Protara Therapeutics, Inc. 10-Q

Item 1. Financial Statements PROTARA THERAPEUTICS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS As of June 30, 2020 December 31, 2019 (unaudited) Assets Current assets: Cash and cash equivalents $ 29,970,617 $ 564,124 Restricted cash 50,000 - Deferred offering costs - 121,712 Prepaid expenses and other current assets 2,828,556 78,057 Total current assets 32,849,173 763,893 Non-current assets: Property and equipment, net 655,495 458,591 Right-of-use asset 384,081 - Goodwill 29,367,213 - Total assets $ 63,255,962 $ 1,222,484 Liabilities and Stockholders’ Equity (Deficit) Current liabilities: Accounts payable $ 915,206 $ 715,653 Accrued expenses 1,575,068 2,634,790 Short-term debt 926,983 - Right-of-use liability, current 29,287 - Total current liabilities 3,446,544 3,350,443 Non-current liabilities: Right-of-use liability, long-term 378,885 - Total liabilities 3,825,429 3,350,443 Commitments and Contingencies (Note 6) Stockholders’ Equity (Deficit) Preferred Stock, $0.001 par value, authorized 10,000,000 shares: Series 1 Convertible Preferred Stock, 3,880 and 0 shares authorized at June 30, 2020 and December 31, 2019, respectively, 3,879 and 0 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively. 4 - Common Stock, $0.001 par value, authorized 100,000,000 shares: Common Stock, 5,843,203 and 2,627,533 common shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively. 5,843 2,628 Additional Paid in Capital 89,406,633 10,651,073 Accumulated Deficit (29,981,947 ) (12,781,660 ) Total Stockholders’ Equity (Deficit) 59,430,533 (2,127,959 ) Total Liabilities and Stockholders’ Equity (Deficit) $ 63,255,962 $ 1,222,484 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 PROTARA THERAPEUTICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) For the Three Months Ended June 30, For the Six Months Ended June 30, 2020 2019 2020 2019 Operating expense: Research & development $ 2,469,720 $ 986,716 $ 5,534,513 $ 2,064,562 General & administrative 4,796,155 441,959 11,890,987 892,169 Total operating expenses 7,265,875 1,428,675 17,425,500 2,956,731 Operating loss (7,265,875 ) (1,428,675 ) (17,425,500 ) (2,956,731 ) Other (income) expense, net Interest (income) expense, net (125,845 ) - (225,213 ) - Total other (income) expense, net (125,845 ) - (225,213 ) - Net Loss $ (7,140,030 ) $ (1,428,675 ) $ (17,200,287 ) $ (2,956,731 ) Weighted Average Shares Outstanding, basic and diluted 5,843,203 2,558,419 5,701,855 2,558,419 Net loss per share, basic and diluted $ (1.22 ) $ (0.56 ) $ (3.02 ) $ (1.16 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 PROTARA THERAPEUTICS, INC. STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (unaudited) Series 1 Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Total Stockholders’ Equity Shares Amount Shares Amount Capital Deficit (Deficit) Balance at January 1, 2020 - $ - 2,627,533 $ 2,628 $ 10,651,073 $ (12,781,660 ) $ (2,127,959 ) Issuance of Series 1 Convertible Preferred Stock, net of offering costs 3,879 4 - - 25,318,702 - 25,318,706 Issuance of Common Stock in ArTara Private Placement, net of offering costs - - 284,875 285 1,867,295 - 1,867,580 Issuance of Common Stock in Proteon Private Placement, net of offering costs - - 1,896,888 1,897 12,411,440 - 12,413,337 Reverse business combination - - 1,033,907 1,033 34,531,594 - 34,532,627 Stock-based compensation - stock options - - - - 368,135 - 368,135 Stock-based compensation - restricted stock units - - - - 2,429,672 - 2,429,672 Net loss - - - - - (10,060,257 ) (10,060,257 ) Balance at March 31, 2020 3,879 $ 4 5,843,203 $ 5,843 $ 87,577,911 $ (22,841,917 ) $ 64,741,841 Stock-based compensation - stock options - - - - 514,054 - 514,054 Stock-based compensation - restricted stock units - - - - 1,314,668 - 1,314,668 Net loss - - - - - (7,140,030 ) (7,140,030 ) Balance at June 30, 2020 3,879 $ 4 5,843,203 $ 5,843 $ 89,406,633 $ (29,981,947 ) $ 59,430,533 Balance at January 1, 2019 - $ - 2,558,419 $ 2,558 $ 9,727,124 $ (4,952,443 ) $ 4,777,239 Stock-based compensation - stock options - - - - 54,382 - 54,382 Stock-based compensation - restricted stock - - - - 22,500 - 22,500 Net loss - - - - - (1,528,056 ) (1,528,056 ) Balance at March 31, 2019 - $ - 2,558,419 $ 2,558 $ 9,804,006 $ (6,480,499 ) $ 3,326,065 Stock-based compensation - stock options - - - - 79,962 - 79,962 Stock-based compensation - restricted stock - - - - 22,500 - 22,500 Net loss - - - - - (1,428,675 ) (1,428,675 ) Balance at June 30, 2019 - $ - 2,558,419 $ 2,558 $ 9,906,468 $ (7,909,174 ) $ 1,999,852 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 PROTARA THERAPEUTICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the Six Months Ended June 30, 2020 2019 Cash flows from operating activities: Net loss $ (17,200,287 ) $ (2,956,731 ) Adjustments to reconcile net loss to Net cash used in operating activities: Stock based compensation 4,626,529 179,344 Amortization of operating lease right-of-use asset 39,492 - Depreciation 44,291 - Changes in operating assets and liabilities: Prepaid expenses and other current assets 657,341 (25,681 ) Accounts payable 199,553 (79,248 ) Accrued expenses (1,230,608 ) 172,569 Right-of-use liability (15,401 ) - Net cash used in operating activities (12,879,090 ) (2,709,747 ) Cash flows from investing activities: Cash and restricted cash acquired in connection with the reverse merger with ArTara Therapeutics, Inc. 3,718,742 - Purchase of property and equipment (241,195 ) (103,738 ) Net cash provided by/(used in) investing activities 3,477,547 (103,738 ) Cash flows from financing activities: Proceeds from - ArTara Private Placement, net of offering costs 1,867,580 - Proceeds from - Proteon Private Placement, net of offering costs 12,413,337 - Proceeds from - Series 1 Convertible Preferred Stock, net of offering costs 25,318,706 - Repayments under short-term debt (741,587 ) - Net cash provided by financing activities 38,858,036 - Net increase/(decrease) in cash and cash equivalents and restricted cash 29,456,493 (2,813,485 ) Cash and cash equivalents and restricted cash - beginning of year 564,124 5,549,952 Cash and cash equivalents and restricted cash - end of year $ 30,020,617 $ 2,736,467 Supplemental cash flow information Cash paid for: Interest $ 15,059 $ - Income Taxes $ - $ - Non-cash investing and financing activities: Deferred offering costs recognized that were previously recorded in accrued expenses $ 121,712 $ - Purchase of insurance agreement with notes payable $ 1,668,570 $ - Common stock issued in connection with the reverse merger with ArTara Therapeutics, Inc. $ 34,532,627 $ - The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 1 – BUSINESS, LIQUIDITY AND CAPITAL RESOURCES Overview Protara Therapeutics, Inc. and its consolidated subsidiaries (“Protara” or the “Company”) is focused on identifying and advancing transformative therapies for people with rare and specialty diseases. Protara’s portfolio includes its lead program, TARA-002, an investigational cell based therapy being developed for the treatment of lymphatic malformations (LMs). In addition to LMs, the Company is also evaluating the potential of TARA-002 in oncologic indications. The second program in the portfolio is Intravenous (IV) Choline Chloride, an investigational phospholipid substrate replacement therapy initially in development for patients receiving parenteral nutrition (PN) who have intestinal failure associated liver disease (IFALD). On January 9, 2020, privately-held ArTara Subsidiary, Inc. (“Private ArTara”) and Protara Therapeutics, Inc. (formerly ArTara Therapeutics, Inc., formerly Proteon Therapeutics, Inc.) completed the merger and reorganization (the “Merger”), in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated September 23, 2019, (the “Merger Agreement”) by and among Protara Therapeutics, Inc., Private ArTara and REM 1 Acquisition, Inc., a wholly owned subsidiary of Protara Therapeutics, Inc. Thereupon, Merger Sub merged with and into Private ArTara, with Private ArTara surviving as a wholly owned subsidiary of Protara Therapeutics, Inc. The Merger was structured as a reverse merger and Private ArTara was determined to be the accounting acquirer based on the terms of the Merger and other factors, and the post-merger company retained the name ArTara Therapeutics, Inc., which on May 11, 2020 was changed to Protara Therapeutics, Inc. On January 9, 2020, in connection with, and prior to the completion of, the Merger, Protara Therapeutics, Inc. effected a 1-for-40 reverse stock split of its common stock, or the Reverse Stock Split, Private ArTara changed its name from “ArTara Therapeutics, Inc.” to “ArTara Subsidiary, Inc.”, and ArTara Therapeutics, Inc. changed its name from “Proteon Therapeutics, Inc.” to “ArTara Therapeutics, Inc.” All share and per share amounts presented in this quarterly report on Form 10-Q have been adjusted to reflect the Reverse Stock Split and the Exchange Ratio. In addition, immediately following the closing of the Private Placements (defined below), all of the outstanding shares of Protara Therapeutics, Inc.’s Series A Preferred Stock were converted into shares of Protara Therapeutics, Inc.’s Common Stock. Shares of the Company’s Common Stock commenced trading on The Nasdaq Capital Market under the new name and ticker symbol “TARA” as of market open on January 10, 2020. See Note 3 for the full discussion regarding the Merger, Exchange Ratio and recapitalization. Liquidity, Capital Resources and Management Plans As of June 30, 2020 and December 31, 2019, the Company’s cash and cash equivalents on hand was $29,970,617 and $564,124, respectively. The Company has not generated revenues since its inception and has incurred net losses of $17,200,287 and $2,956,731 for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, the Company had working capital of $29,402,629 and stockholder’s equity of $59,430,533. During the six months ended June 30, 2020, cash flows used in operating activities were $12,879,090, consisting primarily of a net loss of $17,200,287, which includes non-cash stock-based compensation charges of $4,626,529. Since inception, the Company has met its liquidity requirements principally through the sale of its Common Stock and Series 1 Convertible Preferred Stock in private placements. In connection with the Merger, the Company consummated the Private Placements, raising gross proceeds of $42.5 million and proceeds, net of offering costs, of $39.6 million. The Company is in the business of developing biopharmaceuticals and has no current or near term revenues. The Company has incurred substantial clinical and other costs in its drug development efforts. The Company will need to raise additional capital in order to fully realize management’s plans. The Company believes that its current financial resources, as of the date of the issuance of these consolidated financial statements, are sufficient to satisfy the Company’s estimated liquidity needs for at least twelve months from the date of issuance of these unaudited consolidated financial statements. 