NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
Cara Therapeutics, Inc., or the Company, is a clinical-stage biopharmaceutical corporation formed on July 2, 2004. The Company is focused on developing and commercializing new chemical entities with a primary focus on pruritus as well as pain by selectively targeting peripheral kappa opioid receptors. The Company’s primary activities to date have been organizing and staffing the Company, developing its product candidates, including conducting preclinical studies and clinical trials of CR845/difelikefalin-based product candidates and raising capital.
As of March 31, 2019, the Company had raised aggregate net proceeds of approximately $383,200 from several rounds of equity financing, including its initial public offering, or IPO, which closed in February 2014 and three follow-on public offerings of common stock, which closed in July 2018, April 2017 and August 2015, and the issuance of convertible preferred stock and debt prior to the IPO. The Company had also received $88,900 under its license agreements for CR845/difelikefalin, primarily with Vifor Fresenius Medical Care Renal Pharma Ltd., or VFMCRP, Maruishi Pharmaceutical Co. Ltd., or Maruishi, and Chong Kun Dang Pharmaceutical Corp., or CKDP, and an earlier product candidate for which development efforts ceased in 2007. Additionally, in May 2018, the Company received net proceeds of $14,556 from the issuance and sale of 1,174,827 shares of the Company’s common stock to Vifor (International) Ltd., or Vifor, in connection with the Company’s license agreement with VFMCRP (see Note 10,
Collaboration and Licensing Agreements
).
As of March 31, 2019, the Company had unrestricted cash and cash equivalents and marketable securities of $156,140 and an accumulated deficit of $316,314. The Company has incurred substantial net losses and negative cash flows from operating activities in nearly every fiscal period since inception and expects this trend to continue for the foreseeable future. The Company recognized net losses of $21,960 and $16,767 for the three months ended March 31, 2019 and 2018, respectively, and had net cash used in operating activities of $27,526 and $18,468 for the three months ended March 31, 2019 and 2018, respectively.
The Company is subject to risks common to other life science companies including, but not limited to, uncertainty of product development and commercialization, lack of marketing and sales history, development by its competitors of new technological innovations, dependence on key personnel, market acceptance of products, product liability, protection of proprietary technology, ability to raise additional financing, and compliance with Food and Drug Administration, or FDA, and other government regulations. If the Company does not successfully commercialize any of its product candidates, it will be unable to generate recurring product revenue or achieve profitability.
2. Basis of Presentation
The unaudited interim condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States of America, or GAAP. In the opinion of management, these unaudited interim financial statements reflect all adjustments, consisting primarily of normal recurring accruals, necessary for a fair presentation of results for the periods presented. The results of operations for interim periods are not necessarily indicative of the results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by SEC rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. The condensed balance sheet data as of December 31, 2018 were derived from audited financial statements, but do not include all disclosures required by GAAP. These unaudited interim condensed financial statements should be read in conjunction with the audited financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
5
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, as of the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from the Company’s estimates and assumptions. Significant estimates include the fair value of marketable securities that are classified as level 2 of the fair value hierarchy, useful lives of fixed assets, the periods over which certain revenues will be recognized, including licensing and collaborative revenue recognized from non-refundable up-front and milestone payments, the determination of prepaid research and development, or R&D, clinical costs and accrued research projects, the amount of non-cash compensation costs related to share-based payments to employees and non-employees and the periods over which those costs are expensed, the incremental borrowing rate used in lease calculations and the likelihood of realization of deferred tax assets.
Significant Accounting Policies
There have been no material changes to the significant accounting policies previously disclosed in Note 2 to the Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, except for the recent adoption of new accounting pronouncements as disclosed below.
Accounting Pronouncements Recently Adopted
Leases
On January 1, 2019,
the Company adopted ASC 842,
Leases
, under which it elected not to adjust prior comparative periods, which are reported under ASC 840. In addition, the Company elected to adopt both the practical expedient to use hindsight when determining the lease term and the package of practical expedients available under ASC 842, including:
|
•
|
No re-evaluation of whether a contract is or contains a lease (embedded lease);
|
|
•
|
Lease classification is grandfathered
|
|
•
|
No reassessment of initial direct costs
|
Upon adoption of ASC 842, the Company had only one lease, the Stamford Lease (see Note 15,
Commitments and Contingencies: Leases
), which is included in operating lease right-of-use asset, or ROU asset, operating lease liability – current and operating lease liability – non-current in the Company’s Condensed Balance Sheets.
In general, the Company determines if a contract, at its inception, is a lease or contains a lease based on whether the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. To determine whether a contract conveys the right to control the use of an identified asset for a period of time, the Company assesses whether, throughout the period of use, it has both the right to obtain substantially all of the economic benefits from use of the identified asset, and the right to direct the use of the identified asset. Both of these criteria are met by the Stamford Lease.
Under ASC 842, the Company determines the amount of the operating lease liability based on the present value of the future minimum lease payments over the remaining lease term. The amount of the operating lease ROU asset is equal to the amount of the lease liability, less accrued rent and lease incentives received from the landlord. Initial direct costs were deemed to be immaterial.
Since the Stamford Lease does not provide an implicit interest rate, the Company used an annual incremental borrowing rate of 7% based on the information available at the date of adoption for the purpose of determining the lease liability during the term of the lease.
6
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
As noted above, upon adoption of ASC 842, the Company used hindsight in determining the term of the Stamford Lease. Although the Stamford Lease is renewable for one five-year te
rm, upon inception of the lease the renewal term was not included in the lease term since it was not reasonably certain that the Company will exercise that option. Accordingly, the lease term of the Stamford Lease was not adjusted upon adoption of ASC 842
to determine the operating lease ROU asset and operating lease liability.
The Stamford Lease contains both a lease and non-lease component which are accounted for separately. The Company allocates the consideration to the lease and the non-lease component on a relative standalone price basis. Lease expense under ASC 842 is recognized on a straight-line basis over the lease term in the Condensed Statements of Comprehensive Loss.
There was no cumulative effect adjustment as a result of the adoption of ASC 842 on January 1, 2019, which reflects the difference between the amount of lease expense under ASC 842 that would have been recognized from inception of the Stamford Lease through December 31, 2018 and the amount of rent expense actually recognized under ASC 840 during that same period.
Other Accounting Pronouncements Recently Adopted
In June 2018, the FASB issued ASU No. 2018-07,
Compensation—Stock Compensation (Topic 718)
,
Improvements to Nonemployee Share-Based Payment Accounting
, or ASU 2018-07, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. Accordingly, under ASU 2018-07, the fair value of stock options granted to nonemployees will be measured only on the grant date, the amount of which will be recognized as compensation expense over the nonemployee’s service (vesting) period in the same period(s) and in the same manner as if the Company had paid cash for the goods or services instead of paying with or using share-based payment awards. On an award-by-award basis, the Company may elect to use the contractual term as the expected term when estimating the fair value of a nonemployee award to satisfy the measurement objective. Prior guidance under Subtopic 505-50 required the fair value of nonemployee stock options to be marked to market at each reporting period during the service period, which resulted in volatility of compensation expense during that period. The Company adopted ASU 2018-07 on January 1, 2019 on a modified retrospective basis and remeasured, on that date, the fair value of all outstanding unvested stock options that had been granted to nonemployees. The adoption of ASU 2018-07 did not have a material effect on its results of operations, financial position or cash flows because grants of stock options to nonemployees have been insignificant.
