10-Q 1 pti-10q_20200930.htm 10-Q pti-10q_20200930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended September 30, 2020

OR

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

For the transition period from           to           

Commission file number: 001-37695

 

Proteostasis Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

20-8436652

(State or Other jurisdiction of

Incorporation or organization)

(I.R.S. Employer

Identification No.)

80 Guest Street, Suite 500

Boston, Massachusetts

02135

(Address of Principal Executive Offices)

(Zip Code)

(617) 225-0096

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of exchange on which registered

Common stock, par value $0.001 per share

PTI

The Nasdaq Stock Market LLC

Securities registered pursuant to the Section 12(g) of the Act: None

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

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

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

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

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

As of November 12, 2020, there were 52,184,755 shares of the registrant’s common stock, $0.001 par value per share, outstanding.

 

 


 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or this report, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are often identified by the words, “aim,” “anticipate,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “project,” “seek,” “should,” “target,”  “will,” “would” or the negative of these terms or other comparable terminology intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements about:

 

the success of our efforts, and those of our advisors, in executing on, our strategic alternatives, while preserving our cash balance to the extent practicable, including our proposed merger, or the Merger, with Yumanity Therapeutics, Inc, or Yumanity;

 

the expected benefits of and potential value created by the Merger for our stockholders;

 

the likelihood of the satisfaction of certain conditions to the completion of the Merger and whether and when the Merger will be consummated;

 

the risk of unanticipated costs, liabilities or delays relating to the Merger, including the outcome of any legal proceedings relating to the Merger;

 

the possibility of any change, effect, development, matter, state of facts, series of events or circumstances that could give rise to the termination of the agreement with Yumanity related to the Merger, including a termination of such agreement under circumstances that could require us to pay a termination fee to Yumanity;

 

our ability to implement the reverse stock split, including receiving the necessary stockholder approvals;

 

our ability to dispose of our intellectual property and assets relating to our cystic fibrosis clinical program, or the CF Assets;

 

our ability to control and correctly estimate our operating expenses and our expenses associated with the Merger;

 

our ability to operate as a stand-alone company if the Merger is not consummated;

 

our expectations regarding the impact of the ongoing coronavirus disease 2019, or COVID-19, pandemic, including the expected duration of disruption and immediate and long-term impact and effect on our business and operations; and

 

other forward-looking statements discussed elsewhere in this report.

You should refer to “Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this report.

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

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

2


Proteostasis Therapeutics, Inc.

INDEX

 

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

Item 1.

 

Condensed Consolidated Financial Statements (unaudited):

 

4

 

 

Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019

 

4

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2020 and 2019

 

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019

 

6

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019

 

7

 

 

Notes to Condensed Consolidated Financial Statements

 

8

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

Item 4.

 

Management’s Evaluation of our Disclosure Controls and Procedures

 

25

 

PART II – OTHER INFORMATION

Item 1.

 

Legal Proceedings

 

26

Item 1A.

 

Risk Factors

 

26

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

37

Item 5.

 

Other Information

 

37

Item 6.

 

Exhibits

 

38

 

 

 

 

 

Signatures

 

40

 

3


PART I — FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED Financial Statements (Unaudited)

PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,752

 

 

$

25,008

 

Short-term investments

 

 

5,000

 

 

 

44,459

 

Prepaids and other current assets

 

 

821

 

 

 

1,404

 

Total current assets

 

 

41,573

 

 

 

70,871

 

Operating lease, right-of-use asset

 

 

11,682

 

 

 

12,631

 

Property and equipment, net

 

 

268

 

 

 

394

 

Restricted cash

 

 

828

 

 

 

828

 

Total assets

 

$

54,351

 

 

$

84,724

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

882

 

 

$

2,283

 

Accrued expenses

 

 

3,670

 

 

 

6,864

 

Operating lease liabilities

 

 

1,231

 

 

 

1,153

 

Short-term borrowings

 

 

369

 

 

 

 

Total current liabilities

 

 

6,152

 

 

 

10,300

 

Derivative liability

 

 

3

 

 

 

3

 

Operating lease liabilities, net of current portion

 