5 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and Article 8 Section 3 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. All adjustments (consisting of normal accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2019 and related notes thereto included as Exhibit 99-1, within Form 8-K/A filed on March 20, 2020 with the United States Securities and Exchange Commission (“SEC”). Principles of Consolidation The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and also that affect the amount of expenses reported for each period. Actual results could differ from those which result from using such estimates. Management also utilizes various other estimates, including but not limited to income taxes, the valuation of deferred tax assets, determining the fair value of business combination considerations, determining the fair value and evaluation for impairment of goodwill and intangibles, determining the fair value of the Company’s Common Stock, and the valuation of securities and assumptions underlying stock-based compensation. The results of any changes in accounting estimates are reflected in the financial statements of the period in which the change becomes evident. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary. Cash and cash equivalents The Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents. Cash and cash equivalents are held in depository and money market accounts and are reported at fair value. Restricted Cash Restricted cash as of June 30, 2020 and December 31, 2019 was $50,000 and $0, respectively. As of June 30, 2020, restricted cash consists of a cash deposit of $50,000 to collateralize a letter of credit obligation. 6 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Property and Equipment Property and equipment is recorded at cost. Major property additions, replacements, and betterments are capitalized, while maintenance and repairs that do not extend the useful lives of an asset or add new functionality are expensed as incurred. Property and equipment not placed into service is not depreciated until such time that it is placed into service. Depreciation is recorded using the straight-line method over the respective estimated useful lives of the Company’s assets. Goodwill Goodwill represents the excess of purchase price over the fair value of identifiable net assets of companies acquired. Goodwill and other intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. An entity has the option to first assess qualitative factors to determine whether events or circumstances lead to a conclusion that is more likely than not that the fair value of a reporting unit is greater than its carrying amount. If an entity determines that qualitative factors indicate that it is more likely than not that the fair value of the entity exceeds the carrying amount, the two step quantitative evaluation is not necessary. Under the two-step quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. In the event the estimated fair value of the Company is less than the carrying value, the Company would recognize a goodwill impairment equal to the difference between the carrying value and its fair value, not to exceed the carrying value of goodwill. On January 9, 2020, in connection with the Merger, the Company separately valued the assets and liabilities acquired, and then determined goodwill as the residual of the purchase price less identified net assets (See Note 3). 7 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Net Loss per Common Share Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding, plus the impact of common shares, if dilutive, resulting from the exercise of outstanding stock options. The following securities are excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive: For the Three and Six Months Ended June 30, 2020 2019 Stock options 518,292 207,194 Restricted stock units 477,070 - Conversion of Series 1 Convertible Preferred Stock 3,880,169 - Total potentially dilutive shares 4,875,531 207,194 Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consists principally of cash amounts on deposit with financial institutions. At times, the Company’s cash in banks is in excess of the Federal Deposit Insurance corporation (“FDIC”) insurance limit. The Company has not experienced any loss as a result of these deposits. Stock-Based Compensation The Company accounts for stock-based compensation in accordance with FASB Accounting Standards Codification, or ASC, Topic 718, “Compensation - Stock Compensation” (“ASC 718”). ASC 718 establishes accounting for stock-based awards exchanged for employee and consultant services. Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the equity grant). The fair value of the Company’s stock options are estimated using the Black Scholes option-pricing model with the following assumptions: fair value of the Company’s Common Stock, expected volatility, dividend rate, risk free interest rate and the expected life. The Company calculates the expected volatility using the historical volatility for a pool of peer companies over the most recent period equal to the expected term and evaluates the extent to which available information indicate that future volatility may differ from historical volatility. The expected dividend rate is zero as the Company does not expect to pay or declare any cash dividends on its Common Stock. The risk-free rates for the expected terms of the stock options are based on the U.S. Treasury yield curve in effect at the time of the grant. The Company has not experienced significant exercise activity on stock options. Due to the lack of historical information, the Company determined the expected term of its stock option awards issued using the simplified method. The simplified method assumes each vesting tranche of the award has a term equal to the midpoint between when the award vests and when the award expires. Restricted stock awards generally vest over the requisite service periods (vesting on a straight–line basis). The fair value of a stock award is equal to the fair market value of a share of the Company’s Common Stock on the grant date. The Company accounts for the forfeiture of equity awards as they occur. 8 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Value Measurements The carrying amounts of cash and cash equivalents, prepaid expenses, accounts payable and short-term debt approximate their fair values due to the short-term nature of these instruments. ASC Topic 820 “Fair Value Measurements and Disclosures” provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows: Ø Level 1 Quoted prices in active markets for identical assets or liabilities. Ø Level 2 Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly. Ø Level 3 Significant unobservable inputs that cannot be corroborated by market data. Research and Development Costs Research and development costs are expensed as incurred. These expenses include the costs of our proprietary research and development efforts, as well as costs incurred in connection with certain licensing arrangements. Before a compound receives regulatory approval, the Company records upfront and milestone payments made to third parties under licensing arrangements as expense. Upfront payments are recorded when incurred, and milestone payments are recorded when the specific milestone or progress has been achieved. Once a compound receives regulatory approval, the Company records any milestone payments in identifiable intangible assets, less accumulated amortization and, unless the asset is determined to have an indefinite life, the Company amortizes the payments on a straight-line basis over the remaining agreement term or the expected product life cycle, whichever is shorter. Research and development expenses were $2,469,720 and $986,716 for the three months ended June 30, 2020 and 2019, and $5,534,513 and $2,064,562 for the six months ended June 30, 2020 and 2019, respectively. Business Combinations For a business combination, the assets acquired and the liabilities assumed are recognized at the acquisition date, measured at their fair values as of that date. In a business combination achieved in stages, the identifiable assets and liabilities are recognized at their fair values. In a bargain purchase in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any non-controlling interest in the acquiree, that excess in fair value is recognized as a gain. Deferred tax liabilities and assets are recognized for the deferred tax consequences of differences between the tax bases and the recognized values of assets acquired and liabilities assumed in a business combination in accordance with ASC Topic 740-10 “Income Taxes”. See Note 3 for the Company’s accounting for the reverse merger. 9 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Pronouncements Adopted In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. The second step measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under ASU 2017-04, a company will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 will be applied prospectively and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. On January 1, 2020, the Company adopted this ASU. The adoption of this standard did not have a material effect on the Company’s financial position, results of operations, or cash flows. Subsequent Events The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were available to be issued. Other than as described in Note 6, 8 and 11, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements. 10 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 3 – REVERSE MERGER WITH PROTARA AND RECAPITALIZATION On January 9, 2020, in connection with, and prior to the completion of the Merger, Protara Therapeutics, Inc. effected a 1-for-40 reverse stock split of its common stock (the “Protara Reverse Stock Split”), which resulted in 557,631 pre-merger shares of Protara Therapeutics, Inc. outstanding. Under the terms of the Merger Agreement, Protara Therapeutics, Inc. issued shares of its common stock (“Common Stock”) to the Company’s stockholders, at an exchange ratio of 0.190756 (the “Exchange Ratio”) shares of Common Stock, after taking into account the Protara Reverse Stock Split, for each share of Private ArTara common stock outstanding immediately prior to the Merger. Protara Therapeutics, Inc. assumed all of the unvested Private ArTara restricted stock awards, which were exchanged for a number of shares of Common Stock equal to 0.190756 multiplied by the number of shares of Private ArTara common stock previously represented by such Private ArTara restricted stock awards and unvested to the same extent as such Private ArTara restricted stock awards and subject to the same restrictions as such Private ArTara restricted stock awards. The effect of the Exchange Ratio resulted in the shareholders of the Company being issued 2,627,533 shares of Protara Common Stock. Protara Therapeutics, Inc. assumed all of the outstanding and unexercised stock options of Private ArTara, with such stock options now representing the right to purchase a number of shares of Common Stock equal to 0.190756 multiplied by the number of shares of Private ArTara common stock previously represented by such Private ArTara stock options. As a result, 219,699 shares were assumed under Private ArTara’s 2017 Equity Incentive Plan. No additional awards will be made under the 2017 Equity Incentive Plan. On January 1, 2020, Protara Therapeutics, Inc. amended its Amended and Restated 2014 