Accounting Pronouncements Not Yet Adopted
In November 2018, the FASB issued ASU No. 2018-18,
Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606
, or ASU 2018-18, which clarifies the interaction between Topic 808 and Topic 606 by (1) clarifying that certain transactions between collaborative arrangement participants should be accounted for under Topic 606; (2) adding unit-of-account guidance in Topic 808 to align with the guidance in Topic 606; and (3) clarifying presentation guidance for transactions with a collaborative arrangement participant that are not accounted for under Topic 606. ASU 2018-18 is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The Company has determined that ASU 2018-18 will not have any effect on its financial position, results of operations or cash flows since all three of its collaboration and licensing agreements are accounted for under Topic 606 (see Note 10,
Collaboration and Licensing Agreements
and
Note 11,
Revenue Recognition
)
.
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
, or ASU 2018-13, which modifies the disclosure requirements on fair value measurements in Topic 820 to remove the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. ASU 2018-13 also amends Topic 820 to clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 also requires additional disclosure for changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period as well as the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively
7
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all per
iods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. The Company will adopt ASU 2018-13, as applicable, on January 1, 2020. The Company does not expect that the adoption of ASU 2018-13 will have a material eff
ect on its results of operations, financial position, cash flows or footnote disclosures.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments
, or ASU 2016-13, which replaces the incurred loss impairment methodology in current GAAP, that delays recognition of a credit loss until it is probable that such loss has been incurred, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 modifies the other-than-temporary impairment model for available-for-sale debt securities by requiring (1) estimating expected credit losses only when the fair value is below the amortized cost of the asset; (2) recording a credit loss without regard to the length of time a security has been in an unrealized loss position; (3) limiting the measurement of the credit loss to the difference between the security’s amortized cost basis and its fair value and (4) presenting credit losses as an allowance rather than as a write-down, which will allow the Company to record reversals of credit losses in current period net income, a practice that is currently prohibited. ASU 2016-13 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As such, the Company expects to adopt ASU 2016-13 on January 1, 2020 and is currently evaluating the effect it will have on its results of operations, financial position and cash flows.
3. Available-for-Sale Marketable Securities
As of March 31, 2019 and December 31, 2018, the Company’s available-for-sale marketable securities consisted of debt securities issued by the U.S. Treasury, U.S. government-sponsored entities and investment grade institutions as well as municipal bonds.
The following tables summarize the Company's available-for-sale marketable securities by major type of security as of March 31, 2019 and December 31, 2018:
As of March 31, 2019
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
Type of Security
|
|
Amortized
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Estimated
Fair Value
|
|
U.S. Treasury securities
|
|
$
|
15,921
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
15,937
|
|
U.S. government agency obligations
|
|
|
12,440
|
|
|
|
7
|
|
|
|
—
|
|
|
|
12,447
|
|
Corporate bonds
|
|
|
69,914
|
|
|
|
56
|
|
|
|
(10
|
)
|
|
|
69,960
|
|
Commercial paper
|
|
|
38,104
|
|
|
|
6
|
|
|
|
(2
|
)
|
|
|
38,108
|
|
Municipal bonds
|
|
|
5,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,500
|
|
Total available-for-sale marketable securities
|
|
$
|
141,879
|
|
|
$
|
85
|
|
|
$
|
(12
|
)
|
|
$
|
141,952
|
|
As of December 31, 2018
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
Type of Security
|
|
Amortized
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Estimated
Fair Value
|
|
U.S. Treasury securities
|
|
$
|
19,540
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
19,539
|
|
U.S. government agency obligations
|
|
|
17,860
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
17,859
|
|
Corporate bonds
|
|
|
75,999
|
|
|
|
5
|
|
|
|
(94
|
)
|
|
|
75,910
|
|
Commercial paper
|
|
|
50,413
|
|
|
|
—
|
|
|
|
(23
|
)
|
|
|
50,390
|
|
Municipal bonds
|
|
|
4,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,000
|
|
Total available-for-sale marketable securities
|
|
$
|
167,812
|
|
|
$
|
5
|
|
|
$
|
(119
|
)
|
|
$
|
167,698
|
|
8
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
All available-for-sale marketable securities are classified
as
Marketable securities
, current or Marketable securities, non-current depending
on the contractual maturity date of the individual available-for-sale security
.
The Company classifies its marketable debt securities based on their contractual maturity dates.
As of March 31, 2019, the Company’s marketable debt securities mature at various dates through March 2021. The amortized cost and fair values of marketable debt securities by contractual maturity were as follows.
|
|
As of March 31, 2019
|
|
|
As of December 31, 2018
|
|
Contractual maturity
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Less than one year
|
|
$
|
120,201
|
|
|
$
|
120,265
|
|
|
$
|
146,363
|
|
|
|
146,302
|
|
One year to two years
|
|
|
21,678
|
|
|
|
21,687
|
|
|
|
21,449
|
|
|
|
21,396
|
|
Total
|
|
$
|
141,879
|
|
|
$
|
141,952
|
|
|
$
|
167,812
|
|
|
$
|
167,698
|
|
The following tables show the fair value of the Company's available-for-sale marketable securities that have unrealized losses and that are deemed to be only temporarily impaired, aggregated by investment category and length of time that the individual investments have been in a continuous unrealized loss position.
As of March 31, 2019
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
Corporate bonds
|
|
$
|
14,761
|
|
|
$
|
(10
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,761
|
|
|
$
|
(10
|
)
|
Commercial paper
|
|
|
15,884
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
15,884
|
|
|
|
(2
|
)
|
Total
|
|
$
|
30,645
|
|
|
$
|
(12
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,645
|
|
|
$
|
(12
|
)
|
As of December 31, 2018
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
U.S. Treasury securities
|
|
$
|
16,392
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,392
|
|
|
$
|
(1
|
)
|
U.S. government agency obligations
|
|
|
5,596
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
5,596
|
|
|
|
(1
|
)
|
Corporate bonds
|
|
|
71,322
|
|
|
|
(94
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
71,322
|
|
|
|
(94
|
)
|
Commercial paper
|
|
|
39,445
|
|
|
|
(23
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
39,445
|
|
|
|
(23
|
)
|
Total
|
|
$
|
132,755
|
|
|
$
|
(119
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
132,755
|
|
|
$
|
(119
|
)
|
As of March 31, 2019 and December 31, 2018, the Company held a total of 18 out of 73 positions and 69 out of 84 positions, respectively, that were in an unrealized loss position, none of which had been in an unrealized loss position for 12 months or greater. Based on the Company’s review of these securities, the Company believes that the cost basis of its available-for-sale marketable securities is recoverable and that, therefore, it had no other-than-temporary impairments on these securities as of March 31, 2019 and December 31, 2018. The Company does not intend to sell these debt securities before maturity and the Company believes it is not more likely than not that it will be required to sell these securities before the recovery of their amortized cost basis, which may be maturity.
9
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
4. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss), or AOCI, net of tax, from unrealized gains (losses) on available-for-sale marketable securities, the Company's only component of AOCI, for the three months ended March 31, 2019 and March 31, 2018.
|
|
Total
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Balance, December 31, 2018
|
|
$
|
(114
|
)
|
Other comprehensive income before reclassifications
|
|
|
187
|
|
Amount reclassified from accumulated
other comprehensive income
|
|
|
—
|
|
Net current period other comprehensive income
|
|
|
187
|
|
Balance, March 31, 2019
|
|
$
|
73
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
$
|
(70
|
)
|
Other comprehensive loss before reclassifications
|
|
|
(59
|
)
|
Amount reclassified from accumulated other
comprehensive loss
|
|
|
15
|
|
Net current period other comprehensive loss
|
|
|
(44
|
)
|
Balance, March 31, 2018
|
|
$
|
(114
|
)
|
The reclassifications out of AOCI and into net loss were as follows:
|
|
Three Months Ended
March 31,
|
|
|
Affected Line
Item in the
Statements of
|
Component of AOCI
|
|
2019
|
|
|
2018
|
|
|
Operations
|
Unrealized gains (losses) on available-
for-sale marketable securities
|
|
|
|
|
|
|
|
|
|
|
Realized gains (losses) on sale of securities
|
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
Other income
|
|
|
|
—
|
|
|
|
—
|
|
|
Benefit from income taxes
|
|
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
|
The amounts reclassified out of AOCI into net loss were determined by specific identification.