 

11,109

 

 

 

12,043

 

Total liabilities

 

 

17,264

 

 

 

22,346

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares

   issued and outstanding as of September 30, 2020 and December 31, 2019

 

 

 

 

 

 

Common stock, $0.001 par value; 125,000,000 shares authorized;

   52,180,380 and 52,116,629 shares issued and outstanding as of

   September 30, 2020 and December 31, 2019, respectively

 

 

52

 

 

 

52

 

Additional paid-in capital

 

 

400,635

 

 

 

398,979

 

Accumulated other comprehensive income

 

 

 

 

 

7

 

Accumulated deficit

 

 

(363,600

)

 

 

(336,660

)

Total stockholders’ equity

 

 

37,087

 

 

 

62,378

 

Total liabilities and stockholders’ equity

 

$

54,351

 

 

$

84,724

 

 

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

 

 

4


PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue

 

$

 

 

$

 

 

$

 

 

$

5,000

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,240

 

 

 

10,145

 

 

 

12,342

 

 

 

43,217

 

General and administrative

 

 

4,536

 

 

 

3,154

 

 

 

12,489

 

 

 

10,781

 

Restructuring costs

 

 

2,401

 

 

 

 

 

 

2,401

 

 

 

 

Total operating expenses

 

 

8,177

 

 

 

13,299

 

 

 

27,232

 

 

 

53,998

 

Loss from operations

 

 

(8,177

)

 

 

(13,299

)

 

 

(27,232

)

 

 

(48,998

)

Interest income

 

 

8

 

 

 

224

 

 

 

269

 

 

 

879

 

Interest expense

 

 

(4

)

 

 

 

 

 

(13

)

 

 

 

Other income, net

 

 

4

 

 

 

242

 

 

 

36

 

 

 

850

 

Net loss

 

$

(8,169

)

 

$

(12,833

)

 

$

(26,940

)

 

$

(47,269

)

Net loss per share—basic and diluted

 

$

(0.16

)

 

$

(0.25

)

 

$

(0.52

)

 

$

(0.93

)

Weighted average common shares outstanding—basic

   and diluted

 

 

52,177,557

 

 

 

51,099,307

 

 

 

52,157,355

 

 

 

51,058,339

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments

 

 

 

 

 

(17

)

 

 

(7

)

 

 

15

 

Comprehensive loss

 

$

(8,169

)

 

$

(12,850

)

 

$

(26,947

)

 

$

(47,254

)

 

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

5


PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

in Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balances at June 30, 2020

 

 

52,147,656

 

 

$

52

 

 

$

400,315

 

 

$

 

 

$

(355,431

)

 

$

44,936

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

287

 

 

 

 

 

 

 

 

 

287

 

Issuance of common stock pursuant

   to employee stock purchase plan

 

 

28,205

 

 

 

 

 

 

33

 

 

 

 

 

 

 

 

 

33

 

Issuance of common stock for restricted stock units

 

 

4,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,169

)

 

 

(8,169

)

Balances at September 30, 2020

 

 

52,180,380

 

 

$

52

 

 

$

400,635

 

 

$

 

 

$

(363,600

)

 

$

37,087

 

 

 

 

Common Stock

 

 

Additional

Paid-

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

in Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2019

 

 

52,116,629

 

 

$

52

 

 

$

398,979

 

 

$

7

 

 

$

(336,660

)

 

$

62,378

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,598

 

 

 

 

 

 

 

 

 

1,598

 

Issuance of common stock pursuant

   to employee stock purchase plan

 

 

59,232

 

 

 

 

 

 

58

 

 

 

 

 

 

 

 

 

58

 

Issuance of common stock for restricted stock units

 

 

4,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

(7

)

 

 

 

 

 

(7

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,940

)

 

 

(26,940

)

Balances at September 30, 2020

 

 

52,180,380

 

 

$

52

 

 

$

400,635

 

 

$

 

 

$

(363,600

)

 

$

37,087

 

 

 

 

Common Stock

 

 

Additional

Paid-

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

in Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balances at June 30, 2019

 

 

51,099,307

 

 

$

51

 

 