Equity Incentive Plan (the “2014 Equity Incentive Plan”) to increase the number of shares of stock available for issuance under the 2014 Equity Incentive Plan to 1,048,300 shares and made conforming changes and updates pursuant to Section 162(m) of the Code. Concurrently with the execution of the Merger Agreement, certain institutional investors (together, the “Investors”) entered into a subscription agreement (as amended on November 19, 2019, the “Subscription Agreement”) with Protara Therapeutics, Inc. and Private ArTara, pursuant to which (A) Protara Therapeutics, Inc. issued in a private placement immediately after the Merger (the “Proteon Private Placement”) (i) 3,879.356 of shares of Protara Therapeutics, Inc.’s Series 1 Convertible Non-Voting Preferred Stock at a purchase price of approximately $7,011.47 per share for gross proceeds of $27,199,988 and proceeds, net of issuance costs, of $25,318,706, (ii) 1,896,888 shares of Protara Therapeutics, Inc.’s Common Stock at a purchase price of approximately $7.01 per share for gross proceeds of $13,299,974 and proceeds, net of issuance costs, of $12,413,337 and (B) Private ArTara issued in a private placement immediately prior to the Merger (the “ArTara Private Placement”) 284,875 shares of Private ArTara common stock (post-Exchange Ratio basis) at a purchase price of approximately $7.01 per share (post-Exchange Ratio basis) (together with the Proteon Private Placement, the “Private Placements”) for gross proceeds of $1,999,999 and proceeds, net of issuance costs, of $1,867,580. The shares issued in the Proteon Private Placement were registered for resale on a registration statement on Form S-3 filed and declared effective by the U.S. Securities and Exchange Commission (the “SEC”) on January 30, 2020. Immediately following the closing of the Proteon Private Placement, 18,954 shares of Protara Therapeutics, Inc.’s Series A Convertible Preferred Stock outstanding were converted into 476,276 shares of Protara Therapeutics, Inc.’s Common Stock. These shares, combined with the 557,631 pre-merger shares of Protara Therapeutics, Inc. outstanding after the Protara Reverse Stock Split, resulted in an aggregate of 1,033,907 shares of Common Stock issued in connection with the Merger. Immediately after the consummation of the Merger and prior to the consummation of the Private Placement, the former stockholders and option holders of Private ArTara owned, or held rights to acquire, approximately 75.2% of the fully-diluted Common Stock of Protara, with Protara Therapeutics, Inc.’s stockholders and option holders immediately prior to the Merger owning approximately 24.8% of the fully-diluted Common Stock of Protara. 11 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 3 – REVERSE MERGER WITH PROTARA AND RECAPITALIZATION (Continued) Based on the terms of the Merger, the transaction was treated as a reverse merger of Protara Therapeutics, Inc. by Private ArTara. The Merger was accounted for using acquisition accounting under ASC Topic 805 “Business Combinations”. Under acquisition accounting, the assets and liabilities (including executory contracts, commitments and other obligations) of Protara Therapeutics, Inc. as of the effective time of the Merger were recorded at their respective fair values and added to those of Private ArTara. Any excess of purchase price consideration over the fair values of the identifiable net assets is recorded as goodwill. The following details the preliminary allocation of the purchase price consideration: Cash $ 3,668,742 Restricted Cash 50,000 Prepaid expenses and other current assets 1,739,270 Goodwill 29,367,213 Accrued Expenses (292,598 ) Total Purchase Price Consideration $ 34,532,627 The total fair value of the net assets of Protara Therapeutics Inc. was determined by the Company to be $34,532,627 based on the consideration transferred. The total consideration was based on the enterprise value of Protara Therapeutics Inc. as of January 9, 2020, based upon the number of common shares deemed outstanding, multiplied by the closing stock price on January 9, 2020. Of the amount of goodwill acquired in the reverse merger, no portion is deductible for tax purposes. The primary reasons for the reverse merger: the increased access to sources of capital and a broader range of investors to support the clinical development of the Company’s product candidates, the potential to provide current stockholders with greater liquidity by owning stock in a public company, the potential for a more cost-effective means to access capital and the registration of Protara Common Stock issued to Private ArTara’s stockholders. In addition, Protara assumed the existing 2014 Equity Incentive Plan (the “2014 Plan”), and all outstanding stock options thereunder. In addition, no additional shares may be issued under the 2017 Equity Incentive Plan (See Note 8). 12 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 3 – REVERSE MERGER WITH PROTARA AND RECAPITALIZATION (Continued) The following presents the unaudited pro forma combined financial information as if the reverse merger had occurred as of January 1, 2019. Since the merger was consummated on January 9, 2020, the results of the merger are fully incorporated into the condensed consolidated financial information for the three months ended June 30, 2020. For the Three Months Ended June 30, For the Six Months Ended June 30, 2019 2020 2019 Net loss $ (6,743,675 ) $ (16,975,287 ) $ (14,802,731 ) Pro forma loss per common share, basic and diluted $ (1.17 ) $ (2.91 ) $ (2.56 ) Pro forma weighted average number of common shares outstanding, basic and diluted 5,774,089 5,843,203 5,774,089 The pro forma combined results of operations are not necessarily indicative of the results of operations that actually would have occurred had the reverse merger been completed as of January 1, 2019, nor are they necessarily indicative of future consolidated results. 13 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 4 – ACCRUED EXPENSES Included in the Company’s accrued expenses within the consolidated financial statements are: As of June 30, 2020 December 31, 2019 Legal fees $ 199,884 $ 1,572,554 Research and development 534,751 1,050,500 Bonus 541,325 - Other 299,108 11,736 Total $ 1,575,068 $ 2,634,790 NOTE 5 – SHORT-TERM DEBT Financing Agreement On February 19, 2020, the Company entered into a nine month financing agreement with AFCO Credit Corporation for its directors and officers (“D&O”) liability insurance in the amount of $2,224,760. The Company made a down payment of $556,190, leaving a principal balance of $1,668,570. The financing bears interest at a rate of 4.25% per annum, and will be repaid in monthly installments of $189,161, which includes both principal and interest. As of June 30, 2020 the balance under this debt was $926,983. NOTE 6 – COMMITMENTS AND CONTINGENCIES Lease Agreements The Company has entered into operating leases for office and laboratory space. On January 1, 2019 (“Effective Date”), the Company adopted ASC Topic 842, Leases (“ASC 842”), which increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as lease assets and lease liabilities. The new guidance requires the recognition of the right-of-use (“ROU”) assets and related operating lease liabilities on the balance sheet. The Company adopted the new guidance using the modified retrospective approach on January 1, 2019. The adoption of ASC 842 on January 1, 2019 did not result in the recognition of ROU assets as the Company did not have any leases at that time with a term of twelve months or more. However, on January 9, 2020, subsequent to the reverse merger and private placements, it became reasonably certain that the Company would maintain its quarter-to-quarter lease with its contract development and manufacturing organization for its manufacturing space for a term of approximately eight years, therefore resulting in the recognition of an ROU asset and related operating lease liability. For contracts entered into on or after the Effective Date, at the inception of a contract the Company will assess whether the contract is, or contains, a lease. The Company’s assessment is based on: (i) whether the contract involves the use of a distinct identified asset, (ii) whether the Company obtained the right to substantially all the economic benefit from the use of the asset throughout the period, and (iii) whether the Company has the right to direct the use of the asset. Leases entered into prior to January 1, 2019, which were accounted for under ASC 840, were not reassessed for classification. 14 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 6 – COMMITMENTS AND CONTINGENCIES (Continued) Lease Agreements (Continued) For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments. The Company generally uses its incremental borrowing rate as the discount rate for leases, unless an interest rate is implicitly stated in the lease. The present value of the lease payments is calculated using the incremental borrowing rate for operating leases, which was determined using a rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The lease term for the Company’s lease includes the noncancellable period of the lease plus any additional periods covered by either a Company option to extend the lease that the Company is reasonably certain to exercise, or an option to extend the lease controlled by the lessor. ROU assets, once recorded, are reviewed for impairment. Lease expense for operating leases consists of the lease payments plus any initial direct costs and is recognized on a straight-line basis over the lease term. Balance sheet information related to our leases is presented below: Balance Sheet Location June 30, 2020 January 9, 2020 December 31, 2019 Operating leases: Right-of-use assets Right-of-use assets $ 384,081 $ 403,161 $ - Right-of-use liability, current Right-of-use liability, current 29,287 9,195 - Right-of-use lease liability, long-term Right-of-use lease liability, long-term 378,885 393,966 - On Mar ch 1, 2020, the Company entered into new month-to-month lease agreements for three additional office spaces at monthly rents of $4,890, $1,270 and $7,200. On June 30, 2020, the Company terminated the lease agreements for these office spaces and entered into a new three-month agreement for a smaller office space at a monthly rent of $810. The following provides details of the Company’s lease expense: For the Three Months Ended June 30, 2020 For the Six Months Ended June 30, 2020 Lease cost Operating lease cost $ 19,746 $ 39,492 Short-term lease cost 89,279 148,539 Total $ 109,025 $ 188,031 15 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 6 – COMMITMENTS AND CONTINGENCIES (Continued) Lease Agreements (Continued) Other information related to leases is presented below: As of June 30, 2020 Other information Weighted-average discount rate – operating leases 12.00 % Weighted-average remaining lease term – operating lease (in months) 93 The Company’s future minimum lease payments consists solely of its quarter-to-quarter obligation for its manufacturing space. On January 9, 2020, subsequent to the reverse merger and private placements, it became reasonably certain that the Company would maintain its quarter-to-quarter lease for its manufacturing space for a term of approximately eight years. As of June 30, 2020, the expected annual minimum lease payments of our operating lease liability was as follows: For Years Ending December 31, Operating lease 2020 (excluding the six months ended June 30, 2020) $ 38,346 2021 77,460 2022 79,008 2023 80,586 2024 82,200 Thereafter 278,613 Total future minimum lease payments, undiscounted 636,213 Less: Imputed interest 228,041 Present value of future minimum lease payments $ 408,172 Employment Agreements Executive Employment Agreements In connection with the consummation of the Merger, Jesse Shefferman, the Company’s Chief Executive Officer, had his base salary increased from $365,000 to $510,000 and Jacqueline Zummo, the Company’s Head of Operations and Medical Affairs, had her base salary increased from $305,000 to $325,000. The Company also entered into an employment agreement with Blaine Davis to become the Company’s Chief Financial Officer on January 31, 2020, effective as of February 11, 2020, for a base salary of $385,000, and with Julio Casoy to become the Company’s Chief Medical Officer, on February 6, 2020, for a base salary of $400,000 (See Note 11). During the six months ended June 30, 2020, Mr. Shefferman, Dr. Zummo and Dr. Casoy received bonus payments of $259,688, $95,313 and $115,500, respectively, which were included in research and development expenses of $210,813 and in general and administrative expenses of $259,688, in such period. 