Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
You should read the following
discussion and analysis of our financial condition and results of operations together with our financial statements and related notes
appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth
elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related
financing, 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 of this document, 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.
Overview
We are a New York City based
clinical-stage biopharmaceutical company committed to advancing transformative therapies for the treatment of cancer and rare diseases.
We were founded on the principle of applying modern scientific, regulatory or manufacturing advancements to established mechanisms in
order to create new development opportunities. We prioritize creativity, diverse perspectives, integrity and tenacity to expedite our
goal of bringing life-changing therapies to people with limited treatment options.
Our portfolio includes two
development programs utilizing TARA-002, an investigational cell therapy based on the broad immunopotentiator, OK-432, which was originally
granted marketing approval by the Japanese Ministry of Health and Welfare as an immunopotentiating cancer therapeutic agent. This cell
therapy is currently approved in Japan and Taiwan for lymphatic malformations, or LMs, and multiple oncologic indications. We have secured
worldwide rights to the asset excluding Japan and Taiwan and are exploring its use in oncology and rare disease indications. TARA-002
was developed from the same master cell bank of genetically distinct group A Streptococcus pyogenes as OK-432 (marketed as Picibanil®
in Japan by Chugai Pharmaceutical Co., Ltd., or Chugai Pharmaceutical). We are currently developing TARA-002 in non-muscle invasive bladder
cancer, or NMIBC, and in LMs.
We are also pursuing intravenous,
or IV, Choline Chloride, an investigational phospholipid substrate replacement therapy, for patients receiving parenteral support, or
PS, which includes both nutrition and fluids. Choline is a known important substrate for phospholipids that are critical for healthy liver
function and also plays an important role in modulating gene expression, cell membrane signaling, brain development and neurotransmission,
muscle function and bone health. PS patients are unable to synthesize choline from enteral nutrition sources, and there are currently
no available PS formulations containing choline.
For additional information regarding our various clinical trials
and programs, see “Item 1. Business.” We have devoted substantial efforts to the development of these programs and do not
have any approved products and have not generated any revenue from product sales. Neither TARA-002 nor IV Choline Chloride have been approved
for use for any indications. We do not expect to generate revenues in the near-term, and it is possible we may never generate revenues
in the future. To finance our current strategic plans, including the conduct of ongoing and future clinical trials and further research
and development costs, we will need to raise additional capital. See “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources” for additional information about our liquidity and capital
resource needs.
Since inception, we have
incurred significant operating losses. As of December 31, 2024, we had an accumulated deficit of approximately $245.0 million. We expect
to continue to incur significant expenses and increasing operating losses for at least the next few years as we continue our development
of, and seek marketing approvals for, our product candidates, prepare for and begin the commercialization of any approved products, and
add infrastructure and personnel to support our product development efforts and operations as a public company in the United States.
As a clinical-stage company,
our expenses and results of operations are likely to fluctuate significantly from quarter-to-quarter and year-to-year. We believe that
our period-to-period comparisons of our results of operations should not be relied upon as indicative of our future performance.
As of December 31, 2024,
we had approximately $170.3 million in cash and cash equivalents, and marketable debt securities.
71
Financial Overview
Research and Development
Research and development expenses consist primarily of costs incurred
for the development of TARA-002 and IV Choline Chloride, which include personnel-related expenses, including salaries, benefits, travel
and stock-based compensation expense, external expenses incurred under agreements with contract research organizations, or CROs, contract
development and manufacturing organizations, or CDMOs, the cost of acquiring, developing and manufacturing clinical trial materials, clinical
and non-clinical related costs, costs associated with regulatory operations and facilities, depreciation and other expenses, which include
expenses for rent and maintenance of facilities and other supplies.
General and Administrative
General and administrative expenses consist primarily of personnel-related
expenses, including salaries, benefits, travel and stock-based compensation expense, in executive and other administrative functions.