$

393,872

 

 

$

33

 

 

$

(311,971

)

 

$

81,985

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

961

 

 

 

 

 

 

 

 

 

961

 

Issuance of common stock for payment of

   consulting services

 

 

29,669

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

(17

)

 

 

 

 

 

(17

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,833

)

 

 

(12,833

)

Balances at September 30, 2019

 

 

51,128,976

 

 

$

51

 

 

$

394,858

 

 

$

16

 

 

$

(324,804

)

 

$

70,121

 

 

 

 

Common Stock

 

 

Additional

Paid-

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

in Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2018

 

 

50,808,422

 

 

$

51

 

 

$

391,825

 

 

$

1

 

 

$

(277,535

)

 

$

114,342

 

Exercise of stock options

 

 

2,543

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,710

 

 

 

 

 

 

 

 

 

2,710

 

Issuance of common stock for payment of

   consulting services

 

 

102,302

 

 

 

 

 

 

242

 

 

 

 

 

 

 

 

 

242

 

Issuance of common stock pursuant

   to employee stock purchase plan

 

 

52,284

 

 

 

 

 

 

78

 

 

 

 

 

 

 

 

 

78

 

Vesting of restricted stock units

 

 

163,425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

 

 

 

15

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(47,269

)

 

 

(47,269

)

Balances at September 30, 2019

 

 

51,128,976

 

 

$

51

 

 

$

394,858

 

 

$

16

 

 

$

(324,804

)

 

$

70,121

 

 

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

 

6


PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(26,940

)

 

$

(47,269

)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

126

 

 

 

150

 

Non-cash lease expense

 

 

949

 

 

 

909

 

Accretion of short-term investments

 

 

(38

)

 

 

(850

)

Stock-based compensation expense

 

 

1,598

 

 

 

2,710

 

Stock issued for consulting services

 

 

 

 

 

242

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaids and other current assets

 

 

583

 

 

 

548

 

Other assets

 

 

 

 

 

(112

)

Accounts payable

 

 

(1,401

)

 

 

2,184

 

Accrued expenses

 

 

(3,194

)

 

 

716

 

Operating lease liabilities

 

 

(856

)

 

 

(783

)

Net cash used in operating activities

 

 

(29,173

)

 

 

(41,555

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(16,227

)

 

 

(63,040

)

Proceeds received from maturities of short-term investments

 

 

55,717

 

 

 

111,017

 

Purchases of property and equipment

 

 

 

 

 

(9

)

Net cash provided by investing activities

 

 

39,490

 

 

 

47,968

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

 

 

 

3

 

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

 

 

58

 

 

 

78

 

Proceeds from issuance of short-term borrowings

 

 

1,220

 

 

 

 

Repayment of short-term borrowings

 

 

(851

)

 

 

 

Net cash provided by financing activities

 

 

427

 

 

 

81

 

Net increase in cash, cash equivalents and restricted cash

 

 

10,744

 

 

 

6,494

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

25,836

 

 

 

29,638

 

Cash, cash equivalents and restricted cash at end of period

 

$

36,580

 

 

$

36,132

 

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

 

7


PROTEOSTASIS THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.

Nature of the Business

Proteostasis Therapeutics, Inc. (the “Company”) was incorporated in Delaware on December 13, 2006. The Company 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 cystic fibrosis transmembrane conductance regulator (“CFTR”) mutations. CF is a disease caused by defects in the function or abundance of CFTR protein.

Since its inception, the Company has devoted substantially all of its efforts to organizing and staffing the Company, business planning, raising capital, acquiring and developing product and technology rights, and conducting research and development activities. It has funded its operations to date with proceeds from the sale of preferred stock, the issuance of convertible promissory notes, proceeds from its initial public offering in February 2016, proceeds from its follow-on public offerings, and payments received in connection with collaboration agreements and a research grant, as well as funds from the sale of stock under at-the-market offering programs.