16 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 6 – COMMITMENTS AND CONTINGENCIES (Continued) Employment Agreements (Continued) Temporary Employment Agreement On December 6, 2018, the Company entered into a temporary employment agreement (the “Temporary Employment Agreement”) with an individual who assisted with certain corporate development activities. Pursuant to the Temporary Employment Agreement, the individual was entitled to receive an annual base salary of $90,000. In addition, the individual would be entitled to a performance-based success fee which would be adjusted based on amounts of funding achieved and timing of when such funding was received. On January 9, 2020, the Company’s capital raise triggered a performance-based compensation obligation and accordingly this individual was paid $462,500, which was included in general and administrative expenses within the Company’s unaudited condensed consolidated statements of operations for the six months ended June 30, 2020. Product License and Clinical Services Agreements Alan L. Buchman and Choline License Agreement On September 27, 2017, the Company entered into a license agreement (the “Choline License Agreement”) with Alan L. Buchman (“Dr. Buchman”). Pursuant to the Choline License Agreement, the Company received from Dr. Buchman the license rights in and to the “Licensed Orphan Designations”, the “Licensed IND”, “Existing Study Data” and the “Licensed Know-How” for one or more of the licensed indications. In consideration for the rights and licenses granted, Dr. Buchman received a payment of $50,000 on October 2, 2017, and license payments of $50,000 and $50,000 on December 12, 2018 and January 8, 2019, respectively, upon the Company meeting the criteria for certain meetings to be held with the Federal Drug Administration (the “FDA”). Pursuant to the Choline License Agreement, effective October 2017, the Company incurred a fixed obligation to Dr. Buchman of $400,000 (the “Choline License Fee”). Upon the Company receiving $5,000,000 in cumulative funding (as defined), Dr. Buchman would be entitled to receive payment of the Choline License Fee as a lump sum if the funds are received by April 15, 2019 and the Choline License Fee shall be increased to a one-time payment of $600,000 if the funds are received by October 15, 2019. On October 2, 2019, the Company made a payment of $50,000 to Dr. Buchman. On January 22, 2020, in connection with the closing of the Merger and concurrent financing, Dr. Buchman was paid $550,000 which was included in accrued expenses as of December 31, 2019. During the three months ended June 30, 2020 and 2019, the Company recorded Research and Development expense of $0 and $200,000, respectively, and during the six months ended June 30, 2020 and 2019, the Company recorded Research and Development expense of $0 and $200,000, respectively, for expenditures to Dr. Buchman in connection with obligations under the Choline License Agreement. 17 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 6 – COMMITMENTS AND CONTINGENCIES (Continued) Product License and Clinical Services Agreements (Continued) The Feinstein Institute for Medical Research On December 22, 2017, the Company entered into an agreement (the “Feinstein Agreement”) with The Feinstein Institute for Medical Research (the “Feinstein Institute”), a not-for-profit corporation with 50 research labs and 2,500 clinical research studies. Pursuant to the Feinstein Agreement, the Company acquired an exclusive license relating to treatment of fatty liver diseases in humans for which Choline may be an effective therapeutic. In consideration for the rights and license granted, the Feinstein Institute would receive a royalty of one percent (1%) of the first one hundred million dollars ($100,000,000) of net sales of IV Choline Chloride and a royalty of one and one-half percent (1.5%) of all net sales thereafter. In addition, the Company would pay the Feinstein Institute twelve and one-half percent (12.5%) of net proceeds resulting from agreements entered within 2 years from the Effective Date, and seven and one-half percent (7.5%) of net proceeds resulting from agreements entered into thereafter. Pursuant to the Feinstein Agreement additional payments would be due to the Feinstein Institute for license maintenance payments and for meeting milestone events. On January 9, 2020, the Company’s raising of over $5,000,000 triggered a financing milestone obligation and accordingly the Feinstein Institute was paid $100,000. Pursuant to the Feinstein Agreement, upon the achievement of certain future new drug application milestones, the Company would be obligated to remit an aggregate of $275,000. During the three months ended June 30, 2020 and 2019, the Company recorded Research and Development expense of $0 and $0, respectively, and during the six months ended June 30, 2020 and 2019, the Company recorded Research and Development expense of $100,000 and $0, respectively, in connection with the Feinstein Agreement. The University of Iowa On November 28, 2018, the Company entered into a sponsored research and license agreement (the “Iowa Agreement”) with the University of Iowa. Pursuant to the Iowa Agreement, the University of Iowa, which is engaged in clinical research to improve the diagnosis and treatment of lymphangioma using a pharmaceutical product (Ok-432), would assist the Company in collecting case reports, forms, source data, and safety data available to the University of Iowa in support of the development of the Company’s proprietary Streptococcus Pyogenes investigational product, TARA-002. During the term of the services, the Company would pay the University of Iowa thirty thousand dollars ($30,000) per year to fund the project, plus additional amounts upon the realization of certain milestones. More specifically, upon forty-five (45) days of an approval of the TARA-002 by the FDA, the Company would pay up to $1,750,000 to the University of Iowa for meeting their milestones. Furthermore, the Company would pay the University of Iowa royalties of up to 1.75% for net sales ranging from $0 - $25,000,000, 2.25% for net sales ranging from $25,000,000+ to $50,000,000, and 2.50% for net sales of $50,000,000+. Pursuant to the Iowa Agreement, the University of Iowa would be entitled to additional payments for annual net sales payments as per the following milestones. For annual net sales of product up to $25,000,000; $62,500; for annual net sales of product of up to $50,000,000; $62,500; and for annual net sales of product of up to $100,000,000; $125,000. During the three months ended June 30, 2020 and 2019, the Company recorded Research and Development expense of $7,500 and $7,500, respectively, and during the six months ended June 30, 2020 and 2019, the Company recorded Research and Development expense of $15,000 and $15,000, respectively, in connection with the Iowa Agreement. 18 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 6 – COMMITMENTS AND CONTINGENCIES (Continued) Product License and Clinical Services Agreements (Continued) Chugai Pharmaceutical Co., LTD On June 17, 2019, the Company entered into an agreement (the “Chugai Pharmaceutical Agreement”) with Chugai Pharmaceutical Co., LTD (“Chugai”), a drug manufacturing firm with offices and operations in Japan. Pursuant to the Chugai Pharmaceutical Agreement, Chugai would help the Company in its goals to develop and commercialize a therapeutic product (the “New Product”) which is comparable to the Chugai existing therapeutic product (the “Existing Product”). In addition, the Company would be entitled to the use of Chugai materials and technical support as necessary. On July 14, 2020, the Company and Chugai entered into an amendment (the “Chugai Amendment”) to the Chugai Pharmaceutical Agreement. The Chugai Amendment is effective as of June 30, 2020. The Chugai Amendment extended the date through which Chugai will exclusively provide the Existing Product and materials to the Company from June 30, 2020 to June 30, 2021, extended the date through which Chugai will not provide materials or technical support to any third party for the purpose of development and commercialization in a given area from the fifth anniversary to the eleventh anniversary of the original effective date and provides that, in addition to the designated fee provided upon the initial indication approval in the Chugai Pharmaceutical Agreement, the Company will pay Chugai a designated fee for each additional indication approval. The Company is obligated to Chugai for certain payments upon the completion of agreed upon milestones. As of December 31, 2019, Chugai fulfilled a performance obligation upon which the Company recorded an obligation of $500,000, which the Company paid on July 27, 2020. During the three months ended June 30, 2020 and 2019, the Company recorded Research and Development expense of $0 and $0, respectively, and during the six months ended June 30, 2020 and 2019, the Company recorded Research and Development expense of $0 and $0, respectively, in connection with the Chugai Agreement, as amended. Johns Hopkins University In February 2002, Proteon entered into an agreement to license certain intellectual property in connection with vonapanitase with Johns Hopkins University. The agreement calls for payments to be made by the Company upon the commencement of vonapanitase related product sales, in the form of a royalty of 2.5% on net sales of the product. As of June 30, 2020 the Company has not commenced vonapanitase product sales and therefore has recognized no royalties on product sales. 