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

Overview

We are a clinical stage biopharmaceutical company committed to the discovery and
development of novel therapeutics to treat cystic fibrosis, or CF, through
theratyping, or the process of matching modulators to individual response to
treatment regardless of cystic fibrosis transmembrane conductance regulator, or
CFTR, mutations. CF is a disease caused by defects in the function or abundance
of CFTR protein.

Since our inception in 2006, we have devoted substantially all our resources to
organizing and staffing our company, business planning, raising capital,
acquiring and developing product and technology rights, and conducting research
and development activities for our product candidates. We do not have any
products approved for sale and have not generated any revenue from product
sales. We have funded our operations to date with proceeds received from equity
offerings, the issuance of convertible promissory notes and, to a lesser extent,
payments received in connection with collaboration agreements and a research
grant.

In addition, we have entered into a sales agreement with H.C. Wainwright & Co.,
LLC, or HCW, with respect to an at-the-market, or ATM, offering program, or the
ATM program. As of December 31, 2019, we have sold 987,653 shares of our common
stock for total net proceeds of approximately $3.5 million under the ATM
program. We did not sell any shares of our common stock under the ATM program
during the nine months ended September 30, 2020.

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

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

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

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

                                       18


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

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



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

COVID-19 Business Update



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

Components of our Results of Operations

Revenue



To date, we have not generated any revenue from product sales and do not expect
to generate any revenue from the sale of products in the foreseeable future. We
did not recognize any revenue during the three and nine months ended
September 30, 2020. All our revenue during the nine months ended September 30,
2019 was derived from our Genentech Agreement.

Operating Expenses

Research and Development Expenses



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

• employee-related expenses, including salaries, related benefits, travel,

and stock-based compensation expense for employees engaged in research and


       development functions;


    •  expenses incurred in connection with the preclinical and clinical
       development of our product candidates under agreements with contract

research organizations, or CROs, and contract manufacturing organizations,

or CMOs;

• facilities, depreciation, and other expenses, which include direct and

allocated expenses for rent and maintenance of facilities, insurance, and


       supplies; and


  • payments made under third-party licensing agreements.

We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers.



Our direct research and development expenses are tracked on a program-by-program
basis and consist primarily of external costs, such as fees paid to consultants,
central laboratories, contractors, CROs, and CMOs in connection with our
clinical trials and preclinical development activities. We do not allocate
employee costs, costs associated with our platform technology, facility
expenses, including depreciation, or other indirect costs, to specific product
development programs because these costs are deployed across multiple product
development programs and, as such, are not separately classified. We use
internal resources to manage our preclinical development activities and perform
data analysis for such activities. These employees work across multiple
development programs and, therefore, we do not track their costs by program.

                                       19

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The table below summarizes our research and development expenses incurred by
program (in thousands):



                                 Three Months Ended September 30,             Nine Months Ended September 30,
                                  2020                     2019                 2020                  2019
CF                           $           674         $           6,084     $         6,285       $        30,546
UPR                                        -                        91                  13                   303
Unallocated expenses:
Employee-related                          11                     2,755               4,412                 8,107
Facility-related                         186                       499                 908                 1,577
Other                                    369                       716                 724                 2,684
Total research and
  development expenses       $         1,240         $          10,145     $        12,342       $        43,217




In August 2020, after consideration of various financing and strategic
alternatives for our CF portfolio, with the goal of maximizing stockholder value
of these assets, our Board approved our entry into the proposed Merger. As a
result of this decision, we stopped further research and development of our
product pipeline and our pre-clinical programs, including the Unfolded Protein
Response, or UPR, program, to reduce operating expenses. As a result, our
research and development expenses for the fiscal year ending December 31, 2020
will decrease as compared to the fiscal year ended December 31, 2019.

General and Administrative Expenses



General and administrative expenses consist primarily of salaries and related
benefits, travel, and stock-based compensation for personnel in executive,
finance, and administrative functions. General and administrative expenses also
include facilities, which include direct and allocated expenses for rent and
maintenance of facilities, depreciation, insurance, and supplies, as well as
professional fees for legal, consulting, accounting, and audit services.

We anticipate that our general and administrative expenses in the fiscal year
ending December 31, 2020 will decrease from the fiscal year ended December 31,
2019, with the exception of severance payments, as we continue to focus our
efforts on preserving cash while we seek to maximize stockholder value. Over the
longer term, however, these expenses could increase due to professional fees
associated with the proposed Merger with Yumanity.