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

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

After conducting a process of evaluating strategic alternatives for the Company, on August 22, 2020, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Yumanity Therapeutics, Inc., a Delaware corporation (“Yumanity”), Yumanity Holdings, LLC, a Delaware limited liability company (“Holdings) and the Merger Sub, which was subsequently amended on November 6, 2020. Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, including approval of the transaction by the Company’s stockholders and Yumanity’s stockholders and the consolidation of Yumanity and Holdings prior to the closing of the transaction, Merger Sub will be merged with and into Yumanity (the “Merger”), with Yumanity surviving the Merger as a wholly-owned subsidiary of the Company. If the Merger is completed, the business of the Company will become the business of Yumanity.

The Merger is expected to be treated by the Company as a reverse merger accounted for as an asset acquisition in accordance with accounting principles generally accepted in the United States (“GAAP”). For accounting purposes, Yumanity is considered to be acquiring the Company in the Merger. In accordance with the accounting guidance under Accounting Standard Updates (or “ASU”) 2017-01, the Merger is considered an asset acquisition. Accordingly, the assets and liabilities of the Company will be recorded as of the closing date of the Merger at the purchase price of the accounting acquirer. The Merger is expected to close in the fourth quarter of 2020, subject to the approval by the Company’s stockholders at a special meeting of the Company’s stockholders to be held on December 16, 2020, as well as other customary conditions. Upon completion of the Merger, the combined company will be renamed Yumanity Therapeutics, Inc., and is expected to trade on the Nasdaq Capital Market under the ticker symbol “YMTX”.

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

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

8


The Company has not generated any commercial revenue since inception. As a result, the Company has incurred recurring losses and requires significant cash resources to execute its business plans. In accordance with ASC 205-40, Going Concern (“ASC 205-40”), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the consolidated financial statements are issued. As of September 30, 2020, the Company had an accumulated deficit of $363.6 million. The Company has incurred losses and negative cash flows from operations since its inception. During the nine months ended September 30, 2020, the Company incurred losses of $26.9 million and used $29.2 million of cash in operations. The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. The Company currently expects that its cash, cash equivalents and short-term investments of $40.8 million will be sufficient to fund its operating expenses and capital requirements, based upon its current operating plan, for at least 12 months from the date that these consolidated financial statements are issued.

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

2.

Summary of Significant Accounting Policies

Unaudited Interim Consolidated Financial Information

The condensed balance sheet as of December 31, 2019 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying condensed consolidated financial statements, as of September 30, 2020 and for the three and nine months ended September 30, 2020, are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 10, 2020. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, as necessary for the fair statement of the Company’s financial position as of September 30, 2020, results of its operations for the three and nine months ended September 30, 2020, stockholders’ equity for the three and nine months ended September 30, 2020, and cash flows for the nine months ended September 30, 2020, have been made. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2020.

Summary of Significant Accounting Policies

The Company’s significant accounting policies, which are disclosed in the audited financial statements for the year ended December 31, 2019 and the notes thereto, are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 10, 2020 (the “Annual Report”). There were no changes to significant accounting policies during the three and nine months ended September 30, 2020.

Risks and Uncertainties

The Company is monitoring the potential impact of the ongoing COVID-19 pandemic, if any, on the carrying value of certain assets. To date, the Company has not experienced material business disruption, nor has it incurred impairment of any assets as a result of the COVID-19 pandemic. The extent to which these events may impact the Company’s business, clinical development and regulatory efforts, and the value of its common stock, will depend on future developments, which are highly uncertain and cannot be predicted at this time. The duration and intensity of these impacts and resulting disruption to the Company’s operations is uncertain and the Company will continue to assess the financial impact. In addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company’s business and results of operations, including the ability to execute the proposed Merger, it may also have the effect of heightening many of the other risks and uncertainties discussed in the Annual Report.

9


Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, revenue recognition, the accrual for research and development expenses, and the valuation the derivative liability. Estimates are periodically reviewed in light of changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current year presentation. An adjustment has also been made to the condensed statement of cash flows for the period ended September 30, 2019, to reclassify non-cash lease expense out of depreciation and amortization.

Consolidation

These consolidated financial statements include Pangolin Merger Sub, Inc., the Company’s wholly-owned subsidiary. All intercompany transactions and balances are eliminated in consolidation.