Other general and administrative expenses also include professional fees for business and market development, legal, intellectual property
matters, consulting and accounting services, facility related costs, as well as expenses related to audit, legal, regulatory and tax-related
services associated with maintaining compliance with our Nasdaq listing and Securities and Exchange Commission, or SEC, requirements,
director and officer liability insurance premiums and investor relations costs associated with being a public company.
Other Income (Expense), net
Other Income (Expense), net consists of interest and investment income
and other income. Interest and investment income consists of interest and dividend income on our cash and cash equivalents and marketable
debt securities and amortization of premiums and/or accretion of discounts.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion
and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of consolidated
financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. We base our estimates on historical experience and other market-specific or other relevant assumptions
that we believe to be reasonable under the circumstances. Actual results may differ materially from those estimates or assumptions.
While our significant accounting policies are described in more detail
in the notes to our consolidated financial statements and related notes appearing elsewhere in this Annual Report on this Form 10-K, we
believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial
statements.
Our critical accounting policy is the accounting for prepaid and accrued
research and development expenses.
Research and Development Prepaid and Accrued
Expenses
We record accruals for estimated costs of research, preclinical,
non-clinical, clinical and manufacturing development within accrued expenses which are significant components of research and development
expenses. A substantial portion of our ongoing research and development activities are conducted by third-party service providers. We
accrue costs incurred under these third-party arrangements based on estimates of actual work completed in accordance with the respective
agreements. We determine the estimated costs to accrue through discussions with internal personnel and our external service providers
as to the percentage of completion of the services and the agreed-upon fees to be paid for such services. Payments made to third parties
under these arrangements in advance of performance of the related services are recorded as prepaid expenses until the services are rendered.
72
Results of Operations
Comparison of the Years Ended December 31,
2024 and 2023
The following table summarizes our results of operations (in thousands):
For the Years Ended December 31, Period -to- Period
Operating expenses:
Other income (expense), net:
Research and development
expenses
The following table summarizes our research and development expenses
(in thousands):
For the Years Ended December 31, Period -to- Period
Direct expenses by product candidate:
Research and development expenses were $31.7 million for the year ended
December 31, 2024, which represented an increase of approximately $6.7 million as compared to the year ended December 31, 2023. This increase
was primarily due to a $6.1 million increase in direct expenses for our product candidates and a $0.6 million increase in indirect expenses.
The increase in indirect expenses was primarily due to a $1.0 million increase in personnel-related expenses offset by a decrease of $0.3
million in indirect clinical manufacturing expenses.
General and administrative
expenses
General and administrative expenses were $17.5 million for the year
ended December 31, 2024, which represented a decrease of approximately $1.2 million as compared to the year ended December 31, 2023. This
decrease was primarily due to a net decrease of $1.2 million in personnel-related expenses.
73
Other income (expense),
net
Other income (expense), net was $4.6 million for the year ended December
31, 2024, which represented an increase of approximately $1.4 million as compared to the year ended December 31, 2023, due primarily to
higher investment returns on a higher invested balance as well as a $0.4 million increase in other income.
Liquidity and Capital Resources
Overview
As of December 31, 2024 and 2023, our cash and cash equivalents, and
marketable debt securities were $170.3 million and $65.6 million, respectively. We have not generated revenues since our inception and
have incurred net losses of approximately $44.6 million and $40.4 million for the years ended December 31, 2024 and 2023, respectively.
As of December 31, 2024, we had working capital of approximately $161.2 million and stockholder’s equity of approximately $167.1
million. During the year ended December 31, 2024, cash flows used in operating activities were approximately $35.8 million, consisting
primarily of a net loss of approximately $44.6 million, which includes non-cash activities of approximately $4.8 million, inclusive of
$4.1 million in stock-based compensation expense, as well as working capital adjustments of $4.0 million. Since inception, we have met
our liquidity requirements principally through the sale of our common stock, preferred stock and pre-funded warrants in private placements
and public offerings. In addition, we may receive proceeds upon the exercise of the common warrants issued in the April 2024 private placement
described below.
