Protara Therapeutics, Inc. 10-K

Item 9A. Controls and Procedures. Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. As of December 31, 2020, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer and principal financial officer have concluded based upon the evaluation described above that, as of December 31, 2020, our disclosure controls and procedures were effective at the reasonable assurance level. We continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. As of December 31, 2020, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2017). Based on this assessment, management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2020, our internal control over financial reporting was effective based on those criteria. Changes in Internal Control Over Financial Reporting An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of any changes in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Securities Exchange Act of 1934, that occurred during our latest fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information None. 58 PART III Item 10. Directors, Executive Officers and Corporate Governance. The information required by this Item and not set forth below will be set forth in the section headed “—Election of Directors” and “Information Regarding the Board of Directors and Corporate Governance” in our definitive Proxy Statement for our 2021 Annual Meeting of Stockholders to be filed with the SEC on or before April 30, 2021 (our “ Proxy Statement ”) and is incorporated in this report by reference. We have adopted a code of ethics for directors, officers (including our principal executive officer, principal financial officer and principal accounting officer) and employees, known as the Code of Business Conduct and Ethics. The Code of Business Conduct and Ethics is available on our website at http://www.protaratx.com under the Corporate Governance section of our Investors page. We will promptly disclose on our website (i) the nature of any amendment to the policy that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and (ii) the nature of any waiver, including an implicit waiver, from a provision of the policy that is granted to one of these specified individuals, the name of such person who is granted the waiver and the date of the waiver. Stockholders may request a free copy of the Code of Business Conduct and Ethics by emailing the Company at info@protaratx.com. Item 11. Executive Compensation. The information required by this Item will be set forth in the section headed “ Executive Compensation ” in our Proxy Statement and is incorporated in this report by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this Item will be set forth in the section headed “ Security Ownership of Certain Beneficial Owners and Management ” in our Proxy Statement and is incorporated in this report by reference. Information regarding our equity compensation plans will be set forth in the section headed “ Executive Compensation ” in our Proxy Statement and is incorporated in this report by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this Item will be set forth in the section headed “ Transactions With Related Persons ” in our Proxy Statement and is incorporated in this report by reference. Item 14. Principal Accountant Fees and Services. The information required by this Item will be set forth in the section headed “—Ratification of Selection of Independent Registered Public Accounting Firm” in our Proxy Statement and is incorporated in this report by reference. 59 PART IV Item 15. Exhibits and Financial Statement Schedules. (a) Documents filed as part of this report. 1. The following financial statements of Protara Therapeutics, Inc. and Report of Marcum LLP, Independent Registered Public Accounting Firm, are included in this report: Page Number Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Changes in Stockholders’ Equity (Deficit) F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 2. List of financial statement schedules: All schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 3. List of Exhibits required by Item 601 of Regulation S-K. See part (b) below. (b) Exhibits. Exhibit No. Description 2.1 Agreement and Plan of Merger and Reorganization, dated September 23, 2019, by and among the Registrant, ArTara Therapeutics, Inc. and REM 1 Acquisition, Inc. (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K as filed on September 24, 2019, and incorporated herein by reference). 2.2 Amendment No. 1 to Agreement and Plan of Merger and Reorganization, dated November 19, 2019, by and among the Registrant, ArTara Therapeutics, Inc. and REM 1 Acquisition, Inc. (filed as Exhibit 2.2 to the Registrant’s Registration Statement on Amendment No. 2 to Form S-4 as filed on December 4, 2019, and incorporated herein by reference). 3.1 Sixth Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 27, 2014). 3.2 Certificate of Amendment to the Sixth Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 10, 2020). 3.3 Second Certificate of Amendment to the Sixth Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on May 13, 2020). 3.4 Certificate of Designation of Preferences, Rights and Limitations of Series 1 Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 10, 2020). 