5. Fair Value Measurements
As of March 31, 2019 and December 31, 2018, the Company’s financial instruments consisted of cash, cash equivalents, available-for-sale marketable securities, prepaid expenses, restricted cash, accounts payable and accrued liabilities. The fair values of cash, cash equivalents, prepaid expenses, restricted cash, accounts payable and accrued liabilities approximate their carrying values due to the short-term nature of these financial instruments. Available-for-sale marketable securities are reported on the Company’s Condensed Balance Sheets as Marketable Securities at their fair values, based upon pricing of securities with the same or similar investment characteristics as provided by third-party pricing services, as described below.
Current accounting guidance defines fair value, establishes a framework for measuring fair value in accordance with ASC section 820, and requires certain disclosures about fair value measurements. The valuation techniques included in the guidance are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.
10
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
The Company classifies its investments in a fair value hierarchy that is i
ntended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is divided into three levels based on the source of inputs as follows:
|
•
|
Level 1 – Observable inputs – quoted prices in active markets for identical assets and liabilities.
|
|
•
|
Level 2 – Observable inputs other than the quoted prices in active markets for identical assets and liabilities – such as quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, or other inputs that are observable or can be corroborated by observable market data.
|
|
•
|
Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require the Company to develop relevant assumptions.
|
Valuation Techniques - Level 2 Inputs
The Company estimates the fair values of its financial instruments categorized as level 2 in the fair value hierarchy, including U.S. Treasury securities, U.S. government agency obligations, corporate bonds, commercial paper and municipal bonds, by taking into consideration valuations obtained from third-party pricing services. The pricing services use industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, benchmark yields, issuer credit spreads, benchmark securities, and other observable inputs. The Company obtains a single price for each financial instrument and does not adjust the prices obtained from the pricing service.
The Company validates the prices provided by its third-party pricing services by reviewing their pricing methods, obtaining market values from other pricing sources and comparing them to the share prices presented by the third-party pricing services. After completing its validation procedures, the Company did not adjust or override any fair value measurements provided by its third-party pricing services as of March 31, 2019 or December 31, 2018.
The following tables summarize the Company’s financial assets measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018.
Fair value measurement as of March 31, 2019:
Financial assets
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|
|
|
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Quoted prices in
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
|
|
|
|
active markets for
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
|
identical assets
|
|
|
inputs
|
|
|
inputs
|
|
Type of Instrument
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds and checking accounts
|
|
$
|
14,188
|
|
|
$
|
14,188
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Available-for-sale marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
15,937
|
|
|
|
—
|
|
|
|
15,937
|
|
|
|
—
|
|
U.S. government agency obligations
|
|
|
12,447
|
|
|
|
—
|
|
|
|
12,447
|
|
|
|
—
|
|
Corporate bonds
|
|
|
69,960
|
|
|
|
—
|
|
|
|
69,960
|
|
|
|
—
|
|
Commercial paper
|
|
|
38,108
|
|
|
|
—
|
|
|
|
38,108
|
|
|
|
—
|
|
Municipal bonds
|
|
|
5,500
|
|
|
|
—
|
|
|
|
5,500
|
|
|
|
—
|
|
Restricted cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial money market account
|
|
|
769
|
|
|
|
769
|
|
|
|
—
|
|
|
|
—
|
|
Total financial assets
|
|
$
|
156,909
|
|
|
$
|
14,957
|
|
|
$
|
141,952
|
|
|
$
|
—
|
|
11
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
Fair value measurement as of December 31, 201
8
:
Financial assets
|
|
|
|
|
|
Quoted prices in
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
|
|
|
|
active markets for
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
|
identical assets
|
|
|
inputs
|
|
|
inputs
|
|
Type of Instrument
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds and checking accounts
|
|
$
|
15,081
|
|
|
$
|
15,081
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Available-for-sale marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
19,539
|
|
|
|
—
|
|
|
|
19,539
|
|
|
|
—
|
|
U.S. government agency obligations
|
|
|
17,859
|
|
|
|
—
|
|
|
|
17,859
|
|
|
|
—
|
|
Corporate bonds
|
|
|
75,910
|
|
|
|
—
|
|
|
|
75,910
|
|
|
|
—
|
|
Commercial paper
|
|
|
50,390
|
|
|
|
—
|
|
|
|
50,390
|
|
|
|
—
|
|
Municipal bonds
|
|
|
4,000
|
|
|
|
—
|
|
|
|
4,000
|
|
|
|
—
|
|
Restricted cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial money market account
|
|
|
769
|
|
|
|
769
|
|
|
|
—
|
|
|
|
—
|
|
Total financial assets
|
|
$
|
183,548
|
|
|
$
|
15,850
|
|
|
$
|
167,698
|
|
|
$
|
—
|
|
There were no purchases, sales or maturities of Level 3 financial assets and no unrealized gains or losses related to Level 3 available-for-sale marketable securities for the three months ended March 31, 2019. There were no transfers of financial assets between Levels 1, 2, or 3 classifications during the three months ended March 31, 2019.
6. Restricted Cash
The Company is required to maintain a stand-by letter of credit as a security deposit under its lease for its office space in Stamford, Connecticut (refer to Note 15,
Commitments and Contingencies: Leases
). The fair value of the letter of credit approximates its contract value. The Company’s bank requires the Company to maintain a restricted cash balance to serve as collateral for the letter of credit issued to the landlord by the bank. As of March 31, 2019, the restricted cash balance for the Stamford Lease was invested in a commercial money market account.
The letter of credit balance for the Stamford Lease is required to remain at $769 through May 19, 2019 and may, upon request from the Company, thereafter be reduced to $408 through the end of the lease term in November 2023. The reduction in the balance of the letter of credit for the Stamford Lease is contingent upon the Company not being in default of any provisions of that lease prior to the request for the reduction. As of March 31, 2019 and December 31, 2018, the Company had $361 of restricted cash related to the Stamford Lease in current assets and $408 in long-term assets, respectively.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Balance Sheets that sum to the total of the same such amounts shown in the Condensed Statements of Cash Flows.
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Cash and cash equivalents
|
|
$
|
14,188
|
|
|
$
|
15,081
|
|
Restricted cash, current assets
|
|
|
361
|
|
|
|
361
|
|
Restricted cash, long-term assets
|
|
|
408
|
|
|
|
408
|
|
Total cash, cash equivalents, and restricted cash
shown in the Condensed Statements of Cash Flows
|
|
$
|
14,957
|
|
|
$
|
15,850
|
|
12
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
7. Prepaid expenses
As of March 31, 2019, prepaid expenses were $7,577, consisting of $6,121 of prepaid R&D clinical costs, $920 of prepaid insurance and $536 of other prepaid costs. As of December 31, 2018, prepaid expenses were $4,805, consisting of $4,377 of prepaid R&D clinical costs, $245 of prepaid insurance, and $183 of other prepaid costs.
