# Protara Therapeutics, Inc. (TARA) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Protara Therapeutics, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1359931/000121390023018373/f10k2022_protarathera.htm
Accession: 0001213900-23-018373
Filing date: 2023-03-08
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/TARA/
All MD&A years: /company/TARA/mda/
Previous year: /company/TARA/mda/fy2021/ (FY 2021)
Next year: /company/TARA/mda/fy2023/ (FY 2023)

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 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 and
Taiwan by Chugai Pharmaceutical). We are currently developing TARA-002 in non-muscle invasive bladder cancer, or NMIBC, and in LMs.

Our lead oncology program
is TARA-002 in NMIBC, which is cancer found in the tissue that lines the inner surface of the bladder that has not spread into the bladder
muscle. Bladder cancer is the sixth most common cancer in the United States, with NMIBC representing approximately 80% of bladder cancer
diagnoses. Approximately 65,000 patients are diagnosed with NMIBC in the United States each year. Very few new therapeutics have been
approved for NMIBC since the 1990s and the current standard of care for NMIBC includes intravesical Bacillus Calmette–Guérin,
or BCG. The mechanism of action of TARA-002 is similar to that of BCG. TARA-002 and BCG are both intravesically administered, elicit
a Th1 type immune response and produce a locally-activated generally similar array of cytokines and immune cells.

We are conducting a Phase
1 dose-finding, open-label clinical trial to evaluate TARA-002 in treatment-naïve and treatment-experienced NMIBC patients with carcinoma
in situ, or CIS and high-grade papillary tumors (Ta), known as the ADVANCED-1 trial. In the initial dose escalation phase, or Phase 1a
portion of the trial, patients receive six weekly intravesical doses of TARA-002. The primary objective of the trial is to evaluate the
safety, tolerability and preliminary signs of anti-tumor activity of TARA-002, with the goal of establishing a recommended dose for a
future Phase 2 clinical trial. The trial is ongoing and we expect data from the Phase 1a portion of the trial in the second quarter of
2023. In addition, we continue to conduct pre-clinical studies on TARA-002 to better characterize the mechanism of action to help us understand
how TARA-002 may perform in potential combinations with other agents used to treat NMIBC. We use pre-clinical data to help us define other
cancer targets for TARA-002 both within the urothelial cancer space and other types of cancer affecting different parts of the body.

We are also pursuing TARA-002
in LMs, which are rare, non-malignant cysts of the lymphatic vascular system that primarily form in the head and neck region of children
before the age of two. In July 2020, the FDA granted Rare Pediatric Disease designation for TARA-002 for the treatment of LMs and in May
2022 the European Medicines Agency granted orphan drug designation to TARA-002 for the treatment of LMs. In addition to the clinical experience
in Japan, we have secured the rights to a dataset from one of the largest ever conducted Phase 2 trials in LMs, in which OK-432 was administered
via a compassionate use program led by the University of Iowa to over 500 pediatric and adult patients. We have an IND for LMs with the
Vaccines and Related Products Division of the FDA, or Vaccines Division. The FDA continues to provide us with guidance regarding a development
path for TARA-002 in LMs. We received feedback from the Vaccines Division on the protocol for our proposed Phase 2 clinical trial evaluating
TARA-002 in LMs. In the second half of 2023 we expect to initiate this Phase 2 single arm, open-label clinical trial to evaluate the safety
and efficacy of TARA-002 in pediatric patients with macrocystic and mixed-cystic LMs. The trial design includes a safety lead-in phase
followed by an expansion phase. We are conducting trial preparation activities and have identified multiple trial sites.