3.5 Certificate of Amendment to the Certificate of Designation of Preferences, Rights and Limitations of Series 1 Convertible Non-Voting Preferred Stock (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on September 23, 2020). 3.6 Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of Current Report on Form 8-K, filed on August 3, 2017). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 10, 2020). 4.2+ Description of securities registered under Section 12 of the Exchange Act of 1934 4.3 Registration Rights Agreement, dated as of September 23, 2019, by and among the Registrant and the institutional investors named therein (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K, filed with the SEC on September 24, 2019). 10.1† 2006 Equity Incentive Plan, as amended and restated August 21, 2014 (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed on October 7, 2014 (File No. 333-198777)). 10.2† Form of Stock Option Grant Notice and Stock Option Agreement under the Company’s 2006 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1 filed on September 16, 2014). 60 10.3 Assignment of Rights/License Agreement, effective as of February 4, 2002, by and between Johns Hopkins University and F. Nicholas Franano (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 filed on September 16, 2014). 10.4 Letter Agreement, dated January 12, 2009, by and between F. Nicholas Franano and the Company (as successor-in-interest to Proteon Therapeutics, L.L.C.) (incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1 filed on September 16, 2014). 10.5† 2014 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.25 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed on October 7, 2014). 10.6** Subscription Agreement, dated September 23, 2019, by and among the Registrant and the institutional investors named therein (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K, filed with the SEC on September 24, 2019). 10.7** First Amendment to Subscription Agreement, dated November 19, 2019, by and among the Registrant and the institutional investors named therein (incorporated by reference to Exhibit 99.12 to the Registrant’s Registration Statement on Form S-4). 10.8† Amended and Restated 2014 Equity Incentive Plan of the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on January 10, 2020). 10.9† Forms of Stock Option Agreement, Option Exercise, Restricted Stock Unit Grant and Restricted Stock Unit Agreement under the Amended and Restated 2014 Equity Incentive Plan of the Registrant, as amended (incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report on form 10-K on form 10-K for the fiscal year ended December 31, 2019 filed on March 20, 2020). 10.10† 2017 Equity Incentive Plan of ArTara Subsidiary, Inc. (incorporated by reference to Exhibit 10.11 to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 10, 2020). 10.11† Inducement Plan of the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on March 30, 2020). 10.12† Form of Stock Option Grant Notice and Stock Option Agreement under the Inducement Plan of the Registrant (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on March 30, 2020). 10.13† Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under the Inducement Plan of the Registrant (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed with the SEC on March 30, 2020). 10.14† Executive Employment Agreement, dated as of November 5, 2019, as amended on December 4, 2019, by and between ArTara Subsidiary, Inc. and Jesse Shefferman. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 10, 2020). 10.15† Executive Employment Agreement, dated as of December 17, 2019, by and between ArTara Subsidiary, Inc. and Jacqueline Zummo, Ph.D., MPH, MBA. (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 10, 2020). 10.16†^ Separation Agreement and Release, dated as of July 23, 2020, by and between the Registrant and Julio Casoy (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on July 31, 2020). 10.17† Executive Employment Agreement, effective as of February 11, 2020 by and between the Registrant and Blaine Davis (incorporated by reference to Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K, filed with the SEC on March 19, 2020). 10.18†† Choline License Agreement, by and between ArTara Subsidiary, Inc. and Alan L. Buchman, M.D. dated as of September 27, 2017. (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 10, 2020). 10.19†† Sponsored Research and License Agreement, by and between ArTara Subsidiary, Inc. and The University of Iowa dated as of November 28, 2018. (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 10, 2020). 10.20†† License Agreement, by and between ArTara Subsidiary, Inc. and The Feinstein Institute for Medical Research dated as of December 22, 2017. (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 10, 2020). 10.21†† Agreement, by and between ArTara Subsidiary, Inc. and Chugai Pharmaceutical Co., Ltd. dated as of June 17, 2019. (incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 10, 2020). 10.22†† Amendment to Agreement, by and between Chugai Pharmaceutical Co., Ltd. and the Registrant, dated as of July 14, 2020 and effective as of June 30, 2020 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on November 12, 2020). 61 10.23† Form of Indemnity Agreement between the Registrant and each of its directors and officers. (incorporated by reference to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 10, 2020). 