TENAYA THERAPEUTICS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K) – Marketscreener.com

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that are based upon current expectations that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under "Risk Factors" and elsewhere in this Annual Report on Form 10-K. Please also see the section titled "Special Note Regarding Forward-Looking Statements."

Overview

We are a biotechnology company focused on discovering, designing, developing and delivering curative therapies that address the underlying drivers of heart disease. We are advancing a pipeline of disease-modifying therapies developed using our product platforms and core internal capabilities to target defined sub-populations of patients with rare or highly prevalent forms of heart disease.

We were incorporated in August 2016 and commenced operations thereafter. Our operations to date have included developing our gene therapy, cellular regeneration and precision medicine platforms, identifying and developing product candidates, conducting preclinical studies, acquiring technology, organizing and recruiting management and technical staff, business planning, establishing our intellectual property portfolio, raising capital, and providing general and administrative support for these operations. All of our programs are currently in the preclinical stage and we do not have any products approved for sale. We have not generated any revenue.

Business and Program Highlights

We are advancing a deep and diverse pipeline that includes both gene therapies and small molecules.

TN-201: In the second half of 2022, we expect to submit an investigational new drug application (IND) to the U.S. Food and Drug Administration (FDA), for the most advanced product candidate from our Gene Therapy platform, TN-201, an adeno-associated virus (AAV)-based gene therapy to address genetic hypertrophic cardiomyopathy (gHCM) caused by Myosin Binding Protein C3 (MYBPC3) gene mutations. TN-201, currently in IND-enabling studies, is designed to deliver a fully functional MYBPC3 gene driven by our proprietary heart-specific promoter to restore normal levels of MYBPC3 protein. In 2021, we initiated a global natural history study to improve our understanding of disease progression and unmet need in individuals carrying mutations in the MYBPC3 gene, with an initial focus on pediatric patients under the age of 18. We continue site activation and patient enrollment in the global natural history study to support the future evaluation of TN-201 in pediatric patients during clinical development after early safety has been established in adults. This study complements existing disease registries focused primarily on adult patient HCM populations and may support and expedite the development of TN-201 in the pediatric patient population. TN-201 has been granted orphan drug designation by the FDA.

TN-301 (previously referred to as TYA-11631): We also expect to submit an IND to the FDA in the second half of 2022 for the most advanced product candidate from our Precision Medicine platform, TN-301, a highly specific small molecule inhibitor of histone deacetylase 6 (HDAC6i). TN-301, currently in IND-enabling studies, has potentially broad utility in both heart failure with preserved EF (HFpEF) as well as genetic dilated cardiomyopathy (gDCM). In 2021, we initiated current cGMP manufacturing activities to support the production of TN-301 at larger scales.

TN-401: Our PKP2 program involves using an AAV-based gene therapy to address gARVC caused by plakophilin 2 (PKP2) gene mutations, and we are developing TN-401 as a clinical drug candidate to treat patients carrying PKP2 gene mutations. We have scaled up production of TN-401 to 200L and are initiating IND enabling studies. We intend to support establishment of a global natural history study in 2022 and expect to submit an IND in 2023.

Other: Our DWORF program, an AAV-based gene therapy designed to express the Dwarf Open Reading Frame (DWORF) gene in the heart, has potentially broad utility in dilated cardiomyopathy (DCM) and heart failure with reduced EF (HFrEF) and is currently at the candidate selection stage. Our Reprogramming program for cardiac regeneration can potentially replace heart cells lost in patients experiencing heart failure due to prior myocardial

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infarction (MI), and is currently at the candidate selection stage. In addition, we have numerous earlier-stage programs emerging from our product platforms to address other forms of heart failure.

Manufacturing: We have initiated construction of a cGMP facility in the San Francisco Bay Area near our research labs to enable smooth scale-up of production to support first-in-human studies. We expect this facility will be operational in the first half of 2022. This facility will support the production of drug product at multiple scales for clinical studies for all AAV-based programs, including TN-201 and TN-401.

Financial Highlights

On August 3, 2021, we completed an initial public offering (IPO) of our common stock in which we issued an aggregate of 13,800,000 shares of our common stock at a price of $15.00 per share. We received net proceeds of $188.5 million from the IPO, after deducting underwriting discounts, commissions and offering costs of $18.5 million.