Recently Adopted Accounting Pronouncements

ASU No. 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The new standard modifies the disclosure requirements on fair value measure in Topic 820, including removals of existing disclosures, modifications of existing disclosures, and additions of new disclosures. Certain amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair values measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim of annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted for any removed or modified disclosure. The new standard is effective for the Company on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The FASB subsequently issued amendments to ASU 2016-13, which have the same effective date and transition date of January 1, 2022, as the Company is a smaller reporting company. These standards require that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used, and establishes additional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, these standards now require allowances to be recorded instead of reducing the amortized cost of the investment. These standards limit the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. Based on the composition of the Company’s investment portfolio and other financial assets, current market conditions and historical credit loss activity, the adoption of these standards is not expected to have a material impact on the Company’s condensed consolidated financial statements.

10


3.

Short-Term Investments

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

 

 

 

September 30, 2020

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

U.S. treasury securities

 

$

5,000

 

 

$

 

 

$

 

 

$

5,000

 

 

 

$

5,000

 

 

$

 

 

$

 

 

$

5,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

U.S. government-sponsored enterprise

   securities

 

$

20,456

 

 

$

2

 

 

$

(1

)

 

$

20,457

 

U.S. treasury securities

 

 

23,996

 

 

 

7

 

 

 

(1

)

 

 

24,002

 

 

 

$

44,452

 

 

$

9

 

 

$

(2

)

 

$

44,459

 

 

Short-term investments represent holdings of available-for-sale debt securities and are reported at fair value with unrealized gains and losses reported net of taxes, if material, in other comprehensive income. The Company did not have any realized gains or losses on its short-term investments for the three and nine months ended September 30, 2020 and 2019, respectively. There were no other-than-temporary impairments recognized for the three and nine months ended September 30, 2020 and 2019, respectively.

4.

Fair Value of Financial Assets and Liabilities

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

 

 

 

Fair Value Measurements as of September 30, 2020 using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

27,820

 

 

$

 

 

$

 

 

$

27,820

 

U.S. treasury securities

 

 

 

 

 

5,999

 

 

 

 

 

 

5,999

 

U.S. government-sponsored enterprise

   securities

 

 

 

 

 

1,000

 

 

 

 

 

 

1,000

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

 

 

 

 

5,000

 

 

 

 

 

 

5,000

 

 

 

$

27,820

 

 

$

11,999

 

 

$

 

 

$

39,819

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

 

 

$

 

 

$

3

 

 

$

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2019 using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

23,906

 

 

$

 

 

$

 

 

$

23,906

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprise

   securities

 

 

 

 

 

20,457

 

 

 

 

 

 

20,457

 

U.S. treasury securities

 

 

 

 

 

24,002

 

 

 

 

 

 

24,002

 

 

 

$

23,906

 

 

$

44,459

 

 

$

 

 

$

68,365

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

 

 

$

 

 

$

3

 

 

$

3

 

 

11


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

The derivative liability relates to a cash settlement option associated with the change of control provision in the Company’s Cystic Fibrosis Foundation, Inc. (“CFF”) agreement, which meets the definition of a derivative. The fair value of the derivative liability is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the derivative instrument was originally determined using the Monte-Carlo simulation analysis. In determining the fair value of the derivative liability, the inputs impacting fair value include the fair value of the Company’s common stock, expected term of the derivative instrument, expected volatility of the common stock price, risk-free interest rate, expected sales-based milestone payments, discount rate, probability of a change of control event, and the probability that the counterparty would elect to accept the alternative cash payment in lieu of its right to the future sales-based milestone payments.

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

5.

Prepaids and Other Current Assets

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Prepaid clinical, manufacturing and scientific expenses

 

$

80

 

 

$

767

 

Prepaid insurance expenses

 

 

684

 

 

 

125

 

Other prepaid expenses and other current assets

 

 

57

 

 

 

512

 

 

 

$

821

 

 

$

1,404

 

 

 

6.

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Accrued payroll and related expenses

 

 

2,334

 

 

 

3,203

 

Accrued research and development expenses

 

$

685

 

 

$

3,186

 

Accrued professional fees