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Accounts payable
|
|
$
|
4,943
|
|
|
$
|
4,371
|
|
Accrued research projects
|
|
|
6,446
|
|
|
|
6,079
|
|
Accrued professional fees
|
|
|
721
|
|
|
|
802
|
|
Accrued compensation and benefits
|
|
|
1,200
|
|
|
|
2,370
|
|
Accrued other
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
13,310
|
|
|
$
|
13,622
|
|
9. Stockholders’ Equity
In order to fund future operations, including planned clinical trials, the Company filed a shelf registration statement on Form S-3 (File No. 333-230333), which the Securities and Exchange Commission, or SEC, declared effective on April 4, 2019. The shelf registration statement provides for aggregate offerings of up to $300,000 of common stock, preferred stock, debt securities, warrants or any combination thereof. The securities registered under this shelf registration statement include unsold securities that had been registered under the Company’s previous shelf registration statement (File No. 333-216657) that was declared effective on March 24, 2017.
On March 20, 2019, or the Effective Date, the Company entered into a consulting agreement with an existing stockholder. In accordance with the agreement, the stockholder will provide various consulting services to the Company in exchange for 10,195 unregistered shares of the Company’s common stock. The closing price of the Company’s common stock on the Effective Date was $19.37. The services to be provided by the consultant are expected to be performed during the six-month period following the Effective Date. Accordingly, the prepaid expense of $197 related to this stock issuance will be amortized on a straight-line basis as stock compensation expense within general and administrative expenses over the six-month period as services are performed.
10. Collaboration and Licensing Agreements
Vifor Fresenius Medical Care Renal Pharma Ltd.
On May 17, 2018, the Company entered into a license agreement, or the VFMCRP Agreement, with VFMCRP under which the Company granted VFMCRP an exclusive, royalty-bearing license, or the VFMCRP License, to seek regulatory approval to commercialize, import, export, use, distribute, offer for sale, promote, sell and otherwise commercialize CR845/difelikefalin injection, or the Licensed Product, for all therapeutic uses to prevent, inhibit or treat itch associated with pruritus in hemodialysis and peritoneal-dialysis patients, or the Field, worldwide (excluding the United States, Japan and South Korea), or the Territory.
Upon entry into the VFMCRP Agreement, VFMCRP made a non-refundable, non-creditable $50,000 upfront payment to the Company and Vifor purchased 1,174,827 shares of the Company’s common stock, or the Vifor Shares, for $20,000 at a price of $17.024 per share, which represents a premium over a pre-determined average closing price of the Company’s common stock. The purchase of the Company’s common stock was governed by a separate stock purchase agreement. The excess of the stock purchase price over the cost of the Vifor Shares at the closing price of the Company’s common stock on the purchase date of $5,444 was added to the upfront payment for accounting purposes.
13
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
The Company is eligible to receive from VFMCRP regulatory and commercial mil
estone payments in the aggregate of up to $470,000, consisting of up to $30,000 in regulatory milestones and up to $440,000 in tiered commercial milestones, all of which are sales-related. The Company is also eligible to receive tiered double-digit royalty
payments based on annual net sales, as defined in the VFMCRP Agreement, of CR845/difelikefalin injection in the Licensed Territories. The Company retains full commercialization rights for CR845/difelikefalin injection for the treatment of CKD-aP in the U
nited States except in the dialysis clinics of Fresenius Medical Care North America, or FMCNA, where VFMCRP and the Company will promote CR845/difelikefalin injection under a profit-sharing arrangement (subject to the terms and conditions of the VFMCRP Agr
eement) based on net FMCNA clinic sales recorded by the Company.
At inception of the VFMCRP Agreement, the transaction price of $55,444 was allocated entirely to the one combined performance obligation, as described above, and was initially recorded as deferred revenue. License and milestone revenue will be recognized proportionately as the R&D services are conducted (i.e., prior to submission of an NDA).
The license also requires VFMCRP to promote and take orders in the U.S. for sale by the Company to FMC U.S. Dialysis Clinics and allows VFMCRP to grant sub-licenses, which, in certain cases, requires the Company’s prior written consent. The Company retains the rights to import, distribute, promote, sell and otherwise commercialize the Licensed Product outside of the Field and outside of the Territory.
The VFMCRP Agreement terminates upon the expiration of all royalty terms with respect to the Licensed Products, which expire on a Product-by-Product and country-by-country basis, at the latest of (a) the expiration of all patent rights licensed to VFMCRP covering such Licensed Product; (b) the expiration of all regulatory and data exclusivity applicable to such Licensed Product in such country and (c) the tenth anniversary of the first commercial sale of such Product in such country.
The VFMCRP Agreement may be terminated earlier by either party for material breach that is not cured within 60 days, bankruptcy by either party and by both parties upon mutual written consent. The Company may terminate the VFMCRP Agreement if VFMCRP challenges the validity of any licensed patent rights, except if such patent challenge results from the Company’s action against VFMCRP for infringement of any licensed patent in the Territory. In addition, upon the earlier of (1) the acceptance for filing of an NDA covering Licensed Product filed with the FDA (after completion of the Phase 3 program) or (2) the third anniversary of the Effective Date, the VFMCRP Agreement may be terminated by VFMCRP in its entirety or with respect to any countries within the Territory upon written notice to the Company. Such termination will be effective twelve months following the date of such notice.
If the VFMCRP Agreement terminates early for any reason stated above, VFMCRP’s licenses will terminate, VFMCRP’s rights to use the Company’s confidential information and the Company’s know-how will revert to the Company and VFMCRP will assign and transfer to the Company all right, title and interest in all regulatory applications (IND’s and NDA’s), regulatory approval applications and regulatory approvals in the Territory covering Licensed Product.
Maruishi Pharmaceutical Co., Ltd.
In April 2013, the Company entered into a license agreement with Maruishi, or the Maruishi Agreement, under which the Company granted Maruishi an exclusive license to develop, manufacture, and commercialize drug products containing CR845/difelikefalin for acute pain and/or uremic pruritus in Japan. Maruishi has the right to grant sub-licenses in Japan, which entitles the Company to receive sub-license fees, net of prior payments made by Maruishi to the Company. Under the Maruishi Agreement, the Company and Maruishi are required to use commercially reasonable efforts, at their own expense, to develop, obtain regulatory approval for and commercialize CR845/difelikefalin in the United States and Japan, respectively. In addition, the Company provided Maruishi specific clinical development services for CR845/difelikefalin used in Maruishi’s field of use.
Under the terms of the Maruishi Agreement, the Company is eligible to receive milestone payments upon the achievement of defined clinical and regulatory events as well as tiered, low double-digit royalties with respect to any sales of the licensed product sold in Japan by Maruishi, if any, and share in any sub-license fees.
14
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
During the th
ree months ended March 31, 2019,
the Company recognized clinical compound rev
enue of $
140
from the sale
of clinical compound
to Maruishi and as a result,
the Company incurred R&D expense
of
$
126
during th
e
respective period.
There were no clinical compound sales to Maruishi during the three months ended March 31, 2018.
Chong Kun Dang Pharmaceutical Corporation
In April 2012, the Company entered into a license agreement, or the CKDP Agreement, with Chong Kun Dang Pharmaceutical Corporation, or CKDP, in South Korea, under which the Company granted CKDP an exclusive license to develop, manufacture and commercialize drug products containing CR845/difelikefalin in South Korea. The Company and CKDP are each required to use commercially reasonable efforts, at their respective expense, to develop, obtain regulatory approval for and commercialize CR845/difelikefalin in the United States and South Korea, respectively. The Company identified the granting of the license as its only performance obligation under the CKDP Agreement.
Under the terms of the CKDP Agreement, the Company is eligible to receive milestone payments upon the achievement of defined clinical and regulatory events as well as tiered royalties, with percentages ranging from the high single digits to the high teens, based on net sales of products containing CR845/difelikefalin in South Korea, if any, and share in any sub-license fees.