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The third development program
in our portfolio is intravenous, or IV, Choline Chloride, an investigational phospholipid substrate replacement therapy initially in development
for patients receiving parenteral nutrition, or PN, who have intestinal failure associated liver disease, or IFALD. IV Choline Chloride
has been granted Orphan Drug Designation by the FDA for this indication and has also been granted Fast Track Designation for the treatment
of IFALD. Following a positive end of Phase 2 meeting with the FDA, we received feedback on the design of the studies necessary to complete
a registration package for IV Choline Chloride for the treatment of IFALD, including a Phase 1 pharmacokinetic, or PK, trial and a Phase
3 clinical trial. Prior to initiating these clinical trials, we are conducting a prevalence study to enhance understanding of the PN patient
population and we plan to use this information to determine the next steps for the development program. In September 2021, we reported
results of the retrospective part of the prevalence study, which supported the significant unmet medical need in patients dependent on
PN who have IFALD. We are currently conducting the prospective part of the prevalence study, which is a multi-center, cross-sectional
observational study to assess the prevalence of choline deficiency, as well as cholestasis and steatosis, in patients dependent on PN.
We expect to have results of the study in the third quarter of 2023. In April 2022, the USPTO issued to us Patent No. US 11,311,503 claiming
a sterile aqueous choline salt composition with a term expiring in 2041.

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.
TARA-002 has not yet been approved for use for treatment of NMIBC, LMs or any other indications. We do not expect to generate revenues
in the near-term, if ever. 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.

Since inception, we have
incurred significant operating losses. As of December 31, 2022, we had an accumulated deficit of approximately $130.5 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, 2022,
we had approximately $102.3 million in cash, cash equivalents, and marketable debt securities.

COVID-19 and Related Macroeconomic Conditions

The COVID-19 pandemic and
related macroeconomic conditions, such as supply chain shortages, inflation and economic volatility have, and may continue to have, an
impact on our results of operations. We will continue to monitor whether such conditions would have a material impact on our operations,
liquidity and capital resources. Further, rising inflation has, in part, caused a disruption in the capital markets, which may lead to
a recession or market correction that could impact our access to capital, and could in the future negatively affect our liquidity. A
recession or market correction, continued supply chain disruptions and/or inflation could materially affect our business and the value
of our common stock.

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 employee-related
expenses, including salaries, benefits, travel and stock-based compensation expense, expenses incurred under agreements with clinical
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.

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General and Administrative

General and administrative
expenses consist principally of employee-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 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 SEC requirements, director and
officer liability insurance premiums and investor relations costs associated with being a public company.

Other Income (Expense), net

Interest and investment
income consists of interest income on our cash, cash equivalents and marketable debt securities and amortization of investment premiums.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion
and analysis of our financial position and results of operations is based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America, or GAAP. The preparation of 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 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.

Goodwill

On January 9, 2020, in connection
with the Merger, we separately valued the assets and liabilities acquired, and then determined goodwill as the residual of the purchase
price less identified net assets. The carrying value of goodwill was $0.0 million and $29.5 million at December 31, 2022 and 2021,
respectively.

Goodwill represents the
excess of purchase price over the fair value of identifiable net assets acquired in a business combination. Goodwill has an indefinite
useful life. Goodwill is assessed annually for impairment as of December 31, or more frequently if an event occurs or circumstances
change that would indicate that it is more likely than not that the fair value of a reporting unit or the fair value of an indefinite-lived
intangible asset has declined below its carrying value. In performing its annual goodwill impairment assessment, we have the option under
GAAP to qualitatively assess whether it is more likely than not that the fair value of a reporting unit is less than its carrying value;
if the conclusion of the qualitative assessment is that there are no indicators of impairment, then we would not perform a quantitative
assessment. Otherwise, a quantitative assessment is performed and the fair value of the reporting unit is determined.

Goodwill is evaluated for
impairment at the reporting unit level, which is defined as an operating segment, or one level below an operating segment. We have determined
that we operate as one reporting unit and have selected December 31 as the date to perform our annual impairment test. As of December
31, 2022, we elected to forego the qualitative screen and performed a quantitative annual goodwill impairment test for our single reporting
unit.

As of December 31,
2022, our stock price and market capitalization declined approximately 60% from December 31, 2021. Although we believe this decline reflects
the overall performance of similar life science companies with less than $250 million in market capitalizations, or microcap companies,
we do not believe it reflects the progress made in advancing our product candidate pipeline. The life sciences sector, which includes
pre-commercialization and therefore net operating loss generating companies, relies heavily on the capital markets to finance their operations
and fund pre-clinical and clinical trials for their existing development programs. As a result of a shift in risk appetite in the overall
financial markets, the availability of capital for life science companies decreased significantly in 2022. Industry reports highlight
a decline of more than 50 percent in both the number of healthcare follow-on financings as well as the amount of capital raised in 2022
compared to 2021. These challenging financing conditions had a significantly negative impact on stock prices and respective market capitalizations,
particularly for microcap companies. We consider the heightened financing risk that impacted the life sciences sector during 2022 to be
one of the key macroeconomic factors that led to a sustained decrease in our stock price and market capitalization leading up to our annual
goodwill impairment assessment date in late 2022.