10.24† Restated Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on July 31, 2020). 10.25†† **+ Lease by and between 345 PAS HOLDING LLC, and the Registrant, dated as of December 7, 2020. 21.1+ List of Subsidiaries. 23.1+ Consent of Marcum LLP, independent registered public accounting firm. 31.1+ Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. 31.2+ Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. 32.1+ Principal Executive Officer Certification and Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101* Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of December 31, 2020 and 2019; (ii) the Consolidated Statements of Operations for the years ended December 31, 2020 and 2019; (iii) the Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2020 and 2019; (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019; and (v) the notes to the Consolidated Financial Statements. + Filed herewith. ** Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedules will be furnished to the SEC upon request. † Indicates management contract or compensatory plan or arrangement. †† Certain portions of this exhibit (indicated by “[***]”) have been omitted as the Registrant has determined (i) the omitted information is not material and (ii) the omitted information would likely cause harm to the Registrant if publicly disclosed. ^ Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant hereby undertakes to furnish supplementally a copy of any omitted exhibit or schedule upon request by the SEC. 62 Item 16. Form 10-K Summary None. 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Protara Therapeutics, Inc. Date: March 11, 2021 /s/ Jesse Shefferman Jesse Shefferman President and Chief Executive Officer (on behalf of the registrant and as the registrant’s Principal Executive Officer) KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Stephen Davis, his true and lawful attorney-in-fact and agent with full power of substitution, for him and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ JESSE SHEFFERMAN President and Chief Executive Officer and Director March 11, 2021 Jesse Shefferman (Principal Executive Officer) /s/ BLAINE DAVIS Chief Financial Officer March 11, 2021 Blaine Davis (Principal Financial and Accounting Officer) /s/ LUKE BESHAR Chairman of the Board of Directors March 11, 2021 Luke Beshar /s/ BARRY FLANNELLY, PHARMD Director March 11, 2021 Barry Flannelly, PharmD /s/ ROGER GARCEAU, M.D. Director March 11, 2021 Roger Garceau, M.D. /s/ RICHARD LEVY, M.D. Director March 11, 2021 Richard Levy, M.D. /s/ GREGORY P. SARGEN Director March 11, 2021 Gregory P. Sargen /s/ MICHAEL SOLOMON, PH.D. Director March 11, 2021 Michael Solomon, Ph.D. /s/ CYNTHIA SMITH Director March 11, 2021 Cynthia Smith 64 Protara Therapeutics, Inc. Index to Consolidated Financial Statements Protara Therapeutics, Inc. for the Years Ended December 31, 2020 and 2019 Page No. Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2020 and 2019 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019 F-4 Consolidated Statement of Changes in Stockholders’ (Deficit) Equity for the Years Ended December 31, 2020 and 2019 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 F-6 Notes to Consolidated Financial Statements F-7 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Protara Therapeutics, Inc. New York, New York Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Protara Therapeutics, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Marcum LLP We have served as the Company’s auditor since 2019. New York, New York March 11, 2021 F- 2 PROTARA THERAPEUTICS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) As of December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 168,598 $ 564 Restricted cash 50 - Deferred offering costs - 122 Prepaid expenses and other current assets 787 78 Total current assets 169,435 764 Non-current assets: Restricted cash, long-term 745 - Property and equipment, net 1,240 459 Goodwill 29,517 - Other assets 2,220 - Total assets $ 203,157 $ 1,223 Liabilities and Stockholders’ Equity (Deficit) Current liabilities: Accounts payable $ 914 $ 716 Accrued expenses 1,913 2,635 Operating lease liability, current 88 - Total current liabilities 2,915 3,351 Non-current liabilities: Operating lease liability, long-term 999 - Total liabilities 3,914 3,351 Commitments and Contingencies (Note 7) Stockholders’ Equity (Deficit) Preferred Stock, $0.001 par value, authorized 10,000,000 shares: Series 1 Convertible Preferred Stock, 8,028 and 0 shares authorized at December 31, 2020 and 2019, respectively, 8,027 and 0 shares issued and outstanding as of December 31, 2020 and 2019, respectively. - - Common Stock, $0.001 par value, authorized 100,000,000 shares: Common Stock, 11,211,840 and 2,627,533 shares issued and outstanding as of December 31, 2020 and 2019, respectively. 