11. Revenue Recognition
The Company currently recognizes revenue in accordance with ASC 606, as amended, for the VFMCRP, Maruishi and CKDP agreements (see Note 10
, Collaboration and Licensing Agreements
). Under each of these agreements, the Company has recognized revenue from upfront payments and, under the Maruishi Agreement and the CKDP Agreement, from clinical development milestone payments. The Company has also recognized revenue from a sub-license payment earned under the Maruishi Agreement. Under the Maruishi Agreement and the CKDP Agreement, the Company may earn additional future milestone payments upon the achievement of defined clinical events, and under the VFMCRP Agreement, the Maruishi Agreement and the CKDP Agreement upon the achievement of defined regulatory events and, under the VFMCRP Agreement and the Maruishi Agreement, from sales milestones. The Company may also recognize revenue in the future from royalties on net sales under all
three agreements. In addition, the Company has recognized revenue upon the delivery of clinical compound to Maruishi in accordance with separate supply agreements.
Contract balances
As of March 31, 2019, the Company had deferred revenue, current of $28,194 and deferred revenue, non-current of $9,573 related to the performance obligations from the VFMCRP Agreement and had no balances of receivables or other assets related to the VFMCRP Agreement. There were no balances of receivables, other assets or deferred revenue relating to the Maruishi and CKDP agreements as of March 31, 2019. As of December 31, 2018, the Company had deferred revenue, current of $26,825 and deferred revenue, non-current of $15,184 related to the performance obligations from the VFMCRP Agreement and no balances of receivables or other assets related to the VFMCRP Agreement.
There were no balances of receivables, other assets or deferred revenue relating to the Maruishi and CKDP agreements as of December 31, 2018.
Performance obligations
Under the VFMCRP Agreement, the Company’s performance obligations of granting a license to allow VFMCRP to commercialize CR845/difelikefalin injection worldwide, except in the United States, Japan and South Korea, which occurred at inception of the contract in May 2018, and performing R&D services by the Company to obtain sufficient clinical data which will be shared with VFMCRP to allow them to receive regulatory approval to sell CR845/difelikefalin in the licensed territory, are not distinct, and are accounted for as a single performance obligation during the period that the R&D services are rendered (see Note 10,
Collaboration and Licensing Agreements
).
15
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
The Company’s distinct performance obligations under the Maruishi
Agreement include transfer of the license to the Company’s IP
,
which allowed Maruishi to develop and commercialize CR845/difelikefalin
,
for acute pain and uremic pruritus indications in Japan, which occurred at inception of the contract in 2013, and perfo
rmance of R&D services, which occurred from 2013 to 2015, as those services were rendered. The Company agreed to conduct limited work on an oral tablet formulation of CR845/difelikefalin and to conduct Phase 1 and proof-of-concept Phase 2 clinical trials o
f an intravenous formulation of CR845/difelikefalin to be used to treat patients with uremic pruritus. The Company agreed to transfer the data and information from such development to Maruishi for its efforts to obtain regulatory approval in Japan. These a
ctivities are referred to as R&D services.
The Company’s only performance obligation under the supply agreement with Maruishi is to deliver clinical compound to Maruishi in accordance with the receipt of purchase orders. If and when the Company enters into a supply agreement with VFMCRP, the Company’s only performance obligation under this supply agreement would be to deliver CR845/difelikefalin injection to VFMCRP in accordance with the receipt of purchase orders.
Under the CKDP Agreement, the Company’s only performance obligation is to transfer the license to the Company’s IP related to CR845/difelikefalin, which occurred at inception of the contract in 2012.
Upon execution of the VFMCRP Agreement, the Maruishi Agreement and the CKDP Agreement, the Comp
any received a single fixed payment from each counterparty in exchange for granting the respective licenses and performing its other obligations. In addition, each of the counterparties made an equity investment in the Company’s common stock.
Transaction price allocated to the remaining performance obligations
At inception of the VFMCRP Agreement, the entire transaction price of $55,444 was allocated to the one combined performance obligation, as described above. For the three months ended March 31, 2019, $4,242 was recognized as license and milestone fees revenue based on the percentage of R&D services that were completed during the period. As of March 31, 2019, $17,677 of the $55,444 has been recognized as license and milestone fees revenue based on the percentage of R&D services that has been completed since the inception of the VFMCRP Agreement. As of March 31, 2019, there were no remaining performance obligations under either the Maruishi Agreement or the CKDP Agreement, although the Company is eligible to receive milestone payments and sales royalties in the future.
Significant judgments
In applying ASC 606, as amended, to its three contracts, the Company made the following judgments that significantly affect the timing and amount of revenue recognition:
|
1.
|
Determination of the number of distinct performance obligations in a contract
|
The VFMCRP Agreement contains one combined performance obligation, which includes the Company’s two performance obligations to grant a license to VFMCRP and conduct R&D services. Both of those performance obligations are inputs to the promise, within the context of the contract, to transfer a combined output for which VFMCRP has contracted (the ability of VFMCRP to commercialize the Licensed Product) (see Note 10,
Collaboration and Licensing Agreements
, for further discussion).
The Maruishi Agreement contains two distinct performance obligations: the granting of the license and the promise to deliver defined R&D services. Under the Maruishi Agreement, the license and the R&D services represent distinct goods or services from each other because Maruishi is able to benefit from the license on its own or together with other resources that are readily available to it (i.e., capable of being distinct). Maruishi’s ability to benefit from the license without the R&D services is indicated by its ability to conduct clinical trials of CR845/difelikefalin on its own and by the provision in the Maruishi Agreement whereby if the Company suspends or discontinues its development activity, the Company will provide information regarding its development efforts up to that point so that Maruishi may continue development and commercialization of the product in Japan. Therefore, the R&D services do not significantly affect Maruishi’s ability to use and benefit from the license.
16
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
In addition, the Company’s promise in the Maruishi contract to transfer the license is separately identifiable from the promise to provide defined R&D services
(i.e., distinct within the context of the contract) because the Company is not using the goods or services as inputs to produce or deliver the combined output or outputs specified by the customer. The combined output specified by Maruishi is its right to
conduct development activities related to CR845/difelikefalin in Japan, which could result in regulatory approval in Japan. That right is derived from the Company’s grant of the license. Maruishi is conducting clinical trials on its own and does not requir
e the R&D services provided by the Company. Furthermore, the R&D services do not significantly modify or customize the license and vice versa. Finally, the license and R&D services are not highly interdependent or highly interrelated because the Company is
able to fulfill its promise to transfer the initial license independently from its promise to subsequently provide the R&D services, which Maruishi can obtain on its own.
The only performance obligation in the CKDP Agreement is the granting of the license.
|
2.
|
Determination of the transaction price, including whether any variable consideration is included at inception of the contract
|
The transaction price is the amount of consideration that the Company expects to be entitled to in exchange for transferring promised goods or services to the customer. The transaction price must be determined at inception of a contract and may include amounts of variable consideration. However, there is a constraint on inclusion of variable consideration, such as milestone payments or sales-based royalty payments, in the transaction price related to licenses of IP, if there is uncertainty at inception of the contract as to whether such consideration will be recognized in the future.
The decision as to whether or not it is probable that a significant reversal of revenue will occur in the future, depends on the likelihood and magnitude of the reversal and is highly susceptible to factors outside the entity’s influence (for example, the Company cannot determine the outcome of clinical trials; the Company cannot determine if or when they or the counterparty will initiate or complete clinical trials; and the Company’s ability to obtain regulatory approval is difficult). In addition, the uncertainty is not expected to be resolved for a long period of time (in the order of years) and finally, the Company has limited experience in the field.