The fair value of our reporting
unit was determined using an income approach based on discounted cash flows, or DCF, as we elected to forgo the qualitative screen. Determining
fair value using a DCF analysis requires the exercise of significant judgment with respect to several assumptions and estimates, including
the amount and timing of expected future cash flows and appropriate discount rate to be applied. The expected cash flows used in the DCF
analyses are based on our most recent internal long-range forecast and budget and, for years beyond the budget, our estimates, which are
based, in part, on industry benchmarks and forecasted growth rates.

The discount rate used in
the DCF analysis is intended to reflect the risks inherent in the expected future cash flows of the respective programs within our portfolio.
Assumptions used in the DCF analysis, including the discount rate, are assessed based on our current results and forecasted future performance,
as well as macroeconomic and industry specific factors, including the aforementioned market factors influenced by financing risk discussed
above.

We determined the estimated
fair value of our single reporting unit by utilizing a discount rate of 36%, which reflects these market factors. Based upon this discount
rate, the fair value of our single reporting unit was below its carrying value by an amount greater than the carrying value of goodwill,
and we recorded an impairment charge of $29.5 million in the fourth quarter of 2022 to fully write off the goodwill.  

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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.

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 our tax returns that do not meet these recognition and measurement standards.
As of December 31, 2022 and 2021, no liability for unrecognized tax benefits was required to be recorded. Our policy is to record interest
and penalties on uncertain tax positions as a component of income tax expense. No interest or penalties were recorded during the years
ended December 31, 2022 and 2021.

Results of Operations

Comparison of the Years Ended December
31, 2022 and 2021

The following table summarizes
our results of operations for the years ended December 31, 2022 and 2021(in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Period -to- Period"],["","","2022","","","2021","","","Change"],["Operating expenses:"],["Research and development","","$","16,808","","","$","21,088","","","$","(4,280",")"],["General and administrative","","","20,737","","","","26,401","","","","(5,664",")"],["Loss on impairment of goodwill","","","29,517","","","","-","","","","29,517"],["Total operating expenses","","","67,062","","","","47,489","","","","19,573"],["Loss from operations","","","(67,062",")","","","(47,489",")","","","(19,573",")"],["Other income (expense), net:"],["Interest and investment income","","","1,110","","","","237","","","","873"],["Other income (expense), net","","","1,110","","","","237","","","","873"],["Net Loss","","$","(65,952",")","","$","(47,252",")","","$","(18,700",")"]]
[[/GREPCENT_TABLE]]

Research and Development
Expenses. During the year ended December 31, 2022, our research and development expenses were approximately $16.8 million which represented
a decrease of approximately $4.3 million as compared to the year ended December 31, 2021. This decrease was primarily due to a decrease
of $2.3 million for clinical manufacturing activities associated with TARA-002 due to higher production costs in 2021 as we were preparing
for clinical trials, a decrease of $1.5 million of non-clinical and regulatory expenses associated with TARA-002, and a decrease of $1.4
million in clinical manufacturing expenses associated with the prospective IV Choline Chloride study. This was partially offset by an
increase of $1.2 million of clinical expenses associated with TARA-002.

General and Administrative
Expenses. During the year ended December 31, 2022, our general and administrative expenses were approximately $20.7 million which
represented a decrease of approximately $5.6 million as compared to the year ended December 31, 2021. The decrease was primarily due to
a decrease of $3.8 million in stock-based compensation and a decrease of $1.8 million in expenses related to a reduction in market development
activities.

Loss on impairment of
goodwill. During the year ended December 31, 2022, we recorded a non-cash impairment charge of $29.5 million. There was no impairment
charge during the year ended December 31, 2021.

Other Income (Expense),
Net. During the year ended December 31, 2022, interest and investment income was approximately $1.1 million which represented an
increase of approximately $0.9 million as compared to the year ended December 31, 2021. The increase was due to an increase of $0.9 in
interest earned on investments in marketable debt securities.

