increase of the Exchange Ratio or through additional cash payments if any such transaction is entered into up to nine months after the Effective Time of the Merger.

 

   

the Proteostasis board of directors believes the combined organization would possess sufficient financial resources to allow the management team to focus on implementing Yumanity’s business plan and growing Yumanity’s business;

 

   

the Proteostasis board of directors considered the ability of Yumanity to take advantage of the potential benefits resulting from becoming a public reporting company listed on Nasdaq should it be required to raise additional equity or debt in the future;

 

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the Proteostasis board of directors considered the opportunity as a result of the Merger for Proteostasis stockholders to participate in the potential increase in value that may result as Yumanity continues to invest in pursuing its business plan and growing its business following the Merger;

 

   

the Proteostasis board of directors considered the financial analyses presented by MTS Securities, LLC to the Proteostasis board of directors on August 20, 2020 and the opinion of MTS Securities, LLC, dated August 20, 2020, to the Proteostasis board of directors that, as of such date, based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth in such opinion, the Exchange Ratio (as defined in the draft of the Merger Agreement reviewed by MTS Securities, LLC as of such date) was fair from a financial point of view to Proteostasis, as more fully described below under the caption “The Merger — Opinion of Proteostasis’ Financial Advisor;” and

 

   

the Proteostasis board of directors also reviewed various factors impacting the financial condition, results of operations and prospects for Proteostasis, including:

 

   

the strategic alternatives to the Merger available to Proteostasis, including the discussions that Proteostasis’ management and the Proteostasis board of directors previously conducted with other potential merger partners, and the time to negotiate and complete an alternative merger transaction and anticipated cash burn;

 

   

the risks and delays associated with, and uncertain value and costs to Proteostasis stockholders of, liquidating Proteostasis, including the uncertainties of continuing cash burn while contingent liabilities are resolved, uncertainty of timing of release of cash until contingent liabilities are resolved, and the risks associated with being a shell company prior to cash distribution;

 

   

Proteostasis’ prospects to restructure its business to focus on novel drug discovery and development efforts, and its ability to raise the significant amount of funds it would require to pursue such opportunity and seek regulatory approvals and commence commercialization activities with no ultimate assurance that such activities would be successful or enable Proteostasis to operate a profitable business;

 

   

the risks and challenges of attempting to continue to operate Proteostasis on a stand-alone basis, including the substantial time required to rebuild infrastructure, including a dedicated research team, and the need to rely on established working collaborations with a number of academic institutions who have capabilities and research interest in patient derived cells and commercially available sources novel agents; and

 

   

the challenges of maintaining Proteostasis’ Nasdaq listing without completing the Merger.

The Proteostasis board of directors also reviewed the terms and conditions of the proposed Merger Agreement and the contemplated transactions, as well as the safeguards and protective provisions included therein intended to mitigate risks, including:

 

   

the fact that immediately following the consummation of the Merger, Yumanity stockholders, warrantholders and optionholders were initially expected to own approximately 67.5% of the Proteostasis common stock on a fully diluted basis as defined in the Merger Agreement, with Proteostasis stockholders, optionholders and warrantholders, whose shares of Proteostasis common stock will remain outstanding after the Merger, holding approximately 32.5% of the Proteostasis Stock on a fully diluted basis as defined in the Merger Agreement, subject to adjustment;

 

   

the final Exchange Ratio used to establish the number of shares of Proteostasis common stock to be issued in the Merger is based upon Proteostasis’ and Yumanity’s capitalization at the signing of the Merger Agreement, and will be adjusted based on the amount of Proteostasis net cash and changes in the capitalization of Proteostasis or Yumanity prior to the Closing;

 

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the limited number and the nature of the conditions to Proteostasis’ obligation to consummate the Merger and the limited risk of non-satisfaction of such conditions as well as the likelihood that the Merger will be consummated on a timely basis;

 

   

the limitations on Yumanity under the Merger Agreement to consider certain unsolicited acquisition proposals under certain circumstances should it receive a superior proposal;

 

   

the reasonableness of the potential termination fee being equal to $2,100,000, in the case of Proteostasis, or $4,380,000, in the case of Yumanity, which could become payable if the Merger Agreement is terminated in certain circumstances;

 

   

the terms of the support agreements described above;

 

   

the agreement of Yumanity to provide written consent of its stockholders necessary to adopt the Merger Agreement thereby approving the Merger and related transactions within ten business days of the Registration Statement, of which this proxy statement/prospectus/information statement is a part, becoming effective; and

 

   

the belief that the terms of the Merger Agreement, including the parties’ representations, warranties and covenants, and the conditions to their respective obligations, are reasonable under the circumstances.