Liquidity
On November 3, 2023, we filed a shelf registration statement on Form
S-3, or the Shelf Registration Statement, which became effective in November 2023. The Shelf Registration Statement permits the offering,
issuance and sale by us of up to a maximum aggregate offering price of $300.0 million of common stock, preferred stock, debt securities
and warrants in one or more offerings and in any combination. In December 2024, we sold and issued approximately $100.1 million in gross
proceeds of common stock and pre-funded warrants in a public offering, or the December 2024 Public Offering, under the Shelf Registration
Statement. The net proceeds were approximately $93.4 million. In January 2025, the underwriters partially exercised their option, or the
Underwriters’ Option, to purchase a portion of the additional shares of common stock pursuant to the underwriting agreement,
or the Underwriting Agreement, which resulted in gross proceeds of approximately $2.7 million and net proceeds of approximately $2.5 million.
In April 2024, the Company entered into a private placement transaction,
or the April 2024 Private Placement, whereby the Company sold and issued common stock, warrants and in, in some circumstances, pre-funded
warrants to certain purchasers. At the close of the April 2024 Private Placement, the Company received net proceeds of approximately $42.0
million after deducting placement agent fees and offering expenses.
We are in the business of
developing biopharmaceuticals and have no current or near-term revenues. We have incurred substantial clinical and other costs in our
drug development efforts. We will need to raise additional capital in order to fully realize management’s plans.
We believe that our current
financial resources, as of the date of the issuance of our consolidated financial statements included elsewhere in this Annual Report
on this Form 10-K, are sufficient to satisfy our estimated liquidity needs for at least 12 months.
As a result of volatility
in the capital markets, economic conditions, general global economic uncertainty, political change, global pandemics, and other factors,
we do not know whether additional capital will be available when needed, or that, if available, we will be able to obtain additional capital
on reasonable terms. If we are unable to raise additional capital due to volatile global financial markets, general economic uncertainty
or other factors, we may need to curtail planned development activities. Despite recent moderation, the sustained elevated interest rates
in recent years have had, and may continue to have, a negative effect on market prices for common stock of public companies, especially
those in the biotech industry and those that have no current or near-term revenue. Further, a recession or market correction, supply chain
disruptions and/or continued inflation could materially affect our business and the value of our common stock.
74
Cash Flows
The following table summarizes our sources and uses of cash (in thousands):
For the Years Ended December 31, Period-to- Period
Net cash provided by/(used in) financing activities 139,865 (91 ) 139,956
Comparison of the Years Ended December 31, 2024 and 2023
Net cash provided by (used in) operating activities was approximately
$(35.8) million for the year ended December 31, 2024 compared to approximately $(37.6) million for the year ended December 31, 2023. The
decrease of approximately $1.7 million in cash used in operating activities was primarily driven by a decrease in working capital adjustments,
primarily related to changes in prepaid expenses and other current assets, accounts payable, and accrued expenses resulting from the timing
of payments to our service providers of $8.1 million, offset in part by an increase in net loss of $4.2 million and by a $2.2 million
decrease in non-cash items, consisting principally of stock-based compensation expense.
Net cash provided by (used
in) investing activities was approximately $19.2 million for the year ended December 31, 2024 compared to approximately $53.1 million
for the year ended December 31, 2023. The decrease of $34.0 million resulted primarily from an increase of $17.2 million of marketable
debt securities purchased as well as a decrease of $16.7 million of proceeds from marketable debt securities matured.
Net cash provided by (used in) financing activities was $139.9 million
for the year ended December 31, 2024 compared to $(0.1) million for the year ended December 31, 2023. The increase of approximately $140.0
million resulted primarily from the net proceeds of the December 2024 Public Offering of $94.0 million and the April 2024 Private Placement
of $42.0 million, as well as proceeds from the exercise of common warrants of $3.8 million.