Liquidity and Capital Resources

Overview

As of December 31, 2022 and
2021, our cash, cash equivalents, and marketable debt securities were $102.3 million and $130.7 million, respectively. We have not generated
revenues since our inception and have incurred net losses of approximately $66.0 million and $47.3 million for the years ended December
31, 2022 and 2021, respectively. As of December 31, 2022, we had working capital of approximately $80.4 million and stockholder’s
equity of approximately $102.1 million. During the year ended December 31, 2022, cash flows used in operating activities were approximately
$26.5 million, consisting primarily of a net loss of approximately $66.0 million, which includes non-cash activities such as approximately
$29.5 million in impairment loss on goodwill and $6.7 million in stock-based compensation charges. Since inception, we have met our liquidity
requirements principally through the sale of our common stock and preferred stock in private placements and underwritten offerings.

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Liquidity

In December 2020, we filed
a shelf registration statement on Form S-3, or the Shelf Registration Statement, which became effective in December 2020. The Shelf Registration
Statement permits: (i) 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. No securities have been sold to
date under the Shelf Registration Statement.

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 Form 10-K, are sufficient to satisfy our estimated liquidity needs for at least twelve 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 the volatile global financial markets, general economic
uncertainty or other factors, we may need to curtail planned development activities. Specifically, rising inflation, which is in part,
tied to the impacts of the COVID-19 pandemic and resulting supply chain disruptions, has, in part, caused a disruption in the capital
markets, which may lead to a recession or market correction that could impact our access to capital, and could in the future negatively
affect our liquidity. A recession or market correction, continued supply chain disruptions and/or inflation could materially affect our
business and the value of our common stock. Further, recent rises in interest rates have had and may continue to have a negative effect
on market prices for common stock of pharmaceutical companies that have no current or near-term revenue. Further increases in interest
rates, which have been implemented and may be further implemented to counteract inflationary pressures, may continue to exacerbate this
issue.

Cash Flows

The following table summarizes
our sources and uses of cash for the years ended December 31, 2022 and 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","","","Period-to- Period"],["","","2022","","","2021","","","Change"],["Net cash used in operating activities","","$","(26,457",")","","$","(34,502",")","","$","8,045"],["Net cash provided by/(used in) investing activities","","","14,950","","","","(98,194",")","","","113,144"],["Net cash provided by/(used in) financing activities","","","(90",")","","","(228",")","","","138"],["Net increase/(decrease) in cash and cash equivalents, and restricted cash","","$","(11,597",")","","$","(132,924",")","","","121,327"]]
[[/GREPCENT_TABLE]]

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Comparison of the Years Ended December
31, 2022 and 2021

Net cash used in operating
activities was approximately $26.5 million for the year ended December 31, 2022 compared to approximately $34.5 million for the year ended
December 31, 2021. The decrease in cash used in operating activities of approximately $8.0 million was primarily driven by a decrease
in net loss of approximately $18.7 million, which was partially offset by a $3.8 million decrease in non-cash items including stock-based
compensation, right-of-use asset, and amortization of premium on marketable debt securities. There was an increase in working capital
of $1.1 million, 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.

Net cash provided by investing
activities was approximately $15.0 million for the year ended December 31, 2022 compared to net cash used in investing activities of
approximately $98.2 million for the year ended December 31, 2021. The change of $113.1 million resulted primarily from purchase of marketable
debt securities of $43.6 million for the year ended December 31, 2022 as compared to $124.7 million for the year ended December 31, 2021
and from proceeds from maturity and redemption of marketable debt securities of $58.6 million for the year ended December 31, 2022 as
compared to $27.2 million for the year ended December 31, 2021.

Net cash used in financing
activities was approximately $0.1 million for the year ended December 31, 2022 compared to net cash provided by financing activities
of $0.2 million for the year ended December 31, 2021. The decrease of approximately $0.1 million was driven by the reduction in stock
price of the shares repurchased in connection with the settlement of restricted stock units for the year ended December 31, 2022.

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 8 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, 2022 are $1.3 million, and future contractual payments on operating lease
obligations due greater than one year from December 31, 2022 are $6.4 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 8 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.

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