11 3 Additional Paid in Capital 245,992 10,651 Accumulated Deficit (46,760 ) (12,782 ) Total Stockholders’ Equity (Deficit) 199,243 (2,128 ) Total Liabilities and Stockholders’ Equity (Deficit) $ 203,157 $ 1,223 The accompanying notes are an integral part of these consolidated financial statements. F- 3 PROTARA THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) For the Years Ended December 31, 2020 2019 Operating expense: Research & development $ 11,982 $ 3,878 General & administrative 22,462 3,952 Total operating expenses 34,444 7,830 Operating loss (34,444 ) (7,830 ) Other income, net Interest income, net (466 ) - Total other income, net (466 ) - Net Loss $ (33,978 ) $ (7,830 ) Weighted Average Shares Outstanding, basic and diluted 7,233,913 2,577,493 Net loss per share, basic and diluted $ (4.70 ) $ (3.04 ) The accompanying notes are an integral part of these consolidated financial statements. F- 4 PROTARA THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 (in thousands, except share and per share data) Series 1 Convertible Preferred Stock Common Stock Additional Total Shares Amount Shares Amount Paid-in Capital Accumulated Deficit Stockholders’ Equity (Deficit) Balance at January 1, 2019 - $ - 2,558,419 $ 3 $ 9,727 $ (4,952 ) $ 4,778 Stock-based compensation - stock options - - - - 313 - 313 Stock-based compensation - restricted stock - - - - 75 - 75 Stock-based compensation - restricted stock units - - - - 36 - 36 Issuance of common stock in September capital raise - - 69,114 - 500 - 500 Net loss - - - - - (7,830 ) (7,830 ) Balance at December 31, 2019 - $ - 2,627,533 $ 3 $ 10,651 $ (12,782 ) $ (2,128 ) Issuance of Common Stock in ArTara Private Placement, net of offering costs - - 284,875 - 1,867 - 1,867 Issuance of Common Stock in Proteon Private Placement, net of offering costs - - 1,896,888 2 12,411 - 12,413 Issuance of Series 1 Convertible Preferred Stock in Proteon Private Placement, net of offering costs 3,879 - - - 25,319 - 25,319 Reverse business combination - - 1,033,907 1 34,532 - 34,533 Issuance of Common Stock in Common Offering, net of offering costs - - 4,600,000 4 73,566 - 73,570 Issuance of Series 1 Convertible Preferred Stock in Preferred Offering, net of offering costs 4,148 - - - 66,284 - 66,284 Issuance of Common Stock in Common Offering (Underwriters Overallotment Option), net of offering costs - - 690,000 1 11,086 - 11,087 Settlement of restricted stock units - - 20,870 - - - - Exercise of stock options - - 57,767 - 530 - 530 Stock-based compensation - restricted stock units - - - - 6,357 - 6,357 Stock-based compensation - stock options - - - - 3,389 - 3,389 Net loss - - - - - (33,978 ) (33,978 ) Balance at December 31, 2020 8,027 $ - 11,211,840 $ 11 $ 245,992 $ (46,760 ) $ 199,243 The accompanying notes are an integral part of these consolidated financial statements. F- 5 PROTARA THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2020 2019 Cash flows from operating activities: Net loss $ (33,978 ) $ (7,830 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock based compensation 9,746 424 Amortization of operating lease right-of-use asset 93 - Depreciation 103 16 Changes in operating assets and liabilities: Prepaid expenses and other current assets 1,405 (37 ) Other Assets 58 - Accounts payable 198 366 Accrued expenses (966 ) 2,050 Right-of-use liability (66 ) - Net cash used in operating activities (23,407 ) (5,011 ) Cash flows from investing activities: Cash and restricted cash acquired in connection with the reverse merger with ArTara Therapeutics, Inc. 3,719 - Purchase of property and equipment (884 ) (475 ) Net cash provided by/(used in) investing activities 2,835 (475 ) Cash flows from financing activities: Proceeds from - ArTara Private Placement, net of offering costs 1,867 - Proceeds from - Common Stock in Proteon Private Placement, net of offering costs 12,413 - Proceeds from - Series 1 Convertible Preferred Stock in Proteon Private Placement, net of offering costs 25,319 - Proceeds from Common Offering, net of offering costs 73,570 - Proceeds from Preferred Offering, net of offering costs 66,284 - Proceeds from Underwriters Overallotment Option 11,087 - Repayments under short-term debt (1,669 ) - Proceeds from the exercise of stock options 530 - Proceeds from private placements - 500 Net cash provided by financing activities 189,401 500 Net increase/(decrease) in cash and cash equivalents and restricted cash 168,829 (4,986 ) Cash and cash equivalents and restricted cash - beginning of year 564 5,550 Cash and cash equivalents and restricted cash - end of year $ 169,393 $ 564 Reconciliation of cash and cash equivalents and restricted cash to the consolidated balance sheets: Cash and cash equivalents $ 168,598 $ 564 Restricted cash 50 - Restricted cash, long-term 745 - Cash and cash equivalents and restricted cash $ 169,393 $ 564 Supplemental cash flow information Cash paid for: Interest $ 34 $ - Income Taxes $ - $ - Non-cash investing and financing activities: Deferred offering costs recorded in accrued expenses $ - $ 122 Deferred offering costs recognized that were previously recorded in accrued expenses $ 122 $ - Purchase of insurance agreement with notes payable $ 1,669 $ - Common stock issued in connection with the reverse merger with ArTara Therapeutics, Inc. $ 34,533 $ - The accompanying notes are an integral part of these consolidated financial statements. F- 6 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 1 – BUSINESS, LIQUIDITY AND CAPITAL RESOURCES Overview Protara Therapeutics, Inc. and its consolidated subsidiaries (“Protara” or the “Company”) is committed to identifying and advancing transformative therapies for the treatment of cancer and rare diseases with significant unmet needs. Protara’s portfolio includes two development programs utilizing TARA-002, an investigational cell therapy in development for the treatment of lymphatic malformations (LMs) and non-muscle invasive bladder cancer (NMIBC). The third 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). The fourth program in the portfolio is Vonapanitase, a recombinant human elastase. 