75
Contractual and Other Obligations
Operating lease obligations
Our operating lease obligations
primarily consist of lease payments on our corporate headquarters in New York, New York, as well as lease payments for our development
laboratory, a manufacturing facility and an additional manufacturing space, all located in North America which are described in further
detail in Note 9 of our consolidated financial statements included in this Annual Report on Form 10-K. Future contractual payments on
operating lease obligations due within one year of December 31, 2024 are $1.4 million, and future contractual payments on operating lease
obligations due greater than one year from December 31, 2024 are $3.7 million.
Other obligations
From time to time, we enter
into certain types of contracts that contingently require us to indemnify parties against third-party claims, supply agreements, and agreements
with directors and officers. The terms of such obligations vary by contract and in most instances a maximum dollar amount is not explicitly
stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted, thus no liabilities
have been recorded for these obligations on our consolidated balance sheet for the periods presented.
We enter into contracts in
the normal course of business with CROs and clinical sites for the conduct of clinical trials, non-clinical research studies, professional
consultants for expert advice and other vendors for clinical supply manufacturing or other services. These contracts generally provide
for termination on notice, and therefore are cancelable contracts.
Certain of these agreements
require us to pay milestones to such third parties upon achievement of certain development, regulatory or commercial milestones as further
described in Note 10 of our consolidated financial statements included in this Annual Report on Form 10-K. Amounts related to contingent
milestone payments are not considered contractual obligations as they are contingent on the successful achievement of certain development,
regulatory approval and commercial milestones, which may not be achieved.
We also have obligations
to make future payments to third parties that become due and payable on the achievement of certain milestones, including future payments
to third parties with whom we have entered into research, development and commercialization agreements. We have not included these commitments
on our consolidated balance sheet for the periods presented because the achievement and timing of these milestones is not fixed and determinable.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
No disclosure required.
76
Item 8. Financial Statements and Supplementary Data.
Protara Therapeutics, Inc.
Index to Consolidated Financial Statements
Page No.
Protara Therapeutics, Inc. for the Years Ended December 31, 2024 and 2023
Report of Independent Registered Public Accounting Firm (PCAOB ID:42) 78
Consolidated Balance Sheets as of December 31, 2024 and 2023 79
Notes to Consolidated Financial Statements 83
77
Report of Independent Registered
Public Accounting Firm
To the Stockholders and the Board of Directors of Protara Therapeutics,
Inc.
Opinion on the Financial Statements
We have audited the accompanying
consolidated balance sheets of Protara Therapeutics, Inc. (the “Company”) as of December 31, 2024 and 2023, the related consolidated
statements of operations and comprehensive loss, changes in stockholders’ equity and cash flows for each of the two years in the
period ended December 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company
at December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended
December 31, 2024, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for
our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from
the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:
(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective
or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical
audit matter or on the account or disclosure to which it relates.
Clinical trial prepaid and accrued expenses
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2021
New York, New York
March 5, 2025
78
Protara Therapeutics, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)
December 31,
Assets
Current assets:
Prepaid expenses and other current assets 1,863 3,125
Restricted cash, non-current 745 745
Operating lease right-of-use asset 4,255 5,264
Liabilities and Stockholders’ Equity
Current liabilities:
Accrued expenses and other current liabilities 5,408 2,732
Operating lease liability, non-current 3,359 4,484
Commitments and contingencies (Note 10)
Stockholders’ Equity:
Preferred stock, $0.001 par value, authorized 10,000,000 shares:
Accumulated other comprehensive income (loss) 2 (31 )
Total liabilities and stockholders’ equity $ 181,454 $ 78,954
See accompanying notes to consolidated financial
statements.
79
Protara Therapeutics, Inc.