Since our inception, we have incurred net losses each year and we expect to continue to incur significant and increasing losses for the foreseeable future as we continue to advance our platforms, programs and product candidates, and operate as a public company. Our net losses may fluctuate significantly from period to period, depending on the timing of expenditures on our research and development activities. Our net losses were $72.7 million and $38.4 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $155.5 million and cash, cash equivalents and investments in marketable securities of $251.3 million. Our net losses resulted primarily from our research and development programs and, to a lesser extent, general and administrative costs associated with our operations. Historically, we have funded our operations primarily from the sale and issuance of our equity securities.

COVID-19

The global COVID-19 pandemic continues to evolve, including the continued emergence of variants. Potential impacts to our business include disruptions or restrictions on our employees' ability to effectively conduct research and development activities and the establishment of our internal manufacturing operations. In addition, some of our suppliers of certain laboratory materials, or service providers used in the performance of our research activities, are located in areas significantly impacted by COVID-19, which could limit our ability to achieve planned progress. COVID-19 could continue to adversely affect the economies and financial markets, resulting in a prolonged economic downturn or a period of high inflation rates, which the United States economy has recently experienced, that could affect our ability to raise future funding. To date, we have experienced modest delays in the progress of our research and development activities, primarily due to extended lead times at certain suppliers and temporary and partial shutdowns at certain academic institutions as a result of statewide stay-at-home orders. However, these stay-at-home orders have largely terminated and operations have since resumed. We continue to monitor and assess the effects of the COVID-19 pandemic on our business, but the ultimate impact of the COVID-19 outbreak or a similar health epidemic is highly uncertain and subject to change. For additional details, see "Risk Factors."

Components of Operating Results

Research and Development

Research and development activities account for a significant portion of our operating expenses. Research and development expenses relate primarily to discovery and development of our platforms, programs and product candidates, and are recognized as incurred. Internal research and development costs include, among others, personnel-related costs (including salaries, benefits and stock-based compensation for employees engaged in research and development functions), laboratory supplies and other non-capital equipment utilized for in-house research, allocated facilities and overhead costs. External research and development expenses include, among others, amounts incurred to clinical research organizations (CROs) that conduct research and development activities on our behalf, consulting fees and amounts owed under licensing agreements. We do not allocate our costs by platform, program or product candidate, as a significant amount of research and development expenses include internal costs, which are deployed across multiple platforms, programs, product candidates and activities.

Amounts recorded for external goods or services incurred for research and development activities that have not yet been invoiced often represent estimates. We do not currently have projects that require estimates for

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percentage of completion and we record estimates for amounts due but not yet invoiced based on input from external service providers.

We expect our research and development expenses to increase for the foreseeable future as we continue to invest in research and development activities related to developing our platforms, programs and product candidates, and progressing through preclinical and clinical product development stages. The process of conducting the necessary research to advance to the clinical stage and ultimately obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.

General and Administrative

General and administrative expenses consist of personnel-related costs (including salaries, benefits and stock-based compensation for our employees in finance, human resources, information technology, facilities, legal and other administrative functions), legal fees, professional fees incurred for accounting, audit and tax services, information technology and facility costs not otherwise included in research and development expenses. Legal fees primarily include those related to corporate and intellectual property related matters.

We expect that our general and administrative expenses will increase for the foreseeable future to support our continued research and development activities, general operations, future business development opportunities and professional fees. In addition, we expect to incur additional expenses associated with operating as a public company, including legal, accounting, insurance, exchange listing, SEC compliance, and investor relations costs.

Interest Income

Interest income primarily consists of interest earned on our cash, cash equivalents and investments in marketable securities.

Change in Fair Value of Convertible Preferred Stock Tranche Liability

Our convertible preferred stock tranche liability stemmed from our obligation to issue additional shares to investors upon the second and third closings of our Series B convertible preferred stock financing. Until settlement, fluctuations in the fair value of a convertible preferred stock tranche liability are based on the remeasurement at each reporting period. Our convertible preferred stock tranche liability was settled on the second and third closings of our Series B convertible preferred stock financing in March and August 2020, respectively.

Other Income (Expense), Net

Other income (expense), net primarily consists of sublease income for a portion of our facilities in South San Francisco during 2020.