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 (the “Protara 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” then subsequently changed its name from “ArTara Therapeutics, Inc” to “Protara Therapeutics, Inc.” All share and per share amounts presented in this annual report on Form 10-K have been adjusted to reflect the Protara Reverse Stock Split and the Exchange Ratio (defined below). 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 (defined below). 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 December 31, 2020 and 2019, the Company’s cash and cash equivalents was $168,598 and $564, respectively. The Company has not generated revenues since its inception and has incurred net losses of $33,978 and $7,830 for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, the Company had working capital of $166,520 and stockholder’s equity of $199,243. During the year ended December 31, 2020, cash flows used in operating activities were $23,407, consisting primarily of a net loss of $33,978, which includes non-cash stock-based compensation charges of $9,746. Since inception, the Company has met its liquidity requirements principally through the sale of its Common Stock and Series 1 Convertible Preferred Stock. 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. On September 22, 2020, the Company entered into underwriting agreements with Cowen and Company, LLC and Guggenheim Securities, LLC, as representatives of several underwriters for separate, concurrent underwritten public offerings of the Company’s Common Stock and Series 1 Convertible Preferred Stock. On September 24, 2020, gross and net proceeds from this offering were $147.6 million and $139.9 million, respectively. On October 6, 2020, the underwriters exercised their overallotment option, resulting in the receipt of gross and net proceeds of $11.6 million and $11.1 million, respectively (See Note 8). F- 7 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 1 – BUSINESS, LIQUIDITY AND CAPITAL RESOURCES (Continued) Liquidity, Capital Resources and Management Plans (Continued) The Company is in the business of developing biopharmaceuticals and has no current or near term revenues. The Company has incurred substantial clinical and other costs in its drug development efforts. The Company will need to raise additional capital in order to fully realize management’s plans. The Company believes that its current financial resources are sufficient to satisfy the Company’s estimated liquidity needs for at least twelve months from the date of issuance of these consolidated financial statements. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Principles of Consolidation The 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 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, 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 December 31, 2020 and 2019 was $795 and $0, respectively. As of December 31, 2020, restricted cash consists of cash deposits of $795 to collateralize letter of credit obligations. F- 8 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) 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 acquired in a business combination. 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 quantitative evaluation is not necessary. Under the 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. On December 31, 2020, in connection with the finalization of the purchase price allocation, the Company recorded an adjustment of $150 to goodwill related to prepaid expenses and accrued expenses (See Note 3). F- 9 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) 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 Years Ended December 31, 2020 2019 Stock options 674,039 219,592 Restricted stock units 407,325 5,245 Conversion of Series 1 Convertible Preferred Stock 8,029,039 - Total potentially dilutive shares 9,110,403 224,837 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 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 the Financial Accounting Standards Board (“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. F- 10 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Value Measurements The carrying amounts of cash and cash equivalents, prepaid expenses and accounts payable approximate their fair values due to the short-term nature of these instruments. 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. Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The measurement of net deferred tax assets is reduced by the amount of any tax benefit that, based on available evidence, is not expected to be realized, and a corresponding valuation allowance is established. Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards. As of December 31, 2020 and 2019, no liability for unrecognized tax benefits was required to be recorded. The guidance also discusses the classification of related interest and penalties on income taxes. The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. No interest or penalties were recorded during the years ended December 31, 2020 and 2019. 