Consolidated Statements of Operations
and Comprehensive Loss
(in thousands, except share and per
share data)
Years Ended December 31,
Operating expenses:
Other income (expense), net:
Interest and investment income (expenses) 4,171 3,193
Other income (expense) 387 -
Other comprehensive income (loss):
Net unrealized gain (loss) on marketable debt securities 33 657
Other comprehensive income (loss) 33 657
Comprehensive income (loss) $ (44,563 ) $ (39,763 )
See accompanying notes to consolidated financial
statements.
80
Protara Therapeutics, Inc.
Consolidated Statements of Changes
in Stockholders’ Equity
(in thousands, except share and per
share data)
Shares Amount Shares Amount Capital Deficit (Loss) Equity
Stock-based compensation - restricted stock units - - - - 1,208 - - 1,208
Stock-based compensation - stock options - - - - 4,884 - - 4,884
Unrealized gain (loss) on marketable debt securities - - - - - - 657 657
Issuance of common stock upon exercise of stock options - - 47,580 - 135 - - 135
Stock-based compensation - restricted stock units - - - - 480 - - 480
Stock-based compensation - stock options - - - - 3,645 - - 3,645
Unrealized gain (loss) on marketable debt securities - - - - - - 33 33
See accompanying notes to consolidated financial
statements.
81
Protara Therapeutics, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December 31,
Cash flows from operating activities:
Operating lease right-of-use asset 1,009 1,013
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 1,262 (1,265 )
Accrued expenses and other current liabilities 2,676 (505 )
Operating lease liabilities (984 ) (917 )
Net cash provided by (used in) operating activities (35,808 ) (37,557 )
Cash flows from investing activities:
Purchase of marketable debt securities (29,382 ) (12,186 )
Purchase of property and equipment (63 ) (45 )
Net cash provided by (used in) investing activities 19,155 53,107
Cash flows from financing activities:
Proceeds from public offering, net of offering costs of $6,051 94,042 -
Proceeds from private placement, net of offering costs of $3,034 41,964 -
Proceeds from exercise of common warrants 3,807 -
Proceeds from exercise of stock options 135 -
Taxes paid related to net share settlement of restricted stock units (83 ) (91 )
Net cash provided by (used in) financing activities 139,865 (91 )
Cash and cash equivalents and restricted cash - beginning of year 40,331 24,872
Cash and cash equivalents and restricted cash - end of year $ 163,543 $ 40,331
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ - $ -
Income taxes $ - $ -
Supplemental disclosure of non-cash investing and financing activities:
Proceeds from public offering – offering costs incurred but not paid $ 614 $ -
See accompanying notes to consolidated financial
statements.
82
Protara Therapeutics, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share data)
1. Organization and Nature of the Business
Overview
Protara Therapeutics, Inc.,
and its consolidated subsidiaries (“Protara” or the “Company”), is a clinical-stage biopharmaceutical company
committed to advancing transformative therapies for the treatment of cancer and rare diseases. Protara’s portfolio includes two
development programs utilizing TARA-002, an investigational cell therapy in development for the treatment of non-muscle invasive bladder
cancer, or NMIBC, and lymphatic malformations, or LMs. Additionally, the Company’s portfolio includes Intravenous, or IV, Choline
Chloride, an investigational phospholipid substrate replacement therapy in development for patients receiving parenteral support, or PS.
Liquidity and Capital Resources
The Company is in the business
of developing biopharmaceuticals and has no current or near-term revenues. The Company has incurred substantial clinical and other costs
in its drug development efforts. The Company will need to raise additional capital in order to fully realize management’s plans.
The Company believes that
its current financial resources are sufficient to satisfy the Company’s estimated liquidity needs for at least 12 months from the
date of issuance of these consolidated financial statements.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States of America, or GAAP.
Principles of Consolidation
The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been
eliminated in the accompanying consolidated financial statements.
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, liabilities,
revenues, expenses, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements.
Significant items subject to such estimates include but are not limited to research and development accruals as well as contingencies.