Restructuring Costs

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

Interest Income

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

Interest Expense

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



Other Income (Expense), Net

Other income (expense), net, primarily consists of the amortization of premiums
and discounts on our short-term investments and the gains or losses associated
with the changes in the fair values of our derivative liability.

                                       20

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Critical Accounting Policies and Significant Judgments and Estimates



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

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

  • revenue recognition;


  • accrued research and development expenses; and


  • stock-based compensation.


Accordingly, we believe the policies set forth above are critical to fully
understanding and evaluating our financial condition and results of operations.
If actual results or events differ materially from the estimates, judgments and
assumptions used by us in applying these policies, our reported financial
condition and results of operations could be materially affected.

Results of Operations

Comparison of Three Months Ended September 30, 2020 and 2019

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





                                  Three Months Ended September 30,           Increase
                                    2020                   2019             (Decrease)
  Revenue                      $             -       $               -     $          -
  Operating expenses:
  Research and development               1,240                  10,145           (8,905 )
  General and administrative             4,536                   3,154            1,382
  Restructuring costs                    2,401                       -            2,401
  Total operating expenses               8,177                  13,299           (5,122 )
  Loss from operations                  (8,177 )               (13,299 )         (5,122 )
  Interest income                            8                     224             (216 )
  Interest expense                          (4 )                     -               (4 )
  Other income, net                          4                     242             (238 )
  Net loss                     $        (8,169 )     $         (12,833 )   $     (4,664 )




Revenue

There was no revenue for the three months ended September 30, 2020 or 2019.

Research and Development Expenses



Research and development expenses decreased to $1.2 million for the three months
ended September 30, 2020, compared to $10.1 million for the three months ended
September 30, 2019 due to our strategic shift in strategy related to our pursuit
of the Merger with Yumanity. The decrease of $8.9 million was related to a
decrease of approximately $5.4 million in clinical-related research activities
as we wind down our CF programs, $2.7 million in employee-related expenses as we
reduced our workforce, $0.5 million in professional fees, and $0.3 million in
facility expenses.

                                       21

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General and Administrative Expenses



General and administrative expenses were $4.5 million for the three months ended
September 30, 2020, compared to $3.2 million for the three months ended
September 30, 2019. The increase of $1.3 million in general and administrative
expenses was primarily due to an increase of $1.5 million in professional fees
primarily related to our proposed Merger with Yumanity, $0.2 million in facility
expenses, and $0.2 million in insurance expenses, offset by a decrease of $0.6
million in employee-related expenses.

Restructuring Costs



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

Interest Income



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

Interest Expense

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

Other Income, Net



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

Comparison of Nine Months Ended September 30, 2020 and 2019

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





                                   Nine Months Ended September 30,           Increase
                                     2020                   2019            (Decrease)
  Revenue                      $              -       $          5,000     $     (5,000 )
  Operating expenses:
  Research and development               12,342                 43,217          (30,875 )
  General and administrative             12,489                 10,781            1,708
  Restructuring costs                     2,401                      -            2,401
  Total operating expenses               27,232                 53,998          (26,766 )
  Loss from operations                  (27,232 )              (48,998 )        (21,766 )
  Interest income                           269                    879             (610 )
  Interest expense                          (13 )                    -              (13 )
  Other income, net                          36                    850             (814 )
  Net loss                     $        (26,940 )     $        (47,269 )   $    (20,329 )




Revenue

There was no revenue for the nine months ended September 30, 2020, as compared
to revenue of $5.0 million related to the Genentech Agreement recognized in the
nine months ended September 30, 2019.

Research and Development Expenses



Research and development expenses decreased to $12.3 million for the nine months
ended September 30, 2020, compared to $43.2 million for the nine months ended
September 30, 2019 due to our strategic shift in strategy related to our pursuit
of the Merger with Yumanity. The decrease of $30.9 million was due to a decrease
of approximately $24.8 million in clinical-related research

                                       22

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

General and Administrative Expenses



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

Restructuring Costs



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

Interest Income



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

Interest Expense

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

Other Income, Net



Other income was less than $0.1 million and $0.9 million for the nine months
ended September 30, 2020 and 2019, respectively. The decrease of $0.8 million in
other income is primarily due to a decrease in net accretion of discounts on
short-term securities in the nine months ended September 30, 2020 compared to
the nine months ended September 30, 2019.