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 $11,982 and $3,878 for the years ended December 31, 2020 and 2019, respectively. F- 11 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. Recent Accounting Pronouncements Adopted In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04 (“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 ASU 2017-04. The adoption of this standard did not have a material effect on the Company’s financial position, results of operations, or cash flows. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which removes, adds and modifies certain disclosure requirements for fair value measurements in Topic 820. The Company will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy as well as the valuation processes of Level 3 fair value measurements. The Company will be required to provide additional disclosure related to the changes in unrealized gains and losses included in other comprehensive loss for recurring Level 3 fair value measurements and the range and weighted average of assumptions used to develop significant unobservable inputs for Level 3 fair value measurements. On January 1, 2020, the Company adopted ASU 2018-13. 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. The Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements. F- 12 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) 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 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”), 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. On account of the adjustment required pursuant to the Exchange Ratio, there were 2,627,533 shares of Private ArTara common stock outstanding immediately prior to the Merger. Protara Therapeutics, Inc. assumed all of the outstanding and unexercised stock options of Private ArTara, with such stock options 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 $27,200 and proceeds, net of issuance costs, of $25,319, (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 $13,300 and proceeds, net of issuance costs, of $12,413 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 $2,000 and proceeds, net of issuance costs, of $1,867. 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 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 Proteon 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. F- 13 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) 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. During the year ended December 31, 2020, the Company recorded an adjustment of $150 to goodwill. This adjustment was comprised of a decrease of $78 in prepaid expenses and other current assets, and an increase of $77 in accrued expenses, resulting in a final purchase price allocation as follows: Cash $ 3,669 Restricted cash 50 Prepaid expenses and other current assets 1,662 Goodwill 29,517 Accrued expenses (365 ) Total purchase price consideration $ 34,533 The total fair value of the net assets of Protara Therapeutics Inc. was determined by the Company to be $34,533 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 Private ArTara’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. F- 14 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) 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. For the Years Ended December 31, 2020 2019 Net loss $ (33,754 ) $ (22,821 ) Pro forma loss per common share, basic and diluted $ (4.62 ) $ (3.94 ) Pro forma weighted average number of common shares outstanding, basic and diluted 7,304,201 5,793,024 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. F- 15 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 4 – PROPERTY AND EQUIPMENT Property and equipment consists of the following: As of December 31, Useful Life (in years) 2020 2019 Computer equipment 5 $ 34 $ - Furniture, fixtures and other 5 21 21 Laboratory equipment 7 601 446 Leasehold improvements Over the shorter of the useful life or the lease term 200 - Property and equipment not yet placed into service 503 8 Total property and equipment, gross 1,359 475 Less: Accumulated depreciation (119 ) (16 ) Total property and equipment, net $ 1,240 $ 459 Depreciation expense was $103 and $16 for the years ended December 31, 2020 and 2019, respectively. During the year ended December 31, 2020, $99 and $4 was included in research and development expense and general and administrative expense, respectively, within the consolidated statements of operations. For the year ended December 31, 2019, $16 was included in research and development expense within the consolidated statements of operations. NOTE 5 – ACCRUED EXPENSES Included in the Company’s accrued expenses within the consolidated financial statements are: As of December 31, 2020 2019 Employee bonus $ 1,530 $ - Taxes 159 - Legal fees 156 1,573 Research and development costs 37 1,050 Other expenses 31 12 Total $ 1,913 $ 2,635 NOTE 6 – 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 $2,225. The Company made a down payment of $556, leaving a principal balance of $1,669. The financing bore interest at a rate of 4.25% per annum, and was repaid in monthly installments of $189, which included both principal and interest. As of December 31, 2020, the balance under this debt was $0. The Company recorded interest expense of $34 for the year ended December 31, 2020 under this financing agreement. F- 16 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 