# Protara Therapeutics, Inc. (TARA) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Protara Therapeutics, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1359931/000121390024021982/f10k2023_protarathera.htm
Accession: 0001213900-24-021982
Filing date: 2024-03-13
Report date: 2023-12-31
Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference.
Confidence: high

Company profile: /company/TARA/
All MD&A years: /company/TARA/mda/
Previous year: /company/TARA/mda/fy2022/ (FY 2022)
Next year: /company/TARA/mda/fy2024/ (FY 2024)

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.

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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 Co., Ltd., or 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 in some ways 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 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, or Ta, known as the ADVANCED-1 trial. In the initial dose escalation phase of the trial, patients
received six weekly intravesical doses of TARA-002, evaluating the 10KE, 20KE and 40KE doses (Klinische Einheit, or KE, is a German term
indicating a specified weight of dried cells in vial). 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 Phase 2 dose. In April 2023, we announced
positive preliminary data from the Phase 1a dose escalation component of the ongoing ADVANCED-1 trial through the 40KE dose, in which
TARA-002 indicated favorable tolerability and anti-tumor activity in NMIBC patients. A maximum tolerated dose was not determined,
and dose escalation remains ongoing in exploratory cohorts.

Preliminary data from the
ADVANCED-1 trial suggested that intravesical TARA-002 was generally well tolerated at the three dose levels evaluated in the initial phase
of the trial, and no dose limiting toxicities were observed. The Company has selected the 40KE dose for use in subsequent clinical trials.
The majority of reported adverse events were Grades 1 and 2 across all dose levels, and treatment-related adverse events, as assessed
by study investigators, were in line with typical responses to bacterial immunopotentiation and included fatigue, headache, fever and
chills. The most common urinary symptoms were urinary urgency, urinary frequency, urinary tract pain/burning, incomplete emptying, and
bladder spasm. Most bladder irritations resolved soon after administration, or in a few hours to a few days. A total of nine patients
were enrolled in the dose escalation portion of the study through the 40KE dose. Of those, three patients with CIS,
one of whom was a heavily pre-treated BCG-unresponsive patient, achieved a complete response at the 20KE dose, and tumor regression
was observed in the other two patients. Results from six patients with high-grade, non-invasive papillary, or HGTa, tumors showed five
of six patients with high-grade recurrence free survival, or HGRFS, at week 12. The patient who did not achieve HGRFS was dosed at 10KE,
the lowest dose of TARA-002 offered in the trial.

The ongoing open-label expansion
trial, or ADVANCED-1EXP, is evaluating intravesical TARA-002 at the 40KE dose in up to 12 CIS patients, including BCG-naïve, BCG-unresponsive,
and BCG-inadequately treated patients. Dosing is progressing in the trial, and we anticipate having preliminary data from this trial in
the first half of 2024.

Based on the preliminary
results of ADVANCED-1, we are proceeding with the clinical development of TARA-002 for the treatment of NMIBC. In September 2023, we initiated
ADVANCED-2, a Phase 2 open-label trial evaluating intravesical TARA-002 in at least 102 patients with high-grade CIS. Cohort A of the
Phase 2 trial is expected to enroll 27 patients with CIS (± Ta/T1), BCG-Naïve or BCG-experienced, who have not received intravesical
BCG for at least 24 months prior to CIS diagnosis. Cohort B of the Phase 2 trial is expected to enroll 75-100 patients with BCG-unresponsive
CIS (± Ta/T1). The Company expects to share preliminary results from a pre-planned risk-benefit analysis of the ongoing Phase 2
open-label ADVANCED-2 trial in the second half of 2024. The analysis is expected to include approximately 10 patients who are six-month
evaluable.

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 urothelial cancer and other types of cancer affecting different parts of the body.

63

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 investigational new
drug application for LMs with the Vaccines and Related Products Division of the FDA, or Vaccines Division.

In October 2023, we
initiated STARBORN-1 is a Phase 2 single-arm, open-label,
prospective clinical trial to evaluate the safety and efficacy of intracystic injection of TARA-002 for the treatment of macrocystic
and mixed-cystic LMs (≥ 50% macrocystic disease) in participants six months to less than 18 years of age. Including an age
de-escalation safety lead-in, the trial will enroll approximately 30 patients who will receive up to four injections of TARA-002
spaced approximately six weeks apart.

The
primary endpoint of the trial is the proportion of participants with macrocystic LMs and mixed-cystic LMs who demonstrated clinical success,
defined as having either a complete response (90% to 100% reduction from baseline in total LM volume) or substantial response (60% to
less than 90% reduction in total LM volume) as measured by axial imaging.

The third development program
in our portfolio is intravenous, or IV, Choline Chloride, an investigational phospholipid substrate replacement therapy, for patients
receiving parenteral nutrition, or PN. The FDA has granted IV Choline Chloride Orphan Drug Designation for the prevention of choline deficiency
in PN patients. We have conducted a two-part prevalence study to enhance our understanding of the PN patient population. The first, or
retrospective, part of the prevalence study was completed in September 2021, when we reported results that supported that there was a
significant unmet medical need in patients dependent on PN. We have concluded the second, or prospective part, of the prevalence study,
which is a multi-center, cross-sectional observational study that assessed the prevalence of choline deficiency in patients dependent
on PN. We shared these results with the FDA to inform our discussion on next steps for the IV Choline Chloride program. There are currently
no IV formulations of choline available or in development for PN patients.

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
“—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, 2023, we had an accumulated deficit of approximately $200.4
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, 2023, we had approximately $65.6 million in cash, cash equivalents, and marketable debt securities.

64

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, 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.