19 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 6 – COMMITMENTS AND CONTINGENCIES (Continued) Litigation From time to time, Protara may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities. Between November 15 and December 23, 2019, four lawsuits were filed in federal court against Proteon, ArTara, Merger Sub and the individual members of the Proteon Board (captioned Patrick Plumley v. Proteon Therapeutics, Inc., et al., Case No. 1:19-cv-02143-UNA (D. Del. filed 11/15/19)); Jeffrey Teow v. Proteon Therapeutics, Inc., et al., Case No. 1:19-cv-06745 (E.D.N.Y., filed 11/30/19); Neil Lanteigne v. Proteon Therapeutics, et al., Case No. 1:19-cv-12436 (D. Mass., filed 12/03/19); Stephen Wagner v. Proteon Therapeutics, Inc., et al., Case No. 1:19-cv-02343 (D. Del., filed 12/23/19). The Plumley complaint was brought as a purported class action lawsuit. All four lawsuits alleged that the definitive proxy statement in the preliminary registration statement on Form S-4 filed by Proteon on November 7, 2019 with the SEC in connection with the proposed Merger (the “Proxy Statement”) omitted material information with respect to the transactions contemplated by the Merger Agreement, rendering it false and misleading in violation of Sections 14(a) (and Rule 14a-9 promulgated thereunder) and 20(a) of the Exchange Act. The plaintiffs in each of the four lawsuits sought, among other things, injunctive relief, rescission, declaratory relief and unspecified monetary damages. On December 31, 2019, Proteon filed an amendment to the Proxy Statement on Form 8-K, which contained certain supplemental disclosures intended to moot the plaintiffs’ disclosure claims. On January 9, 2020, Proteon held a special meeting of its stockholders, at which the Company’s stockholders approved the Merger. On January 27, 2020, plaintiff in the Lanteigne action voluntarily dismissed his case. On February 3, 2020, plaintiff in the Plumley action voluntarily dismissed his case. On February 7, 2020, plaintiff in the Teow action voluntarily dismissed his case. On February 10, 2020, plaintiff in the Wagner action dismissed his case. Thereafter, in connection with the supplemental disclosures that were filed by the Company to moot plaintiffs’ claims in these actions, counsel for plaintiffs demanded an award of attorney’s fees, which the parties recently resolved. Other The Company is involved in various claims and legal actions arising in the ordinary course of business. Management is of the opinion that the ultimate outcome of these matters would not have a material adverse impact on the financial position of the Company or the results of its operations. In the normal course of business, the Company enters into contracts in which it makes representations and warranties regarding the performance of its services and that its services will not infringe on third party intellectual rights. There have been no significant events related to such representations and warranties in which the Company believes the outcome could result in losses or penalties in the future. 20 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 7 – STOCKHOLDERS’ EQUITY Authorized Stock As of June 30, 2020 and December 31, 2019, the Company has 100,000,000 shares of Common Stock authorized for issuance, $0.001 par value per share, of which 5,843,203 and 2,627,533 shares were issued and outstanding, respectively. As of June 30, 2020 and December 31, 2019, the Company has 10,000,000 shares of preferred stock authorized for issuance, $0.001 par value per share of which 3,880 shares of Series 1 Convertible Preferred Stock are authorized for issuance, $0.001 par value per share, and 3,879 and 0 shares were issued and outstanding, respectively. The holders of the Company’s Common Stock are entitled to one vote per share. Each share of Series 1 Convertible Preferred Stock is convertible into 1,000 shares of Common Stock, at a conversion price initially equal to approximately $7.01 per common share, subject to adjustment for any stock splits, stock dividends and similar events, at any time at the option of the holder, provided that any conversion of Series 1 Convertible Preferred Stock by a holder into shares of Common Stock would be prohibited if, as a result of such conversion, the holder, together with its affiliates and any other person or entity whose beneficial ownership of the Common Stock would be aggregated with such holder’s for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, would beneficially own more than 9.99% of the total number of shares Common Stock issued and outstanding after giving effect to such conversion. Upon written notice to the Company, the holder may from time to time increase or decrease such limitation to any other percentage not in excess of 19.99% specified in such notice. Each share of Series 1 Convertible Preferred Stock is entitled to a preference of $10.00 per share upon liquidation of the Company, and thereafter will share ratably in any distributions or payments on an as-converted basis with the holders of Common Stock. In addition, upon the occurrence of certain transactions that involve the merger or consolidation of the Company, an exchange or tender offer, a sale of all or substantially all of the assets of the Company or a reclassification of its Common Stock, each share of Series 1 Convertible Preferred Stock will be convertible into the kind and amount of securities, cash and/or other property that the holder of a number of shares of Common Stock issuable upon conversion of one share of Series 1 Convertible Preferred Stock would receive in connection with such transaction. The Company’s Series 1 Convertible Preferred Stock are non-voting. The terms of the Series 1 Convertible Preferred Stock provide that, in the event of a fundamental transaction (as such term is described in the certificate of designation of preferences, rights and limitations of series 1 convertible non-voting preferred stock), each share of Series 1 Convertible Preferred Stock outstanding shall thereafter be convertible into the kind and amount of securities, cash and/or other property which a holder of the number of shares of Common Stock of the Company issuable upon conversion of one share of Series 1 Convertible Preferred Stock immediately prior to such fundamental transaction would have been entitled to receive pursuant to such fundamental transaction, provided that, if the value of the aggregate of such securities, cash and/or other property the which the holder of one share of Series 1 Convertible Preferred Stock would be entitled to upon conversion thereof would be less than the stated value, then each outstanding share of Series 1 Convertible Preferred Stock shall instead be convertible into such kind of securities, cash and/or other property with an aggregate value equal to the stated value. 21 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 8 – STOCK BASED COMPENSATION 2020 Inducement Plan On March 26, 2020, the Compensation Committee of the Board of Directors (the “Compensation Committee”) approved the ArTara Therapeutics, Inc. Inducement Plan (the “2020 Inducement Plan”) in order to award nonstatutory stock options, restricted stock awards, restricted stock unit awards and other stock-based awards to persons not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to such persons entering into employment with the Company. The 2020 Inducement Plan provides for a total of 600,000 shares for the issuance of the Company’s Common Stock. The Compensation Committee also adopted a form of stock option grant notice and stock option agreement and forms of restricted stock unit grant notice and restricted stock unit agreement for use with the Inducement Plan. As of June 30, 2020, 560,550 shares remain available to be issued under the 2020 Inducement Plan. 2017 Equity Incentive Plan On August 10, 2017, Private ArTara, its Board of Directors of the Company (“Board”) and its shareholders approved the ArTara Therapeutics, Inc. 2017 Equity Incentive Plan (the “2017 Equity Incentive Plan”) to enable Private ArTara and its affiliates to recruit and retain highly qualified personnel and to incentivize personnel for productivity and growth. The 2017 Equity Incentive Plan provided for the grant of a total of 2,000,000 shares for the issuance of stock options, stock appreciation rights, restricted stock and restricted stock units to among others, members of the board of directors, employees, consultants and service providers to the Company and its affiliates. As of January 9, 2020, in connection with the reverse merger, no additional awards will be made under the 2017 Equity Incentive Plan. 2014 Equity Incentive Plan On October 3, 2014, the stockholders approved the 2014 Equity Incentive Plan (the “2014 Plan”). On June 20, 2017, the Company’s Board of Directors amended the 2014 Plan (the “Amended 2014 Plan”). On July 31, 2017, the stockholders approved this amendment. The Amended 2014 Plan provides for the grant of incentive and non-statutory stock options, stock appreciation rights, restricted stock and stock unit awards, performance units, stock grants and qualified performance-based awards. The 2014 Plan provides that the number of shares reserved and available for issuance under the 2014 Plan will automatically increase each January 1, beginning January 1, 2015 by four percent of the outstanding shares of Common Stock on the immediately preceding December 31 or such lesser number of shares as determined by the Company’s Board of Directors prior to each such January 1st. The Amended 2014 Plan clarifies that the number of shares for purposes of calculating the evergreen feature includes the number of shares of Common Stock issuable upon conversion of any security that the Company may issue that is convertible into or exchangeable for Common Stock, including, but not limited to, preferred stock or warrants. Pursuant to a special meeting of the Proteon stockholders held on January 9, 2020, the number of shares available for issuance under the Amended 2014 Plan increased by 900,002 shares from 148,298 shares to 1,048,300 shares on January 1, 2020. As of June 30, 2020, 317,114 shares remain available to be issued under the 2014 Equity Incentive Plan. Terms of the stock awards, including vesting requirements, are determined by the Board of Directors, subject to the provisions of the Plans. Certain awards provide for accelerated vesting if there is a change in control as defined in the Plans. 