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Results of Operations

Comparison of the Years Ended December 31, 2021 and 2020

NM = Not Meaningful

Research and Development Expenses

Facility and laboratory costs $ 22,833 $ 11,798 $ 11,035 94% Personnel-related costs

Research and development expenses were $54.4 million and $31.1 million for the years ended December 31, 2021 and 2020, respectively. The change of $23.3 million, or 75%, was primarily due to:

an increase of $11.0 million in facility and laboratory costs, including laboratory supplies and materials and other allocated costs, as we ramped up our research and development operations;

an increase of $7.2 million in personnel-related costs, including stock-based compensation, primarily due to growth in the number of our research and development employees as we expanded our research and development capabilities; and

an increase of $5.2 million in external costs, including amounts paid to CROs for research and development activities, consulting fees, preclinical studies and other external research expenses as we progressed development of our programs.

General and Administrative

General and administrative expenses were $18.4 million and $7.8 million for the years ended December 31, 2021 and 2020, respectively. The change of $10.6 million, or 136%, was primarily due to a $4.0 million increase in personnel-related expenses, including stock-based compensation, as a result of higher headcount as we grew our operations, a $3.7 million increase in professional service expenses as we prepared to become a public company and completed our IPO of our common stock, and a $1.6 million increase in facility and insurance costs.

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Interest Income

Interest income was $108,000 and $87,000 for the years ended December 31, 2021 and 2020, respectively. The increase of $21,000, or 24%, was primarily due to an increase in our investment balance.

Change in Fair Value of Convertible Preferred Stock Tranche Liability

The change in fair value of our convertible preferred stock tranche liability for the year ended December 31, 2020 was attributable to changes in the fair value of the underlying Series B convertible preferred stock. There was no similar expense for the year ended December 31, 2021 as our convertible preferred stock tranche liability was settled in 2020.

Other Income (Expense), Net

Other income (expense), net of $0.4 million for the year ended December 31, 2020 was primarily related to sublease income. We had previously entered into agreements to sublease portions of our facilities in South San Francisco to two different subtenants and both agreements expired during 2020.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception, we have not generated any revenue and we have incurred significant net losses and negative cash flows from operations. From our inception through December 31, 2021, we have funded our operations primarily from the sale and issuance of our equity securities. In connection with our IPO, we issued and sold 13,800,000 shares of our common stock at a price of $15.00 per share for net proceeds of $188.5 million. As of December 31, 2021, we had cash, cash equivalents and investments in marketable securities of $251.3 million and an accumulated deficit of $155.5 million.

Funding Requirements

We expect our expenses and operating losses will increase substantially over the foreseeable future. The expected increase in expenses will be driven in large part by our ongoing activities, if and as we:

continue to advance our Gene Therapy, Cellular Regeneration and Precision Medicine platforms;

continue preclinical development of our product candidates and initiate additional preclinical studies;

commence clinical trials of our product candidates;

build out our manufacturing facilities, including the construction of our cGMP manufacturing facility in Union City, California, and establish our manufacturing capabilities, including developing our contract development and manufacturing relationships;

acquire and license technologies aligned with our Gene Therapy, Cellular Regeneration and Precision Medicine platforms;

seek regulatory approval of our product candidates that successfully complete clinical trials;

expand our operational, financial, and management systems and increase personnel, including personnel to support our preclinical and clinical development, manufacturing, and future commercialization efforts;

continue to develop, grow, perfect, enforce, and defend our intellectual property portfolio; and

incur additional legal, accounting, and other expenses in operating our business, including the additional costs associated with operating as a public company.

Based on our current operating plan, we believe that our existing cash, cash equivalents and investments in marketable securities will be sufficient to meet our working capital and capital expenditure needs through at least the next twelve months following the date of this Annual Report on Form 10-K.

In order to complete the development of our product candidates and commercialize them, if approved, we will require substantial additional funding. Until such time as we can generate significant revenue from sales of our

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product candidates, if ever, we expect to finance our operations through public or private equity offerings or debt financings or other capital sources, which may include strategic collaborations or other arrangements with third parties, or other sources of financing. We may not be able to raise additional capital on terms acceptable to us or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, including restricting our operations and limiting our ability to incur liens, issue additional debt, pay dividends, repurchase our common stock, make certain investments or engage in merger, consolidation, licensing or asset sale transactions. If we raise funds through strategic collaborations, partnerships and other similar arrangements with third parties, we may be required to grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. If we are unable to raise additional capital on acceptable terms when needed, our business, results of operations, and financial condition would be adversely affected.

Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. If we fail to obtain necessary capital when needed on acceptable terms, or at all, it could force us to delay, limit, reduce or terminate our product development programs, future commercialization efforts or other operations. Because of the numerous risks and uncertainties associated with research, product development and commercialization of product candidates, we are unable to predict the timing or amount of our working capital requirements or when or if we will be able to achieve or maintain profitability.

Cash Flows

The following table summarizes our cash flows for each of the periods indicated:

Net cash used in operating activities for the year ended December 31, 2021, was $60.8 million, which consisted primarily of a net loss of $72.7 million, offset by $7.2 million in non-cash charges and a net change in net operating assets and liabilities of $4.7 million. The non-cash charges primarily consisted of depreciation and amortization of $3.0 million, stock-based compensation of $3.0 million and non-cash operating lease expense of $1.1 million. The change in net operating assets and liabilities was primarily due to an increase in accounts payable and accrued expenses and other current liabilities of $11.9 million, partially offset by an increase in other non-current assets of $3.1 million related to a security deposit for a lease entered into in February 2021, an increase in prepaid expenses and other current assets of $2.7 million, and a decrease in operating lease liabilities of $1.5 million.

Net cash used in operating activities for the year ended December 31, 2020, was $35.4 million, which consisted primarily of a net loss of $38.4 million and a net change in net operating assets and liabilities of $0.2 million, partially offset by $3.2 million in non-cash charges. The change in net operating assets and liabilities was primarily due to a decrease in deferred rent of $0.8 million, an increase in prepaid expenses and other current assets of $0.3 million and an increase in other non-current assets of $0.2 million, partially offset by an increase in accrued expenses and other current liabilities of $0.9 million and an increase in accounts payable of $0.1 million as we expanded our operations. The non-cash charges primarily consisted of depreciation and amortization of $2.5 million and stock-based compensation of $0.7 million.

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Investing Activities

Net cash used in investing activities for the year ended December 31, 2021, was $238.6 million, which consisted of purchases of marketable securities of $213.4 million and purchases of property and equipment of $25.1 million.

Net cash used in investing activities for the year ended December 31, 2020, was $7.0 million, which consisted of purchases of property and equipment of $9.8 million, partially offset by proceeds from maturities of marketable securities of $2.8 million.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2021, was $209.0 million, which primarily consisted of proceeds from our initial public offering, net of issuance costs, of $188.5 million, net proceeds received from the sale and issuance of our Series C convertible preferred stock of $20.0 million, and proceeds from the exercise of stock options of $0.4 million.

Net cash provided by financing activities for the year ended December 31, 2020, was $147.3 million, which consisted of net proceeds received from the sale and issuance of our Series B convertible preferred stock of $61.3 million and net proceeds received from the initial closing of our Series C convertible preferred stock financing of $86.0 million.

Contractual and Other Obligations

We lease office space for our corporate headquarters in South San Francisco under a lease that expires in May 2025. We expect to pay rent of approximately $2.4 million during 2022 for this lease. We also lease manufacturing and office space in Union City, California under a lease that expires in July 2031. We expect to pay rent of approximately $1.2 million in 2022 for this lease. As of December 31, 2021, undiscounted future minimum lease payments of $8.7 million and $13.4 million remain on the South San Francisco and Union City leases, respectively.

In addition, we enter into agreements in the normal course of business with vendors for preclinical research studies and other services and products for operating purposes. These contracts do not contain any minimum purchase commitments and are generally cancelable upon written notice. Payments due upon cancellation consist only of payments for services provided and expenses incurred up to the date of cancellation.

We have also entered into license agreements under which we are obligated to make specified milestone and royalty payments. The payment obligations under these agreements are contingent upon future events, such as our achievement of specified development, regulatory, and sales milestones, or generating product sales. As of December 31, 2021, we were unable to estimate the timing or likelihood of achieving these milestones or generating future product sales.

Off-Balance Sheet Arrangements

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TENAYA THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K) - Marketscreener.com