Therefore, at inception of the VFMCRP Agreement, the Maruishi Agreement and the CKDP Agreement, milestones and sales-based royalty payments were not included in the transaction price based on the factors noted above.
Under the VFMCRP Agreement, the single combined performance obligation will be satisfied as the R&D services are rendered and the transaction price, including the upfront payment of $50,000 and the premium on the common stock purchased by VFMCRP of $5,444, will be recognized as revenue as the R&D services are performed based on the costs incurred as a percentage of the estimated total costs to be incurred to complete the performance obligation. The remaining potential consideration was considered to be variable consideration and was constrained at inception of the contract, including regulatory and sales milestones and sales royalties (see Note 10,
Collaboration and Licensing Agreements
).
All performance obligations under the Maruishi Agreement and the CKDP Agreement were satisfied by the end of 2015. In the future, any milestone event will be recognized as milestone and license fee revenue and collaboration revenue based upon the relative standalone selling prices of the two performance obligations at inception of the Maruishi Agreement, and as milestone and license fee revenue under the CKDP Agreement.
Under the Maruishi Agreement, the transaction price includes only the non-refundable and non-creditable upfront license fee of $15,337, including the premium of $337 from t
he sale of Company stock to Maruishi, that was paid to the Company at inception of the contract. The remaining potential consideration was considered to be variable consideration and was constrained at inception of the contract, including an aggregate of up to $10,500, which the Company is eligible to receive upon achievement of clinical development and regulatory milestones, a one-time sales milestone of one billion Yen when a certain sales level is attained; a mid-double-digit percentage of all non-royalty payments received by Maruishi from its sub-licensees, if any; and tiered royalties based on net sales of products containing CR845/difelikefalin in Japan, if any, with minimum royalty rates in the low double digits and maximum royalty rates in the low twenties.
17
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
Under the CKDP Agreement, the transaction price includes only the non-refundable and non-creditable upfront license fee of $646, including the premium of $83 from the sale of Company stock to CKDP, that was paid to the Company at inception of th
e contract. The remaining consideration was considered to be variable consideration and was constrained at inception of the contract, including an aggregate of up to $3,750, which the Company is eligible to earn upon achievement of clinical development and
regulatory milestones. The Company is also eligible to receive a mid-double-digit percentage of all non-royalty payments received by CKDP from its sub-licensees, if any, and tiered royalties ranging from the high single digits to the high teens based on
net sales of products containing CR845/difelikefalin in South Korea, if any.
|
3.
|
Determination of the estimate of the standalone selling price of performance obligations
|
In order to recognize revenue under ASC 606, as amended, for contracts for which more than one distinct performance obligation has been identified, the Company must allocate the transaction price to the performance obligations based upon their standalone selling prices. The best evidence of standalone selling price is an observable price of a good or service when sold separately by an entity in similar circumstances to similar customers. If such evidence is not available, standalone selling price should be estimated so that the amount that is allocated to each performance obligation equals the amount that the entity expects to receive for transferring goods or services. The Company has identified more than one performance obligation only in the Maruishi Agreement. Since evidence based on observable prices is not available for the performance obligations under the Maruishi Agreement, the Company considered market conditions and entity-specific factors, including those contemplated in negotiating the agreements, as well as certain internally developed estimates.
At inception of the Maruishi Agreement, the Company determined the estimate of standalone selling price for the license performance obligation by using the adjusted market assessment approach. Under this method, the Company forecasted and analyzed CR845/difelikefalin in the Japanese market, the phase of clinical development as well as considered recent similar license arrangements within the same phase of clinical development, therapeutic area, type of agreement, etc. To estimate the standalone selling price of the R&D services, the Company forecasted its expected costs of satisfying that performance obligation and added a margin for that service.
|
4.
|
Determination of the method of allocation of the transaction price to the distinct performance obligations
|
At inception of the Maruishi Agreement, the Company allocated the transaction price of $15,337 between the two performance obligations based on their relative standalone selling prices, determined as described above. The Company determined that the license and the R&D services had estimated standalone selling prices of $10,200 and $6,200, respectively. The resulting percentage allocations were applied to the $15,337 of total transaction price, which resulted in $9,637 being allocated to the license performance obligation, which was recognized immediately as license revenue, while $5,700 was allocated to the R&D services performance obligation. The amount allocated to the R&D services performance obligation was initially recorded as deferred revenue and was recognized as collaborative revenue as the R&D services were provided through July 2015.
Since both the VFMCRP Agreement and the CKDP Agreement each contain only one distinct performance obligation, at the inception of each of those agreements, the entire transaction price was allocated to the respective performance obligation.
|
5.
|
Determination of the timing of revenue recognition for contracts
|
Revenue should be recognized when, or as, an entity satisfies a performance obligation by transferring a promised good or service to a customer; i.e., when the customer obtains control of the good or service. The licenses granted to both Maruishi and CKDP are being accounted for as distinct performance obligations. As discussed below, both licenses relate to functional IP for which revenue is recognized at a point in time – in the case of these two license agreements, the point in time is at inception of the contract because the customer obtained control of the license at that point.
The licenses grant Maruishi and CKDP the right to use the Company’s IP relating to CR845/difelikefalin as it existed at the point in time that the licenses were granted. That IP has significant standalone functionality as it provides the customer with the ability to perform a function or task, such as to manufacture CR845/difelikefalin and conduct clinical trials, and is considered to be functional IP.
18
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
During the license periods, the Company is continuing to develop and advance CR845/difelikefalin by conducting clinical trials. Those development efforts are for its
own benefit and do not substantively change the significant standalone functionality of the licensed IP granted to Maruishi or CKDP. Therefore, the Company’s ongoing development efforts do not significantly affect the IP’s utility to which Maruishi or CKD
P have rights. Furthermore, if the Company abandons its development efforts, Maruishi or CKDP may still continue to develop CR845/difelikefalin in their respective countries.
The R&D services performance obligation under the Maruishi Agreement represents a separate performance obligation. The R&D services were provided to Maruishi by the Company from inception of the agreement in 2013 through the third quarter of 2015, at which time the Company had fulfilled its promise related to the R&D services. Revenue related to the R&D services performance obligation was recognized as services were performed based on the costs incurred as a percentage of the estimated total costs to be incurred to complete the performance obligation.
Similarly, under the VFMCRP Agreement, revenue related to the single distinct performance obligation, which includes both granting of the license and performance of the R&D services, will be recognized as the R&D services are performed, based on the costs
incurred as a percentage of the estimated total costs to be incurred to complete the performance obligation. The Company expects that the remaining amount of the transaction price that was allocated to the combined performance obligation of $37,767 at March 31, 2019 will be recognized by 2020, as the R&D services are performed, subject to certain development and regulatory uncertainties.
|
6.
|
Determination of consideration as variable consideration, including factors related to inclusion in the transaction price at inception of the contract and timing of recognition as revenue.
|
The VFMCRP Agreement, the Maruishi Agreement and the CKDP Agreement contain potential payments related to achievement of defined milestone events and royalties upon net sales of future products, which are considered to be variable consideration because of the uncertainty of occurrence of any of those events specified in those agreements at inception of the agreements. Therefore, those potential payments were not included in the transaction price at the inception of the agreements.
Revenue related to achievement of milestone events is recog
nized when the Company has determined that it is probable that a milestone event will be achieved and there will not be a significant reversal of revenue in future periods. Upon probability of achievement of a milestone event, the most likely amount of variable consideration is included in the transaction price. Subsequent changes to the transaction price, after contract initiation, are allocated to the performance obligations in the contract on the same basis as at contract inception. Revenue for variable consideration is recognized in the same manner (point in time or over time) as for the performance obligations to which the payment amounts were allocated.