In the course of its deliberations, the Proteostasis board of directors also considered a variety of risks and other countervailing factors related to the Merger and the transactions contemplated by the Merger Agreement, including:

 

   

the risk to Proteostasis’ financial results in the event that the Merger is not consummated, including the risk of Proteostasis needing to cease operations;

 

   

the termination fee of $2,100,000 payable by Proteostasis and the potential effect of such termination fee in deterring other potential acquirers from proposing an alternative transaction that may be more advantageous to Proteostasis stockholders;

 

   

the risk that the Exchange Ratio will be adjusted if Proteostasis’ net cash at Closing is reduced resulting in current Proteostasis equity holders owning a smaller percentage of the combined organization after Closing and the risk that Yumanity could terminate the Merger Agreement if Proteostasis’ net cash at Closing is less than $30.0 million;

 

   

the substantial expenses to be incurred in connection with the Merger and obtaining the necessary approval from the Proteostasis stockholders;

 

   

the possible volatility, at least in the short-term, of the trading price of Proteostasis common stock resulting from the announcement of the Merger;

 

   

the risk that the Merger might not be consummated in a timely manner or at all and the potential adverse effect of the public announcement of the Merger or on the delay or failure to complete the Merger on the reputation of Proteostasis;

 

   

the strategic direction of the combined organization following the completion of the Merger, which will be determined by a board of directors initially designated substantially by Yumanity; and

 

   

various other risks associated with the combined organization and the Merger, including those described in the section titled “Risk Factors” in this proxy statement/prospectus/information statement.

With respect to the requirement that Proteostasis have no less than $30.0 million of net cash at Closing, on November 6, 2020, Proteostasis and Yumanity entered into an amendment to the Merger Agreement in order to adjust the closing condition requirement for Proteostasis’ net cash at closing, reducing the required amount to at least $28 million (in lieu of $30 million).

 

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The foregoing information and factors considered by the Proteostasis board of directors are not intended to be exhaustive but are believed to include all of the material factors considered by the Proteostasis board of directors. In view of the wide variety of factors considered in connection with its evaluation of the Merger and the complexity of these matters, the Proteostasis board of directors did not find it useful to attempt, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, individual members of the Proteostasis board of directors may have given different weight to different factors. The Proteostasis board of directors conducted an overall analysis of the factors described above, including thorough discussions with, and questioning of, the Proteostasis management team and the legal and financial advisors of Proteostasis, and considered the factors overall to be favorable to, and to support, its determination.

Yumanity Reasons for the Merger

The following discussion sets forth material factors considered by the Yumanity board of directors in reaching its determination to approve the terms and authorize the execution of the Merger Agreement for the purpose of implementing the Merger; however, it may not include all of the factors considered by the Yumanity board of directors. In light of the number and wide variety of factors considered in connection with its evaluation of the Merger Agreement, the Yumanity board of directors did not consider it practicable to, and did not attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its determination. The Yumanity board of directors viewed its position and determinations as being based on all of the information available and the factors presented to and considered by it. In addition, individual directors may have given different weight to different factors.

In the course of reaching its decision to approve the Merger, the board of directors of Yumanity consulted with its senior management, advisors and legal counsel, reviewed a significant amount of information and considered a number of factors, including, among others:

 

   

Yumanity’s need for capital to support the clinical and preclinical development of its product candidates and the potential to access public market capital, including sources of capital from a broader range of investors than it could otherwise obtain if it continued to operate as a privately-held company;

 

   

the expectation that the Merger would be a more time- and cost-effective means to access capital than other options considered;

 

   

the potential to provide its current stockholders with greater liquidity by owning stock in a public company listed on Nasdaq;

 

   

Yumanity’s board of director’s belief that no alternatives to the Merger were reasonably likely to create greater value for Yumanity’s stockholders, after reviewing the various financing and other strategic options to enhance stockholder value that were considered by Yumanity’s board of directors, including remaining as an independent company;

 

   

the projected financial position, operations, management structure, geographic locations, operating plans, cash burn rate and financial projections of the combined organization, including the impact of the CVR Agreement and