On an ongoing basis, the
Company’s management evaluates its estimates based on historical and anticipated results, trends, and various other assumptions
believed to be reasonable. Actual results could differ from those estimates. The results of any changes in accounting estimates are
reflected in the financial statements of the period in which the change becomes evident.
Cash and Cash Equivalents and Restricted
Cash
The Company considers all highly liquid instruments with an original
maturity of three months or less when acquired to be cash equivalents. Cash and cash equivalents may be held in depository, money market
accounts and/or U.S. Treasury securities, and are reported at fair value.
83
Protara Therapeutics,
Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share data)
The Company’s restricted
cash balances consist of cash deposits to collateralize letter of credit obligations.
The following table provides
a reconciliation of cash and cash equivalents, and restricted cash in the consolidated balance sheets to the total amount shown in the
consolidated statements of cash flows:
As of December 31,
Restricted cash, non-current 745 745
Fair Value Measurements
Accounting Standards Codification,
or ASC, Topic 820 “Fair Value Measurements” provides the framework for measuring fair value and establishes a fair value hierarchy
that prioritizes the inputs used in pricing the asset or liability. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).
Fair value is defined as
the exchange price, or an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer
a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value
measurements, the three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
● Level 1 Quoted prices in active markets for identical assets or liabilities.
The carrying amounts of cash
and cash equivalents, prepaid expenses and accounts payable approximate their fair values due to the short-term nature of these instruments.
Marketable Debt Securities
The Company classifies investments
in marketable debt securities with remaining maturities when purchased of greater than three months as available-for-sale. Investments
with a remaining maturity date greater than one year are classified as non-current. The cost of securities sold is based on the specific
identification method. Interest earned on securities that are classified as available-for-sale are included in interest and investment
income.
The Company records investments
at fair value with unrealized gains and losses recorded as a component of other comprehensive income (loss) in the consolidated statements
of operations and comprehensive loss until realized. Realized gains and losses are reflected in interest and investment income in the
consolidated statements of operations and comprehensive loss and are determined using the specific identification method with transactions
recorded on a settlement date basis. Fair value is determined based on quoted market rates when observable or utilizing data points that
are observable, such as quoted prices, interest rates and yield curves. To determine whether an other-than-temporary impairment exists,
the Company considers whether it has the ability and intent to hold the investment until a market price recovery, and whether evidence
indicating the recoverability of the cost of the investment outweighs evidence to the contrary. The Company has the ability to hold such
securities with an unrealized loss until its forecasted recovery. The Company determined that there was no material change in the credit
risk of these investments.
84
Protara Therapeutics,
Inc.
Notes to Consolidated
Financial Statements
(amounts in thousands, except share and per share data)
The Company periodically
evaluates the need for an allowance for credit losses. This evaluation includes consideration of several qualitative and quantitative
factors, including whether it plans to sell the security, whether it is more likely than not it will be required to sell any marketable
debt securities before recovery of its amortized cost basis, and if the entity has the ability and intent to hold the security to maturity,
and the portion of any unrealized loss that is the result of a credit loss. Factors considered in making these evaluations include quoted
market prices, recent financial results, operating trends, and implied values from any recent transactions or offers of investee securities,
credit quality of debt instrument issuers, expected cash flows from securities, other publicly available information that may affect the
value of the marketable debt security, duration and severity of decline in value and the Company’s strategy and intentions for holding
the marketable debt security.
Concentrations of Credit Risk
Financial instruments, which
potentially subject the Company to concentrations of credit risk, consists principally of cash and cash equivalents, restricted cash and
investments in marketable debt securities.
The Company invests its excess
cash primarily in money market funds and high quality investment grade marketable debt securities of governments and/or corporations.
The Company has adopted an investment policy that includes guidelines relative to credit quality, diversification and maturities to preserve
principal and liquidity.