Liquidity and Capital Resources

Sources of Liquidity



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

As of September 30, 2020, we had cash, cash equivalents and short-term
investments of approximately $40.8 million and an accumulated deficit of $363.6
million. During the nine months ended September 30, 2020, we incurred a loss of
$26.9 million and used $29.2 million of cash in operations.

Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):





                                                  Nine Months Ended September 30,
                                                    2020                   2019
 Cash used in operating activities            $        (29,173 )     $

(41,555 )


 Cash provided by investing activities                  39,490

47,968


 Cash provided by financing activities                     427

81

Net increase in cash, cash equivalents and


   restricted cash                            $         10,744       $          6,494


                                       23


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Operating Activities



Net cash used in operating activities was $29.2 million during the nine months
ended September 30, 2020, primarily driven by our net loss of $26.9 million and
changes in operating assets and liabilities of $4.9, partially offset by
non-cash charges of $2.6 million. Our net loss was primarily attributed to our
research and development activities associated with our clinical trials and
preclinical studies. Changes in operating assets and liabilities were primarily
related to a decrease of $3.2 million in accrued expenses, a decrease of $1.4
million in accounts payable, a decrease of $0.9 million in operating lease
liabilities, and an increase in prepaid and other current assets of $0.6
million. Non-cash charges include $1.6 million of stock-based compensation and
$0.9 million of non-cash lease expense.

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

Investing Activities



During the nine months ended September 30, 2020, net cash provided by investing
activities was $39.5 million, consisting of proceeds received from maturities of
short-term investments of $55.7 million, partially offset by purchases of our
short-term investments of $16.2 million.

During the nine months ended September 30, 2019, net cash provided by investing
activities was $48.0 million, consisting of proceeds received from maturities of
short-term investments of $111.0 million, partially offset by purchases of
short-term investments of $63.0 million.

Financing Activities



During the nine months ended September 30, 2020, net cash provided by financing
activities was $0.4 million, primarily related to proceeds from the issuance of
short-term borrowings of $1.2 million, offset by payments made on short-term
borrowings of $0.9 million.

During the nine months ended September 30, 2019, net cash provided by financing
activities was less than $0.1 million, resulting from the issuance of common
stock pursuant to our employee stock purchase plan as well as stock option
exercises.

Future Funding Requirements



We expect that our cash, cash equivalents, and short-term investments as of
September 30, 2020 will enable us to fund our operating expenses and capital
requirements, based upon our current operating plan, for at least 12 months from
the date of this filing and through the completion of the Merger. If the Merger
is not successful, and we determine to operate as a stand-alone entity, we will
require additional funding to fund our pipeline and advance our proprietary
candidates through regulatory approval and into commercialization, if approved.

If, for any reason, the Merger does not close and the Merger Agreement is
terminated, the Board may elect to, among other things, attempt to complete
another strategic transaction including a transaction similar to the Merger,
continue to operate our business or to dissolve and liquidate our assets,
including the CF Assets. In addition, if our Board were to approve and
recommend, and our stockholders were to approve, a dissolution and liquidation
of our Company, we would be required under Delaware corporate law to pay our
outstanding obligations, as well as to make reasonable provision for contingent
and unknown obligations, prior to making any distributions in liquidation to our
stockholders. As a result of this requirement, a portion of our remaining cash
assets may need to be reserved pending the resolution of such obligations. In
addition, we may be subject to litigation or other claims related to a
dissolution and liquidation of our Company. If a dissolution and liquidation
were pursued, our Board, in consultation with its advisors, would need to
evaluate these matters and make a determination about a reasonable amount to
reserve. As of September 30, 2020, we had cash and cash equivalents and
short-term investments totaling approximately $40.8 million. However, there can
be no assurances as to the amount or timing of available cash, if any, left to
distribute to our stockholders after paying the debts and our other obligations
and setting aside funds for potential future claims.

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In the event we are unable to complete the Merger, we continue will to pursue
cost saving initiatives to reduce operating expenses, but we will also need to
raise additional funds to pursue our business strategy and explore sources of
equity or debt financing. We may seek to raise such capital through a
combination of equity offerings, debt financings, collaborations, strategic
alliances and licensing arrangements. We do not currently have any committed
external source of funds and additional funding may not be available on
favorable terms or at all.

Contractual Obligations and Commitments

Under various agreements, we will be required to make milestone payments and pay royalties and other amounts to third parties.



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

JOBS Act

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

Off-Balance Sheet Arrangements



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

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