General
and Administrative

General
and administrative expenses consist principally 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
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 and dividend income on our cash, 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 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.

Our critical accounting policy is the accounting for accrued research
and development expenses. During the year ended December 31, 2022, goodwill was also considered a critical accounting estimate.

Research
and Development Accruals

We
record accruals for estimated costs of research, preclinical, 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.

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Goodwill

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
was 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 had 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 believed
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 highlighted 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 considered 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 required 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 was 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, were 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.

66

Results
of Operations

Comparison
of the Years Ended December 31, 2023 and 2022

The
following table summarizes our results of operations for the years ended December 31, 2023 and 2022 (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Period -to- Period"],["","","2023","","","2022","","","Change"],["Operating expenses:"],["Research and development","","$","24,989","","","$","16,808","","","$","8,181"],["General and administrative","","","18,624","","","","20,737","","","","(2,113",")"],["Loss on impairment of goodwill","","","-","","","","29,517","","","","(29,517",")"],["Total operating expenses","","","43,613","","","","67,062","","","","(23,449",")"],["Loss from operations","","","(43,613",")","","","(67,062",")","","","23,449"],["Other income (expense), net:"],["Interest and investment income","","","3,193","","","","1,110","","","","2,083"],["Other income (expense), net","","","3,193","","","","1,110","","","","2,083"],["Net loss","","$","(40,420",")","","$","(65,952",")","","$","25,532"]]
[[/GREPCENT_TABLE]]

Research and development
expenses. During the year ended December 31, 2023, our research and development expenses were approximately $25.0 million, which represented
an increase of approximately $8.2 million as compared to the year ended December 31, 2022. This was primarily due to an increase in expenses
related to clinical trial and non-clinical activities for TARA-002 of $7.3 million as well as an increase of $0.8 million in personnel-related
expenses.

General and administrative
expenses. During the year ended December 31, 2023, our general and administrative expenses were approximately $18.6 million, which
represented a decrease of approximately $2.1 million as compared to the year ended December 31, 2022. This decrease was primarily due
to a reduction of $1.6 million in personnel-related expenses (inclusive of $0.7 million of stock-based compensation) and lower premiums
of $1.2 million for directors and officers liability insurance. These cost reductions were partially offset by an increase of $0.8 related
to legal and 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 to
fully impair goodwill. There was no impairment charge during the year ended December 31, 2023. 

Other income (expense),
net. During the year ended December 31, 2023, our other income (expense), net was approximately $3.2 million, which represented an
increase of approximately $2.1 million as compared to the year ended December 31, 2022, due primarily to higher market interest rates
obtained from money market funds and corporate debt securities held as marketable securities.

Liquidity
and Capital Resources

Overview

As
of December 31, 2023 and 2022, our cash, cash equivalents, and marketable debt securities were $65.6 million and $102.3 million, respectively.
We have not generated revenues since our inception and have incurred net losses of approximately $40.4 million and $66.0 million for
the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, we had working capital of approximately $62.6 million
and stockholder’s equity of approximately $68.3 million. During the year ended December 31, 2023, cash flows used in operating
activities were approximately $37.6 million, consisting primarily of a net loss of approximately $40.4 million, which includes non-cash
activities of approximately $7.0 million, inclusive of $6.1 million in stock-based compensation charges, as well as working capital adjustments
of $4.1 million. 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.

67

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 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. For so long as the public float of our common stock held by non-affiliates is below $75 million, our
ability to use the Shelf Registration Statement will be limited by “baby shelf” rules, which limit us to sales in an amount
not to exceed one-third of such public float. Such amounts may not be adequate for meeting our capital needs.

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 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. 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 pharmaceutical
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.

Cash
Flows

The
following table summarizes our sources and uses of cash for the years ended December 31, 2023 and 2022 (in thousands):

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","","","Period-to- Period"],["","","2023","","","2022","","","Change"],["Net cash provided by/(used in) operating activities","","$","(37,557",")","","$","(26,457",")","","$","(11,100",")"],["Net cash provided by/(used in) investing activities","","","53,107","","","","14,950","","","","38,157"],["Net cash provided by/(used in) financing activities","","","(91",")","","","(90",")","","","(1",")"],["Net increase/(decrease) in cash and cash equivalents, and restricted cash","","$","15,459","","","$","(11,597",")","","","27,056"]]
[[/GREPCENT_TABLE]]

Comparison
of the Years Ended December 31, 2023 and 2022

Net cash used in operating
activities was approximately $37.6 million for the year ended December 31, 2023 compared to approximately $26.5 million for the year ended
December 31, 2022. The increase of approximately $11.1 million in cash used in operating activities was primarily driven by a decrease
in net loss of $25.5 million which includes a $32.0 million decrease in non-cash items including goodwill, stock-based compensation, operating
lease right-of-use asset, depreciation, and amortization of premium on marketable debt securities and a $4.7 million increase 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.

68

Net
cash provided by investing activities was approximately $53.1 million for the year ended December 31, 2023 compared to net cash provided
by investing activities of approximately $15.0 million for the year ended December 31, 2022. The increase of $38.2 million resulted primarily
from maturities and redemptions of marketable debt securities of $65.3 million for the year ended December 31, 2023 as compared to $58.6
million for the year ended December 31, 2022 and the purchase of marketable debt securities of $12.2 million for the year ended December
31, 2023 as compared to $43.6 million for the year ended December 31, 2022.

Net
cash used in financing activities was approximately $0.1 million for the years ended December 31, 2023 and 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 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, 2023 are $1.3 million, and future contractual
payments on operating lease obligations due greater than one year from December 31, 2023 are $5.1 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.