Property and Equipment, net
Property and equipment, including
leasehold improvements, are recorded at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful life of the asset. Depreciation begins at the time the asset is placed in service. Leasehold improvements
are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. Repairs and maintenance
costs are expensed as incurred, whereas major improvements are capitalized as additions to property and equipment.
The estimated useful lives
for significant property and equipment categories are as follows:
Asset Classification Estimated Useful Life
Computer equipment 3-5 years
Furniture, fixtures and other 5 years
Laboratory equipment 7 years
Leasehold improvements Shorter of the useful life of asset or the lease term
Leases
The Company enters into contracts in the normal course of business
and assesses whether any such contracts contain a lease. The Company determines if an arrangement is a lease at inception if it conveys
the right to control the identified asset for a period of time in exchange for consideration. Under Accounting Standards Codification,
or ASC, 842, lease expense is recognized as a single lease cost on a straight-line basis over the lease term. The lease term consists
of non-cancelable periods and may include options to extend or terminate the lease term, when it is reasonably certain such options will
be exercised.
Leases classified as operating
leases are included in operating lease right-of-use, or ROU, assets, current operating lease liabilities and noncurrent operating lease
liabilities in our consolidated balance sheet. Finance leases are included in property and equipment and finance lease obligations, in
our consolidated balance sheet. ROU assets represent the right to use an underlying asset for the lease term. Lease liabilities represent
the present value of future lease payments, discounted using an incremental borrowing rate, which is a management estimate based on the
information available at the commencement date of a lease arrangement. ROU assets and lease liabilities are recognized at the lease commencement
date.
The Company has elected to
account for the lease and non-lease components for leases as a single component for classes of all underlying assets and allocate all
the contract consideration to the lease component only. Lease cost for operating leases is recognized on a straight-line basis over the
lease term and is included in operating expenses on the statements of operations and comprehensive loss. Variable lease payments are included
in lease operating expenses.
The Company recognizes costs
associated with lease arrangements having an initial term of 12 months or less, or short-term leases, on a straight-line basis over the
lease term; such short-term leases are not recorded on the balance sheet.
85
Protara Therapeutics,
Inc.
Notes to Consolidated
Financial Statements
(amounts in thousands, except share and per share data)
Impairment of Long-Lived Assets
Long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable
or that the useful life is shorter than originally estimated. When such events occur, the Company compares the carrying amounts of the
asset or asset group to the undiscounted expected future cash flows. If this comparison indicates that the asset or asset group is impaired,
the amount of impairment is measured as the difference between the carrying value and fair value of the asset or asset group. If the useful
life is shorter than originally estimated, the Company will amortize the remaining carrying value over the new shorter useful life. To
date, no such impairment loss has been recognized.
Segment Information
In accordance with ASC 280, Segment Reporting, operating segments are
defined as components of an enterprise for which separate discrete information is available for evaluation by the chief operating decision
maker, or CODM, or decision-making group in deciding how to allocate resources and in assessing performance. The Company views its operations
and manages its business as one operating and reporting segment. See Note 16, Segment Information for further information.
Research and Development
Research and development
expenses consist primarily of third-party costs incurred to develop drug candidates, personnel-related expenses, including salaries, benefits,
travel and stock-based compensation expense, depreciation and other allocated overhead costs, which include rent and maintenance of facilities
and other supplies. Research and development costs are expensed as incurred.
Before a compound receives
regulatory approval, the Company records upfront and milestone payments made to third parties under licensing arrangements as expense
provided that there is no alternative future use of the rights in other research and development projects.
Nonrefundable advance payments
to vendors for goods or services that will be used or received in future research and development activities are deferred and recognized
as expense in the period in which the related goods are delivered or services are performed. Where milestone payments are due to third
parties under research and development collaboration arrangements or other contractual agreements, the milestone payment obligations are
expensed when the milestone conditions are met and the amount of payment is reasonably estimable.