22 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 8 – STOCK BASED COMPENSATION (Continued) 2014 Employee Stock Purchase Plan On October 3, 2014, the stockholders approved the 2014 Employee Stock Purchase Plan (the “2014 ESPP”). The 2014 ESPP initially authorized the issuance of up to 3,513 shares of Common Stock. The number of shares increases each January 1, commencing on January 1, 2015 and ending on (and including) January 1, 2024, by an amount equal to the lesser of one percent of the outstanding shares as of the end of the immediately preceding fiscal year, 7,025 shares or any lower amount determined by the Company’s Board of Directors prior to each such January 1st. As of June 30, 2020, the authorized number of shares under the 2014 ESPP is 18,012 and the number of shares available for issuance is 13,340. During the six months ended June 30, 2020 and 2019, no shares were issued under the 2014 ESPP. Restricted Stock Units Awards to Directors The following RSUs were granted pursuant to the Company’s 2014 Equity Incentive Plan. Settlement for the RSUs is deferred until the earliest to occur of (i) the director’s termination of service, (ii) death, (iii) disability and (iv) a change in control of the Company. In the event of a change in control of the Company, the RSUs will vest in full. On January 10, 2020, the Board of Directors granted an aggregate of 254,000 RSUs to directors of the Company. These RSUs vest 12.5% on the date of grant and in twenty-one equal monthly installments thereafter. The grant date fair value of these RSUs was $7,620,000. On January 10, 2020, the Board of Directors granted an aggregate of 62,000 RSUs to directors of the Company. These RSUs vest 50% on the one year anniversary of the grant date, and the remainder vest in 12 equal monthly installments thereafter. The grant date fair value of these RSUs was $1,860,000. Awards to Others On January 10, 2020, the Board of Directors granted an aggregate of 91,000 RSUs to officers of the Company. These RSUs vest in four equal installments beginning on the first year anniversary of the grant. The grant date fair value of these RSUs was $2,730,000. On January 10, 2020, the Board of Directors granted an aggregate of 14,825 RSUs to employees of the Company. These RSUs vest in four equal annual installments beginning on the first year anniversary of the grant. The grant date fair value of these RSUs was $444,750. On January 10, 2020, the Board of Directors granted 50,000 RSUs to the CEO of the Company. These RSUs vest in four equal annual installments beginning on the first year anniversary of the date of grant. The grant date fair value of these RSUs was $1,500,000. Following is a summary of restricted stock unit activities for the six months ended June 30, 2020: Restricted Stock Units Weighted Average Grant Date Fair Value Non-vested 1/1/2020 - $ - Granted 471,825 30.00 Vested (84,668 ) 30.00 Non-vested 6/30/2020 387,157 $ 30.00 The fair value of restricted stock units is amortized on a straight line basis over the requisite service periods of the respective awards. As of June 30, 2020 the unamortized value of RSUs was $10,414,800. As of June 30, 2020, the weighted average remaining amortization period was 2.22 years. As of June 30, 2020 and 2019, 89,913 and 0 RSUs, respectively, have vested that have not yet been settled into shares of the Company’s Common Stock. 23 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 8 – STOCK BASED COMPENSATION (Continued) Stock Options On January 10, 2020, the Board of Directors approved the grant of two options under the 2014 Equity Incentive Plan for the purchase of an aggregate 222,500 shares of the Company’s Common Stock to Mr. Shefferman. The first option, granted on January 10, 2020, is for the purchase of 111,250 shares of the Company’s Common Stock and has an exercise price of $30 per share. This option expires ten years from the date of grant and vests 25% on the one year anniversary of the grant date and the remainder of the underlying shares vest in thirty-six equal monthly installments thereafter. The grant date fair value of this option was $2,662,135. The second option, which was granted on July 10, 2020, is for the purchase of 111,250 shares of the Company’s Common Stock. The option has an exercise price of $27.42 per share. This option will expire ten years from the date of grant and will vest 25% on the one year anniversary of the grant date and the remainder of the underlying shares vest in thirty-six equal monthly installments thereafter. On February 4, 2020, pursuant to the hiring of the Company’s CFO, the Board of Directors approved the grant of a stock option under the 2014 Equity Incentive Plan to purchase 94,000 shares of the Company’s Common Stock with an exercise price of $37.30 per share. This option will expire ten years from the date of grant and will vest 25% on the one year anniversary of the grant date and the remainder of the underlying shares vest in thirty-six equal monthly installments thereafter. Mr. Davis will be eligible for future equity awards under such plan on an annual basis. The grant date fair value of this option was $2,791,556. On February 26, 2020, the Compensation Committee of the Company pre-approved the grants of stock options under the Inducement Plan to new hires of the Company. On April 1, 2020, these employees were granted options to purchase an aggregate of 51,650 shares of the Company’s Common Stock with an exercise price of $24.25 per share. These options will expire ten years from the date of grant and will each vest 25% between March 9, 2021 and March 23, 2021 (depending on the specific grant) and the remainder of the underlying shares shall vest in thirty-six equal monthly installments thereafter. The grant date fair value of these options was $954,053. On April 27, 2020, the Compensation Committee of the Company approved the grant of stock options under the 2020 Inducement Plan to new hires of the Company. On May 1, 2020, these employees were granted options to purchase an aggregate of 4,100 shares of the Company’s Common Stock with an exercise price of $24.02 per share. These options expire ten years from the date of grant and vests 25% between April 20, 2021 and April 27, 2021 (depending on the specific grant) and the remainder of the underlying shares shall vest in thirty-six equal monthly installments thereafter. The grant date fair value of these options was $75,019. On May 19, 2020, the Compensation Committee of the Company approved the grant of a stock option under the 2020 Inducement Plan to a new hire of the Company. On June 1, 2020, this employee was granted an option to purchase 3,700 shares of the Company’s Common Stock with an exercise price of $51.12 per share. This option expires ten years from the date of grant and vests 25% on May 11, 2021 and the remainder of the underlying shares shall vest in thirty-six equal monthly installments thereafter. The grant date fair value of this option was $144,025. On June 9, 2020, the Company issued to directors of the Company stock options to purchase an aggregate of 54,000 shares of the Company’s common stock. These stock options has an exercise price of $35.00, expire 10 years from the date of grant, and vest monthly over 12 months. The grant date fair value of these options was $1,374,732. 24 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 8 – STOCK BASED COMPENSATION (Continued) Stock Options (Continued) The Company determined the fair value of stock options granted based upon the assumptions as provided below. For the Six Months Ended June 30, 2020 2019 Stock price $ 24.02 - $ 51.12 $ 8.65 Exercise price $ 24.02 - $ 51.12 $ 9.18 Dividend yield 0 % 0 % Expected volatility 95% - 101 % 97 % Risk-Free interest rate 0.40% - 1.69 % 2.37 % Expected life (in years) 5.27 - 6.08 6.02 Following is a summary of stock option activities for the six months ended June 30, 2020: Options Weighted Average Grant Date Fair Value Weighted Average Exercise Price Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value Outstanding 1/1/2020 219,592 $ 7.29 $ 9.18 9.72 $ - Granted 318,700 25.11 32.24 - - Forfeited (20,000 ) 18.47 24.25 - - Outstanding 6/30/2020 518,292 $ 17.57 $ 22.78 9.16 $ 4,604,778 Exercisable as of 6/30/2020 94,220 $ 6.75 $ 9.18 8.41 $ 1,897,591 The weighted average grant date fair value of the options granted during the six months ended June 30, 2019 was $6.71. The fair value of stock options is amortized on a straight line basis over the requisite service periods of the respective awards. As of June 30, 2020 the unamortized value of stock options was $7,751,851. As of June 30, 2020, the weighted average remaining amortization period was 2.92 years. 25 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 8 – STOCK BASED COMPENSATION (Continued) Summary of Stock Based Compensation Expense The following tables summarize total stock-based compensation costs recognized: For the Three Months Ended June 30, For the Six Months Ended June 30, 2020 2019 2020 2019 Restricted stock $ - $ 22,500 $ - $ 45,000 RSUs 1,314,668 - 3,744,340 - Stock options 514,054 79,962 882,189 134,344 Total $ 1,828,722 $ 102,462 $ 4,626,529 $ 179,344 Stock based compensation expense was reflected within the statements of operations as: For the Three Months Ended June 30, For the Six Months Ended June 30, 2020 2019 2020 2019 Research and development $ 201,872 $ 52,479 $ 410,637 $ 93,552 General and administrative 1,626,850 49,983 4,215,892 85,792 Total $ 1,828,722 $ 102,462 $ 4,626,529 $ 179,344 26 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 9 – EMPLOYEE BENEFIT PLAN The Company maintains a defined contribution benefit plan under section 401(k) of the Internal Revenue Code covering substantially all qualified employees of the Company (the “401(k) Plan”). Under the 401(k) Plan, the Company matches 100% up to a 4% contribution. The plan was implemented in June of 2020. For the three and six months ended June 30, 2020, the Company recorded expense of $7,956 under the 401(k) Plan. NOTE 10 – COVID-19 The ultimate impact of the current COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. The Company does not yet know the full extent of potential delays or impacts on its business, its research and development activities, healthcare systems or the global economy as a whole. However, the effects could have a material impact on the Company’s operations, liquidity and capital resources and the Company will continue to monitor the COVID-19 situation closely. In response to public health directives and orders, the Company has implemented work-from-home policies for its employees and temporarily modified its operations to comply with applicable social distancing recommendations. Similar health directives and orders are affecting third parties with whom the Company does business, including the third party that the Company has contracted with to conduct comparability studies for TARA-002. The effects of the orders and the Company’s related adjustments in its business is likely to negatively impact productivity, disrupt the Company’s business and delay its timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on the Company’s ability to conduct its business in the ordinary course. Severe and/or long-term disruptions in the Company’s operations will negatively impact its business, operating results and financial condition in other ways, as well. Specifically, the Company anticipates that the stress of COVID-19 on healthcare systems around the globe will negatively impact its ability to conduct clinical trials in the near term due primarily to the lack of resources at clinical trial sites and the resulting inability to enroll patients in the trials. The Company also anticipates that the global impact of COVID-19 will negatively impact its ability to conduct nonclinical studies due primarily to laboratory closures and limited availability of personnel. In addition, while the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, it has significantly disrupted global financial markets, and may limit the Company’s ability to access capital, which could in the future negatively affect its liquidity. A recession or market correction resulting from the spread of COVID-19 could materially affect the Company’s business and