The Maruishi Agreement and the CKDP Agreement specify that certain development milestones will be achieved at pre-specified defined phases of a clinical trial (such as initiation or completion or other pre-specified time during a clinical trial as specified in the agreements).
During the three months ended March 31, 2019 and 2018, no milestone events were probable of occurrence or achieved.
Sublicense payments
VFMCRP’s, Maruishi’s and CKDP’s right to grant sub-licenses is explicitly stated in their respective license agreements. The amount of any potential sub-license fees to be received by the Company, which is based on a formula, is considered to be variable consideration and is constrained from inclusion in the transaction price at inception of the contract since at that time it was probable that there would be a reversal of such revenue in the future because the Company did not know if a sublicense would be granted in the future.
19
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
Sales-based Royalty Payments
The VFMCRP Agreement, CKDP Agreement and Maruishi Agreement each allow the Company to earn sales-based royalty payments in exchange for a license of intellectual property. In that case, the Company will recognize revenue for a sales-based royalty only when (or as) the later of the following events occurs:
|
a.
|
The subsequent sale or usage occurs.
|
|
b.
|
The performance obligation
to which some or all of the sales-based royalty has been allocated has been satisfied (or partially satisfied).
|
Since the sale (item a, above) occurs after the license was delivered (item b, above), the sales-based royalty exception, to exclude such royalty payments from the transaction price, applies to the overall revenue stream. Therefore,
sales-based royalty payments are recognized as revenue when the customer’s sales occur.
To date, no royalties have been earned or were otherwise due to the Company.
12. Net Loss Per Share
The Company computes basic net income (loss) per share by dividing net income (loss) by the weighted-average number of shares of common stock outstanding. Diluted net income per share includes the potential dilutive effect of common stock equivalents as if such securities were exercised during the period, when the effect is dilutive. Common stock equivalents may include outstanding stock options or restricted stock units, which are included using the treasury stock method when dilutive. For the three months ended March 31, 2019 and 2018, the Company excluded the effects of potentially dilutive shares that were outstanding during those respective periods from the denominator as their inclusion would be anti-dilutive due to the Company’s net losses during those periods.
The denominators used in the net loss per share computations are as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Basic:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
39,552,277
|
|
|
|
32,681,661
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - Basic
|
|
|
39,552,277
|
|
|
|
32,681,661
|
|
Common stock options*
|
|
|
—
|
|
|
|
—
|
|
Denominator for diluted net loss per share
|
|
|
39,552,277
|
|
|
|
32,681,661
|
|
|
*
|
No amounts were considered as their effects would be anti-dilutive.
|
Basic and diluted net loss per share are computed as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net loss
|
|
$
|
(21,960
|
)
|
|
$
|
(16,767
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
39,552,277
|
|
|
|
32,681,661
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, Basic and Diluted
|
|
$
|
(0.56
|
)
|
|
$
|
(0.51
|
)
|
20
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
As of
March
3
1
, 201
9
and 201
8
,
4
,
925
,
641
and 3,
932
,
992
stock options, respectively, were outstanding, which could potentially dilute basic earnings per share in the future, but were not included in the computation of diluted net loss per share because to do so would have been anti-dilutive
. In addition, 215,0
00 restricted stock units granted during the three months ended March 31, 2019 were also not included in the computation of diluted net loss per share because to do so would have been anti-dilutive
(see Note
13
,
Stock-Based Compensation
).
13.
Stock-Based Compensation
2014 Equity Incentive
Plan
The Company’s 2014 Equity Incentive Plan, or the 2014 Plan, is administered by the Company’s Board of Directors or a duly authorized committee thereof, referred to as the Plan administrator. The 2014 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards and other forms of equity compensation, collectively referred to as Stock Awards. Additionally, the 2014 Plan provides for the grant of performance cash awards. Incentive stock options may be granted only to employees. All other awards may be granted to employees, including officers, non-employee directors, and consultants. No incentive stock options may be granted under the 2014 Plan after the tenth anniversary of the effective date of the 2014 Plan. Stock Awards granted under the 2014 Plan vest at the rate specified by the Plan administrator. Initial grants of Stock Awards made to employees and non-employee consultants generally vest as to 25% on the first anniversary of the date of grant and the balance ratably over the next 36 months and subsequent grants vest monthly over a period of four years from the grant date. Stock options initially granted to members of the Company’s Board of Directors vest over a period of three years in equal installments from the date of the grant, subject to the option holder’s continued service as a Director through such date. Subsequent grants to Directors that are made automatically at Annual Meetings of Stockholders vest fully on the first anniversary of the date of grant. The Plan administrator determines the term of Stock Awards granted under the 2014 Plan up to a maximum of ten years.
The aggregate number of shares of the Company’s common stock reserved for issuance under the 2014 Plan has automatically increased on January 1 of each year, beginning on January 1, 2015 and will continue to increase on January 1 of each year through and including January 1, 2024, by 3% of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the Company’s Board of Directors. On January 1, 2019, the aggregate number of shares of common stock that may be issued pursuant to Stock Awards under the 2014 Plan automatically increased from 4,900,481 to 6,086,907. The maximum number of shares that may be issued pursuant to the exercise of incentive stock options under the 2014 Plan is 30,000,000 shares.
Restricted Stock Units
During the three months ended March 31, 2019, the Compensation Committee of the Company’s Board of Directors approved and granted a total of 215,000 restricted stock units to executive officers under the 2014 Plan. Vesting of the restricted stock units will be contingent on the achievement of certain performance targets, subject to the recipient’s continuous service through the vesting events. The Company has determined that the probability of achievement of the performance targets cannot be determined until they are achieved, and accordingly, the Company intends to recognize compensation expense associated with these awards when, and to the extent, the restricted stock units vest in accordance with achievement of the performance targets. As of March 31, 2019, none of the restricted stock units had vested and, consequently, no compensation expense has been recognized.
21
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
Stock Options
Under the 2014 Plan, the Company granted 957,000 and 596,000 stock options during the three months ended March 31, 2019 and 2018, respectively. The fair values of stock options granted during the three months ended March 31, 2019 and 2018 were estimated as of the dates of grant using the Black-Scholes option pricing model with the following assumptions:
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Risk-free interest rate
|
|
2.54% - 2.62%
|
|
|
2.51% - 2.71%
|
|
Expected volatility
|
|
74.29% - 75.19%
|
|
|
85.9%
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
Expected life of employee options (in years)
|
|
6.25
|
|
|
6.25
|
|
Expected life of non-employee options
(in years)
|
|
—
|
|
|
—
|
|
The weighted-average grant date fair value per share of options granted to employees, non-employee members of the Company’s Board of Directors for their Board service and non-employee consultants during the three months ended March 31, 2019 and 2018 was $10.83 and $10.43, respectively.