Once a compound receives
regulatory approval, the Company records any milestone payments in identifiable intangible assets, less accumulated amortization and,
unless the asset is determined to have an indefinite life, the Company amortizes the payments on a straight-line basis over the remaining
agreement term or the expected product life cycle, whichever is shorter.
Certain third-party costs
are included as a component of research and development expense. These expenses include fees paid to contract research organizations,
or CROs, and other clinical trial costs, contractual services costs and costs for supply of its drug candidates. Depending upon the timing
of payments to the service providers, the Company recognizes prepaid expenses or accrued expenses related to these costs. These accrued
or prepaid expenses are based on management’s estimates of the work performed under service agreements, milestones achieved and
experience with similar contracts in conjunction with known variable factors such as enrolled patients and site activity. The Company
monitors each of these factors and adjusts estimates accordingly.
86
Protara Therapeutics,
Inc.
Notes to Consolidated
Financial Statements
(amounts in thousands, except share and per share data)
Patent Costs
All patent-related costs
incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery
of the expenditure. Amounts incurred are classified as general and administrative expenses.
Interest and Investment Income
Investment income consists
primarily of interest income, accretion income earned and amortization expense incurred and realized gains or losses related to our
marketable debt securities, interest income related to cash and cash equivalents and restricted cash and dividend income related to money
market funds.
Stock-Based Compensation
The Company’s stock-based
compensation programs include stock options, restricted stock units, or RSUs, and an employee stock purchase program, or ESPP. The Company
accounts for stock-based compensation using the fair value method.
The Company measures all
stock options and other stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognizes
compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award.
The Company recognizes forfeitures at the time forfeitures occur.
The fair value of each option
is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility for the Company’s common stock
is determined based on an average of the historical volatility of the Company and the historical volatility of a peer-group of similar
public companies. The expected term of options granted to employees is calculated using the simplified method, which represents the average
of the contractual term of the option and the weighted-average vesting period of the option. The simplified method is used as the Company
does not have sufficient appropriate exercise data on which to base its own estimate. The assumed dividend yield is based upon the Company’s
expectation of not paying dividends in the foreseeable future. The risk-free interest rate is based upon the U.S. Treasury yield curve
commensurate with the expected term at the time of grant or remeasurement.
The stock-based compensation
expense associated with purchase rights under the ESPP is measured at fair-value using a Black-Scholes option-pricing model at commencement
of each offering period and recognized over that offering period. The Black-Scholes option pricing assumptions are similar to those used
for stock options with the exception of the expected term of purchase rights for the ESPP which is based on the duration of an offering
period.
The fair values of RSUs are
based on the fair market value of the Company’s common stock on the date of the grant.
RSUs were historically granted to directors pursuant to the Company’s
equity plan. Settlement for these RSUs is deferred until the earliest to occur of (i) the director’s termination of service, (ii)
death, (iii) disability or (iv) a change in control of the Company. In the event of a change in control of the Company, the RSUs will
vest in full.
The fair value of all stock-based awards is recognized as stock-based
compensation expense on a straight-line basis over the vesting period, which is typically three years for RSUs and one or four years for
stock options.
The Company classifies stock-based
compensation expense in its statement of operations and comprehensive loss in the same way the payroll costs or service payments are classified
for the related stock-based award recipients.
87
Protara Therapeutics,
Inc.
Notes to Consolidated
Financial Statements
(amounts in thousands, except share and per share data)
Income Taxes
Deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax basis, operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered
or settled. The measurement of net deferred tax assets is reduced by the amount of any tax benefit that, based on available evidence,
is not expected to be realized, and a corresponding valuation allowance is established. In making such a determination, the Company considers
all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable
income, tax-planning strategies, and results of recent operations.
Tax benefits are recognized
only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured
as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for unrecognized tax
benefits is recorded for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement
standards. The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense
in the consolidated statement of operations and comprehensive loss.
Net Income (Loss) Per Share Attributable
to Common Stockholders