the value of its common stock. NOTE 11 – SUBSEQUENT EVENTS Issuance of Stock Options On June 30, 2020, the Compensation Committee of the Company approved the grant of stock options under the 2020 Inducement Plan to new hires of the Company. On July 1, 2020, these employees were granted options to purchase an aggregate of 25,700 shares of the Company’s Common Stock with an exercise price of $28.20 per share. These options expire ten years from the date of grant and vests 25% on June 29, 2021 and the remainder of the underlying shares shall vest in thirty-six equal monthly installments thereafter. Issuance of RSUs On July 1, 2020, the Compensation Committee of the Company granted 7,500 RSUs to a new hire of the Company under the 2014 Equity Incentive Plan. These RSUs will vest 25% on the one, two, three and four year anniversary of the date of grant. Settlement of RSUs On July 9, 2020, the Company issued 5,245 shares of common stock from the settlement of RSUs. 27 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE 11 – SUBSEQUENT EVENTS (Continued) Departure of Executive On July 23, 2020, effective July 31, 2020, the Company and Dr. Casoy entered into a Separation Agreement and Release (the “Separation Agreement”), whereupon Dr. Casoy will no longer be employed by the Company as Chief Medical Officer, effective August 3, 2020. Pursuant to the Separation Agreement, in consideration of a general release of all claims against the Company and certain representations, warranties, covenants and agreements, Dr. Casoy is entitled to receive (i) his base salary for a period of nine months paid in a lump sum, (ii) a one-time lump sum payment equal to nine months of his bonus at target, (iii) reimbursement of all business expenses for which he is entitled, (iv) reimbursement of COBRA premium costs for nine months, or until he has secured other employment, whichever comes first and (v) pro-rata vesting of his outstanding equity award given that he was not employed through the one-year anniversary of the applicable grant date of such outstanding equity award. Resignation of Director On July 20, 2020, Scott Braunstein, M.D. notified the Company of his resignation from the Company’s Board of Directors, effective immediately. In connection with Dr. Braunstein’s resignation, the compensation committee approved the accelerated vesting of all stock options issued to Dr. Braunstein prior to the Merger, and to extend the post-termination exercise period of vested options to 12 months from the date of resignation. Appointment of Director On July 23, 2020, the Company’s Board of Directors appointed Barry Flannelly, Pharm.D, MBA as a director to fill the vacancy created by Dr. Braunstein’s resignation, to serve in such capacity until the Company’s 2023 annual meeting of stockholders. On July 23, 2020, the Company issued to Dr. Flannelly a stock option to purchase 18,000 shares of the Company’s common stock. This stock option has an exercise price of $26.70 per share, expires 10 years from the date of grant, and will vest in equal monthly installments following the date of grant over a three year period. On July 23, 2020, the Company issued to Dr. Flannelly a stock option to purchase 8,250 shares of the Company’s common stock. This stock option has an exercise price of $26.70 per share, expires 10 years from the date of grant, and will vest in equal monthly installments following the date of grant over a one year period, and in any event will be fully vested on the date of the Company’s 2021 annual meeting of stockholders. 28 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 the unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods. Overview We are a New York City based clinical-stage biopharmaceutical company focused on identifying and advancing transformative therapies for people with rare and specialty diseases. We prioritize creativity, diverse perspectives, integrity and tenacity to expedite our goal of bringing life-changing therapies to people with limited treatment options. Our lead program, TARA-002 is an investigational cell based therapy currently being developed for the treatment of lymphatic malformations (LMs). In addition to LMs, the Company is also evaluating the potential of TARA-002 in oncologic 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. (Chugai Pharmaceutical)). We have engaged the U.S. Food and Drug Administration (FDA) to determine the requirements for a biologics license application (BLA) submission for the treatment of LMs, including agreement on requirements to demonstrate the comparability of the two products. Through this engagement with the FDA, we are evaluating whether OK-432’s more than 25-year safety database in LMs, as well as the efficacy and safety database from the clinical trials conducted in the US and led by the University of Iowa are sufficient for a BLA submission for TARA-002. Based on the guidance from the FDA, we may be required to conduct additional clinical trials as necessary. TARA-002 has been granted Rare Pediatric Disease designation (RPD) by the FDA for the LMs indication. Our second program, Intravenous (IV) Choline Chloride, is an investigational, Phase 3-ready, phospholipid substrate replacement therapy initially in development for patients receiving parenteral nutrition (PN) who have intestinal failure associated liver disease (IFALD). IV Choline Chloride has been granted Orphan Drug Designation (ODD) and Fast Track designation (FTD) by the FDA for this indication. Our third program, vonapanitase, is a recombinant human elastase. We are reviewing the research and preclinical and clinical data of vonapanitase and have not yet determined whether to pursue further development of this product candidate. We do not have any approved products and have not generated any revenue from product sales. The lead program, TARA-002, is in later stage development and has not yet been approved for use for treatment of LMs or any other indications. The Company does not expect to generate any significant revenues prior to 2022, if ever. To finance the Company’s current strategic plans, including the conduct of ongoing and future clinical trials and further research and development costs, the Company will need to raise additional capital. COVID-19 The ultimate impact of the current COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our research and development activities, healthcare systems or the global economy as a whole. However, the effects could have a material impact on our operations, liquidity and capital resources and we will continue to monitor the COVID-19 situation closely. In response to public health directives and orders, we have implemented work-from-home policies for our employees and temporarily modified our operations to comply with applicable social distancing recommendations. Similar health directives and orders are affecting third parties with whom we do business, including the third party that we have contracted with to conduct comparability studies for TARA-002. The effects of the orders and our related adjustments in our business is likely to negatively impact productivity, disrupt our business and delay our timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. Severe and/or long-term disruptions in our operations will negatively impact our business, operating results and financial condition in other ways, as well. Specifically, we anticipate that the stress of COVID-19 on healthcare systems around the globe will negatively impact our ability to conduct clinical trials in the near term due primarily to the lack of resources at clinical trial sites and the resulting inability to enroll patients in the trials. We also anticipate that the global impact of COVID-19 will negatively impact our ability to conduct nonclinical studies due primarily to laboratory closures and limited availability of personnel. In addition, while the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, it has significantly disrupted global financial markets, and may limit our ability to access capital, which could in the future negatively affect our liquidity. A recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. 29 Merger As further described in Note 3 of the financial statements included in Part I, Item I of this quarterly report on Form 10-Q, on January 9, 2020, privately-held ArTara Subsidiary, Inc. (“Private ArTara”) and Protara Therapeutics, Inc. (formerly ArTara Therapeutics, Inc., formerly Proteon Therapeutics, Inc.) completed the merger and reorganization (the “Merger”), in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated September 23, 2019, (the “Merger Agreement”) by and among Protara Therapeutics, Inc., Private ArTara and REM 1 Acquisition, Inc., a wholly owned subsidiary of Protara Therapeutics, Inc. (“Merger Sub”). Thereupon, Merger Sub merged with and into Private ArTara, with Private ArTara surviving as a wholly owned subsidiary of Protara Therapeutics, Inc. The Merger was structured as a reverse merger and Private ArTara was determined to be the accounting acquirer based on the terms of the Merger and other factors, and the post-merger company retained the name ArTara Therapeutics, Inc. which, on May 11, 2020, was changed to Protara Therapeutics, Inc. On January 9, 2020, in connection with, and prior to the completion of, the Merger, Protara Therapeutics, Inc. effected a 1-for-40 reverse stock split of its common stock, or the Reverse Stock Split, Private ArTara changed its name from “ArTara Therapeutics, Inc.” to “ArTara Subsidiary, Inc.”, and Protara Therapeutics, Inc. changed its name from “Proteon Therapeutics, Inc.” to “ArTara Therapeutics, Inc.” All share and per share amounts presented in this quarterly report on Form 10-Q have been adjusted to reflect the Reverse Stock Split. In addition, immediately following the closing of the Private Placements (described below), all of the outstanding shares of Protara Therapeutic, Inc.’s Series A Preferred Stock were converted into shares of Protara Therapeutics, Inc.’s Common Stock. Shares of our Common Stock commenced trading on The Nasdaq Capital Market under the new name and ticker symbol “TARA” as of market open on January 10, 2020. Financial Overview Research and Development Research and development expenses consist primarily of costs incurred for the development of TARA-002 and IV Choline Chloride, which include employee-related expenses, including salaries, benefits, travel and stock-based compensation expense, expenses incurred under agreements with clinical research organizations, or CROs, contract development and manufacturing organizations, or CDMOs, the cost of acquiring, developing and manufacturing clinical trial materials, 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 employee-related expenses, including salaries, benefits, travel and stock-based compensation expense, in executive and other administrative functions. Other general and administrative expenses also include professional fees for legal, patent review, consulting and accounting services as well as 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. Interest (Income) Expense, Net Interest (income) expense, net, consists of interest income earned on our cash, cash equivalents and restricted cash and interest expenditures related to our short-term debt. 