Prior to January 1, 2019, the Company used the Black-Scholes option valuation model to re-measure the fair value of all outstanding options that had been granted to non-employee consultants during the vesting period of each tranche in accordance with ASC 505-50. On January 1, 2019, the Company used the Black-Scholes option valuation model to re-measure the fair value of all outstanding unvested options that had been granted to non-employee consultants in accordance with ASU 2018-07 (see Note 2,
Other Accounting Pronouncements Recently Adopted
). The range of assumptions used by the Company on January 1, 2019 and March 31, 2018 are as follows:
|
|
January 1,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Risk-free interest rate
|
|
2.59% - 2.62%
|
|
|
1.82% - 2.70%
|
|
Expected volatility
|
|
58.9% - 84.6%
|
|
|
78.2% - 101.0%
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
Expected life of non-employee options (in years)
|
|
0.81 - 8.19
|
|
|
0.50 - 8.94
|
|
During the three months ended March 31, 2019 and 2018, the Company recognized compensation expense in the accompanying Condensed Statements of Comprehensive Loss relating to stock options, as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Research and development
|
|
$
|
1,082
|
|
|
$
|
649
|
|
General and administrative
|
|
|
1,152
|
|
|
|
1,222
|
|
Total stock option expense
|
|
$
|
2,234
|
|
|
$
|
1,871
|
|
A summary of stock option award activity related to employees, non-employee members of the Company’s Board of Directors and non-employee consultants as of and for the three months ended March 31, 2019 is presented below:
|
|
Number of
Shares
|
|
|
Weighted
Average Exercise
Price
|
|
Outstanding, December 31, 2018
|
|
|
4,004,422
|
|
|
$
|
13.34
|
|
Granted
|
|
|
957,000
|
|
|
|
16.06
|
|
Exercised
|
|
|
(17,291
|
)
|
|
|
13.52
|
|
Forfeited
|
|
|
(18,490
|
)
|
|
|
16.55
|
|
Outstanding, March 31, 2019
|
|
|
4,925,641
|
|
|
$
|
13.86
|
|
Options exercisable, March 31, 2019
|
|
|
2,134,424
|
|
|
|
|
|
22
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
The Company does not expect to realize any tax benefits from its stock option activity or the recognition of stock-based compensation expense because the Company currently has net operating losses and has a full valuation allowance against its deferred tax assets. Accordingly, no amounts related to excess tax benefits have been reported in cash flows from operations for the three months ended March 31, 2019 and 2018.
14. Income Taxes
For the three months ended March 31, 2019 and 2018, pre-tax losses were $22,045 and $16,813, respectively. The Company recognized a full tax valuation allowance against its deferred tax assets as of March 31, 2019 and December 31, 2018. Upon adoption of ASU 2016-09 on January 1, 2017, the tax benefit related to the exercise of stock options is recognized as a deferred tax asset that is offset by a corresponding valuation allowance.
The benefit from income taxes of $85 and $46 for the three months ended March 31, 2019 and 2018, respectively, relates to state R&D tax credits exchanged for cash pursuant to the Connecticut R&D Tax Credit Exchange Program, which permits qualified small businesses engaged in R&D activities within Connecticut to exchange their unused R&D tax credits for a cash amount equal to 65% of the value of the exchanged credits.
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act, or the Act. The Act, which is also commonly referred to as “U.S. tax reform”, significantly changed U.S. corporate income tax laws by, among other provisions, reducing the maximum U.S. corporate income tax rate from 35% to 21% starting in 2018. In accordance with the reduction in U.S. corporate income tax rate during the period of enactment, the Company reduced its deferred tax assets, which were offset by a corresponding reduction to its valuation allowance. On March 31, 2019 and December 31, 2018, the Company did not have any foreign subsidiaries and the international aspects of the Act are not applicable for the respective periods.
On December 22, 2017, Staff Accounting Bulletin 118, or SAB 118, was issued by the SEC due to the complexities involved in accounting for the Act. SAB 118 requires the Company to include in its financial statements a reasonable estimate of the impact of the Act on earnings to the extent such estimate has been determined. Accordingly, the U.S. provision for income tax for 2017 was based on the reasonable estimate guidance provided by SAB 118. The Company finalized its accounting for the Act as of December 31, 2018, which resulted in insignificant adjustments.
15. Commitments and Contingencies
Leases
In December 2015, the Company entered into a lease agreement, or the Stamford Lease, for office space in Stamford, Connecticut, or the Premises, for the purposes of relocating its headquarters. The initial term of the Stamford Lease commenced in May 2016, or the Commencement Date, and ends in November 2023 and is renewable for one five-year term.
The Stamford Lease requires monthly lease payments, including rent escalations and rent holidays, during the initial lease term. The Company began to make rental payments from the Commencement Date. Prior to January 1, 2019, the Company recorded monthly rent expense on a straight-line basis from March 2016, upon taking possession of the Premises, through December 31, 2018. As of December 31, 2018, the balance of deferred lease obligation, representing the difference between cash rent paid and straight-line rent expense, was $864.
As of the Commencement Date, the Stamford Lease landlord had made tenant improvements of $1,094 to the leased premises. Such amount was included in Property and equipment, net and in Deferred lease obligation as of December 31, 2018. The portion of Deferred lease obligation that is related to tenant improvements was being amortized as a reduction to rent expense over the same term as rent expense. As of December 31, 2018, the balance of Deferred lease obligation related to tenant improvements was $698.
Total rent expense under the Stamford Lease was $246 for the three months ended March 31, 2018.
23
CARA THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
In connection with the signing of the Stamfo
rd Lease, the Company entered into a standby letter of credit agreement for $769, which serves as a security deposit for the Premises. The standby letter of credit is automatically renewed annually through November 2023. This standby letter of credit is se
cured with restricted cash in a money market account (refer to Note 6,
Restricted Cash
).
On January 1, 2019, the Company adopted ASC 842 (see Note 2 –
Basis of Presentation: Accounting Pronouncements Recently Adopted
). Under ASC 842, since the Company adopted the practical expedients not to re-evaluate whether a contract is or contains a lease and to maintain the lease classification under ASC 840, the Stamford Lease continues to be accounted for as an operating lease.
Upon adoption of ASC 842, the Company was required to establish an operating lease ROU asset and operating lease liability for the Stamford Lease. In establishing the ROU asset, the operating lease liability of $5,198 was reduced by lease incentives relating to tenant improvements of $698 and deferred lease obligation of $864, which were outstanding on December 31, 2018.
Under ASC 842, lease expense is recognized on a straight-line basis over the lease term. As a result, $234 of operating lease cost, or lease expense, was recognized in the Company’s Condensed Statements of Comprehensive Loss for the three months ended March 31, 2019, consisting of $164 relating to R&D lease expense and $70 relating to G&A lease expense.
Other information related to the Stamford Lease was as follows:
|
|
Three Months
Ended
|
|
|
|
March 31, 2019
|
|
|
|
|
|
|
Cash paid for amounts included in the
measurement of lease liability:
|
|
|
|
|
Operating cash outflows from operating lease
|
|
$
|
(300
|
)
|
ROU assets obtained in exchange for new
operating lease liabilities
|
|
$
|
3,636
|
|
Remaining lease term-operating lease
|
|
4.7 years
|
|
Discount rate - operating lease
|
|
|
7.0
|
%
|
Future minimum lease payments under non-cancellable operating leases, as well as a reconciliation of these undiscounted cash flows to the operating lease liability as of March 31, 2019, were as follows:
Year Ending December 31,
|
|
|
|
|
2019 (Excluding the three months ended March 31, 2019)
|
|
$
|
915
|
|
2020
|
|
|
1,239
|
|
2021
|
|
|
1,264
|
|
2022
|
|
|
1,288
|
|
2023
|
|
|
1,164
|
|
Total future minimum lease payments, undiscounted
|
|
|
5,870
|
|
Less imputed interest
|
|
|
(882
|
)
|
Total
|
|
$
|
4,988
|
|
|
|
|
|
|
Operating lease liability reported as of March 31, 2019:
|
|
|
|
|
Operating lease liability-current
|
|
$
|
901
|
|
Operating lease liability - non-current
|
|
|
4,087
|
|
Total
|
|
$
|
4,988
|
|
24