7 – 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. ASC 842 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 immediately 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 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 an expected term of approximately eight years, therefore resulting in the recognition of an ROU asset and related operating lease liability. The Company elected the package of practical expedients permitted within the standard, which allow an entity to forgo reassessing (i) whether a contract contains a lease, (ii) classification of leases, and (iii) whether capitalized costs associated with a lease meet the definition of initial direct costs. Also, the Company elected the expedient to allow the Company to not have to separate lease and non-lease components. The Company has also elected the short-term lease accounting policy under which the Company would not recognize a lease liability or ROU asset for any lease that at the commencement date has a lease term of twelve months or less and does not include a purchase option that the Company is more than reasonably certain to exercise. On July 1, 2020 and December 1, 2020, the Company entered into additional quarter-to-quarter leases for additional contract development and manufacturing space for expected terms of approximately seven years, therefore resulting in the recognition of additional ROU assets and related operating lease liabilities. On December 1, 2020, the Company entered into a long-term lease for office space for a term of seven years. This lease was entered into with a related party of the Company, and its terms were determined by management to be on an arms-length basis. The lease will not commence until the second quarter of 2021 when the Company is granted access to the premises. Accordingly, as of December 31, 2020, the Company did not recognize an additional ROU asset and related operating lease liability for this lease. 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, Leases, were not reassessed for classification. F- 17 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 7 – 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 the Company 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: As of Operating leases: Balance Sheet Location December 31, 2020 January 9, 2020 December 31, 2019 Right-of-use assets Other assets $ 1,060 $ 403 $ - Operating lease liability, current Operating lease liability, current 88 9 - Operating lease liability, long-term Operating lease liability, long-term 999 394 - The following provides details of the Company’s lease expense: Lease cost For the Year Ended December 31, 2020 Operating lease cost $ 93 Short-term lease cost 215 Total $ 308 F- 18 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 7 – COMMITMENTS AND CONTINGENCIES (Continued) Lease Agreements (Continued) Other information related to leases is presented below: As of December 31, 2020 Other information Weighted-average discount rate – operating lease 12.00 % Weighted-average remaining lease term – operating lease (in months) 87 As of December 31, 2020, the expected annual minimum lease payments of our operating lease liabilities and other short-term leases were as follows (includes long-term lease entered into on December 1, 2020 that does not commence until the second quarter of 2021): For Years Ending December 31, Operating lease 2021 $ 1,111 2022 1,333 2023 1,338 2024 1,342 2025 1,423 Thereafter 3,277 Total future minimum lease payments, undiscounted 9,824 Less: Imputed interest for leases in excess of one year 8,676 Present value of future minimum lease payments $ 1,148 Present value of future minimum lease payments for our operating lease liabilities $ 1,087 Present value of future minimum lease payments, short-term leases $ 61 Employment Agreements Executive Employment Agreements The Company’s executive officers have entered into at-will employment agreements. F- 19 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 7 – 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. 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, which was included in general and administrative expenses within the Company’s consolidated statements of operations for the year ended December 31, 2020. Collaborations and License Agreements 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 on October 2, 2017, and license payments of $50 and $50 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 (the “Choline License Fee”). Upon the Company receiving $5,000 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 if the funds are received by October 15, 2019. On October 2, 2019, the Company made a payment of $50 to Dr. Buchman. On January 22, 2020, in connection with the closing of the Merger and concurrent financing, Dr. Buchman was paid $550 which was included in accrued expenses as of December 31, 2019. During the years ended December 31, 2020 and 2019, the Company recorded research and development expense of $0 and $200 (representing the increase in the Choline License Fee obligation), respectively, for expenditures to Dr. Buchman in connection with obligations under the Choline License Agreement. F- 20 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 7 – COMMITMENTS AND CONTINGENCIES (Continued) Collaborations and License Agreements (Continued) License Agreement 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) 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 triggered a financing milestone obligation and accordingly the Feinstein Institute was paid $100. 