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. On an ongoing basis, we evaluate estimates, which include estimates related to clinical trial accruals, stock-based compensation expense, and reported amounts of revenues and expenses during the reported period. 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. Our critical accounting policies are accounting for research and development expenses and stock-based compensation. It is important that the discussion of our operating results that follow be read in conjunction with these critical accounting policies which have been disclosed in the Annual Report of Private ArTara for the year ended December 31, 2019 as Exhibit 99.1 within the Form 8-K/A, as filed with the SEC on March 20, 2020. 30 Results of Operations Comparison of the Three Months Ended June 30, 2020 and 2019 The following table summarizes our results of operations for the three months ended June 30, 2020 and 2019: Three Months Ended June 30, Period-to-Period 2020 2019 Change Operating expenses: Research and development $ 2,469,720 $ 986,716 $ 1,483,004 General and administrative 4,796,155 441,959 4,354,196 Total operating expenses 7,265,875 1,428,675 5,837,200 Operating loss (7,265,875 ) (1,428,675 ) (5,837,200 ) Other income: Interest (income) expense, net (125,845 ) - (125,845 ) Total other (income) expense (125,845 ) - (125,845 ) Net Loss $ (7,140,030 ) $ (1,428,675 ) $ (5,711,355 ) Research and Development Expenses . During the three months ended June 30, 2020, our research and development expenses were $2.5 million which represented an increase of $1.5 million as compared to the three months ended June 30, 2019. This increase was primarily due to an increase of $0.7 million in consulting and studies related to TARA-002, an increase of $0.5 million related to the manufacturing and testing of TARA-002, an increase of $0.2 million in headcount cost due to the hiring of additional employees and an increase of $0.1 million in stock-based compensation. General and Administrative Expenses . During the three months ended June 30, 2020, our general and administrative expenses were $4.8 million which represented an increase of $4.4 million as compared to the three months ended June 30, 2019. The increase was primarily due to an increase of $1.6 million in stock-based compensation, an increase of $1.0 million in professional fees in conjunction with being a public company, an increase of $0.6 million in insurance, an increase of $0.5 million in headcount cost due to the hiring of additional employees and an increase of $0.3 million in recruiting fees. Interest (Income) Expense, Net . During the three months ended June 30, 2020, interest (income) expense was $0.1 million higher as compared to the three months ended June 30, 2019. The increase was primarily due to the Company earning interest on the funds received in the Private Placements (as defined below). Comparison of the Six Months Ended June 30, 2020 and 2019 The following table summarizes our results of operations for the six months ended June 30, 2020 and 2019: Six Months Ended June 30, Period-to-Period 2020 2019 Change Operating expenses: Research and development $ 5,534,513 $ 2,064,562 $ 3,469,951 General and administrative 11,890,987 892,169 10,998,818 Total operating expenses 17,425,500 2,956,731 14,468,769 Operating loss (17,425,500 ) (2,956,731 ) (14,468,769 ) Other income: Interest (income) expense, net (225,213 ) - (225,213 ) Total other (income) expense (225,213 ) - (225,213 ) Net Loss $ (17,200,287 ) $ (2,956,731 ) $ (14,243,556 ) Research and Development Expenses . During the six months ended June 30, 2020, our research and development expenses were $5.5 million which represented an increase of $3.5 million as compared to the six months ended June 30, 2019. This increase was primarily due to an increase of $1.3 million related to the manufacturing and testing of TARA-002, an increase of $1.0 million in consulting and studies related to TARA-002, an increase of $0.5 million in data management for TARA-002 an increase of $0.5 million in headcount cost due to bonuses earned upon the merger, and the hiring of additional employees and an increase of $0.3 million in stock-based compensation. General and Administrative Expenses . During the six months ended June 30, 2020, our general and administrative expenses were $11.9 million which represented an increase of $11.0 million as compared to the six months ended June 30, 2019. The increase was primarily due to an increase of $4.2 million in stock-based compensation, an increase of $2.3 million in professional fees in conjunction with being a public company, an increase of $0.6 million in professional fees directly related to the merger, an increase of $1.2 million in insurance, an increase of $0.9 million in recruiting fees and an increase of $1.0 million in headcount cost due to the hiring of additional employees. 31 Interest (Income) Expense, Net. During the six months ended June 30, 2020, interest (income) expense was $0.2 million higher as compared to the six months ended June 30, 2019. The increase was primarily due to the Company earning interest on the funds received in the Private Placements. Liquidity and Capital Resources Overview As of June 30, 2020 and December 31, 2019, our cash on hand was $29,970,617 and $564,124, respectively. We have not generated revenues since our inception and have incurred net losses of $17,200,287 and $2,956,731 for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, we had working capital of $29,402,629 and stockholder’s equity of $59,430,533. During the six months ended June 30, 2020, cash flows used in operating activities were $12,879,090, consisting primarily of a net loss of $17,200,287, which includes non-cash stock-based compensation charges of $4,626,529. Since inception, we have met our liquidity requirements principally through the sale of our equity in private placements. In connection with the Merger, we consummated the Private Placements, raising gross proceeds of $42.5 million and proceeds, net of offering costs, of $39.6 million. Concurrently with the execution of the Merger Agreement, certain institutional investors (together, the “Investors”) entered into a subscription agreement (as amended on November 19, 2019, the “Subscription Agreement”) with Protara Therapeutics, Inc. and Private ArTara, pursuant to which (A) Protara Therapeutics, Inc. issued, in a private placement immediately after the Merger (the “Proteon Private Placement”), (i) 3,879.356 of shares of Protara Therapeutics, Inc.’s Series 1 Convertible Non-Voting Preferred Stock at a purchase price of approximately $7,011.47 per share for gross proceeds of $27,199,988 and proceeds, net of issuance costs, of $25,318,706, (ii) 1,896,888 shares of Protara Therapeutics, Inc.’s Common Stock at a purchase price of approximately $7.01 per share for gross proceeds of $13,299,974 and proceeds, net of issuance costs, of $12,413,337 and (B) Private ArTara issued, in a private placement immediately prior to the Merger (the “ArTara Private Placement”), 284,875 shares of Private ArTara common stock (post-Exchange Ratio (as defined in the Merger Agreement) basis) at a purchase price of approximately $7.01 per share (post-Exchange Ratio basis) (together with the Proteon Private Placement, the “Private Placements”) for gross proceeds of $1,999,999 and proceeds, net of issuance costs, of $1,867,580. The shares issued in the Proteon Private Placement were registered for resale on a registration statement on Form S-3 filed and declared effective by the U.S. Securities and Exchange Commission (the “SEC”) on January 30, 2020. 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 these condensed consolidated financial statements, are sufficient to satisfy our estimated liquidity needs for at least twelve months from the issuance of these condensed consolidated financial statements. The Company currently has an effective shelf registration statement on Form S-3 (“2020 Shelf Registration Statement”) on file with the Securities and Exchange Commission (“SEC”), which expires in May 2023. The 2020 Shelf Registration Statement currently permits the offering, issuance and sale by the Company of up to an aggregate in offering price of $150.0 million of common stock, preferred stock, debt securities and warrants in one or more offerings and in any combination. No securities have been sold under the 2020 Shelf Registration Statement. As a result of economic conditions, general global economic uncertainty, political change, global pandemics, and other factors, we do not know whether additional capital will be available when needed, or that, if available, we will be able to obtain additional capital on reasonable terms. If we are unable to raise additional capital due to the volatile global financial markets, general economic uncertainty or other factors, we may need to curtail planned development activities. Specifically, the COVID-19 pandemic has significantly disrupted global financial markets, and may limit our ability to access capital, which could in the future negatively affect our liquidity. A recession or market correction resulting from the spread of COVID-19 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: Six Months Ended June 30, 2020 2019 Net cash used in operating activities $ (12,879,090 ) $ (2,709,747 ) Net cash provided by/(used in) investing activities 3,477,547 (103,738 ) Net cash provided by financing activities 38,858,036 - Net increase/(decrease) in cash and cash equivalents, and restricted cash $ 29,456,493 $ (2,813,485 ) 32 Comparison of the Six Months Ended June 30, 2020 and 2019 Net cash used in operating activities was $12.9 million for the six months ended June 30, 2020 compared to $2.7 million for the six months ended June 30, 2019. The increase of $10.2 million in cash used in operating activities was primarily driven by an increased net loss of $14.2 million and change in accrued expenses of $1.4 million, off-set by a change of $4.4 million of stock-based compensation and a change of $0.7 million in prepaid expenses and other current assets. Net cash provided by investing activities was $3.5 million for the six months ended June 30, 2020 compared to net cash used in investing activities of $0.1 million in the six months ended June 30, 2019. The increase of $3.6 million was primarily due to the cash and restricted cash acquired in connection with the Merger with Protara Therapeutics, Inc. of $3.7 million. Net cash provided by financing was $38.9 million for the six months ended June 30, 2020 compared to $0 for the six months ended June 30, 2019. The increase of $38.9 million was primarily due to proceeds, net of offering costs, from the ArTara Private Placement of $1.9 million, proceeds from the Proteon Private Placement, net of offering costs of $12.4 million, proceeds from the issuance of Series 1 Convertible Preferred Stock, net of offering costs of $25.3 million, offset by repayments of short-term debt of $0.7 million. Off-Balance Sheet Arrangements We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under the applicable regulations of the SEC. Item 3. Qualitative and Quantitative Disclosures about Market Risk Not applicable. 33