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. During the years ended December 31, 2020 and 2019, the Company recorded research and development expense of $115 and $1, respectively, in connection with the Feinstein Agreement. Sponsored Research and License Agreement 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 for the LMs indication. During the term of the services, the Company would pay the University of Iowa thirty thousand dollars ($30) 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 TARA-002 by the FDA, the Company would pay up to $1,750 to the University of Iowa for meeting these milestones. Furthermore, the Company would pay the University of Iowa royalties of up to 1.75% for net sales ranging from $0 - $25,000, 2.25% for net sales ranging from $25,000 to $50,000, and 2.50% for net sales in excess of $50,000. Pursuant to the Iowa Agreement, the University of Iowa would be entitled to additional payments for the Company achieving annual net sales of product according to the milestones. For annual net sales of product up to $25,000; $62; for annual net sales of product of up to $50,000; $62; and for annual net sales of product of up to $100,000; $125. During the years ended December 31, 2020 and 2019, the Company recorded research and development expense of $30 and $30 respectively, in connection with the Iowa Agreement. F- 21 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 7 – COMMITMENTS AND CONTINGENCIES (Continued) Collaborations and License Agreements (Continued) Chugai Agreement 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, the Company recorded an obligation of $500 upon Chugai having completed an agreed upon milestone, which the Company paid on July 27, 2020. During the years ended December 31, 2020 and 2019, the Company recorded research and development expense of $0 and $500, respectively, 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 December 31, 2020, the Company has not commenced vonapanitase product sales and therefore has recognized no royalties on product sales. F- 22 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 7 – 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. 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. NOTE 8 – STOCKHOLDERS’ EQUITY Authorized Common Stock As of December 31, 2020, the Company has 100,000,000 shares of Common Stock authorized for issuance, $0.001 par value per share, of which 11,211,840 and 2,627,533 shares were issued and outstanding as of December 31, 2020 and 2019, respectively. The holders of the Company’s Common Stock are entitled to one vote per share. Authorized Series 1 Convertible Preferred Stock In connection with the Preferred Offering (defined below) on September 22, 2020, the Company filed a Certificate of Amendment to the Certificate of Designation of Preferences, Rights and Limitations of Series 1 Convertible Preferred Stock of the Company (the “Amendment”) with the State of Delaware to increase the authorized number of shares of the Company’s Series 1 Convertible Preferred Stock that may be issued from 3,880 to 8,028. The Amendment was approved by a committee of the Company’s Board of Directors and the requisite holders of outstanding shares of Series 1 Convertible Preferred Stock. No approval of the holders of the Company’s Common Stock was required to effectuate the Amendment. As of December 31, 2020 and 2019, the Company has 10,000,000 shares of preferred stock authorized for issuance, $0.001 par value per share of which 8,028 shares of Series 1 Convertible Preferred Stock are authorized for issuance and 8,027 and 0 shares were issued and outstanding, respectively. F- 23 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 8 – STOCKHOLDERS’ EQUITY (Continued) Description of Series 1 Convertible Preferred Stock 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. Common Stock On September 23, 2019, the Company completed a placement of 69,114 shares of its common stock at a price of $7.23 per share for gross proceeds of $500. F- 24 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 8 – STOCKHOLDERS’ EQUITY (Continued) Underwritten Public Offering On September 24, 2020, pursuant to an underwriting agreement dated September 22, 2020, the Company issued and sold in an underwritten public offering (the “Common Offering”) an aggregate of 4,600,000 shares of its Common Stock at an offering price of $16.87 per share, for gross and net proceeds of approximately $77.6 million and $73.6 million, respectively. The underwriters were granted an option to purchase up to 690,000 additional shares of Common Stock at the public offering price, less the underwriting discount. On October 6, 2020, the underwriters exercised their overallotment option in full, purchasing an additional 690,000 shares, resulting in the receipt of gross and net proceeds of $11.6 million and $11.1 million, respectively. On September 24, 2020, pursuant to an underwriting agreement (dated September 22, 2020), the Company issued and sold in an underwritten public offering (the “Preferred Offering”) an aggregate of 4,148 shares of its Series 1 Convertible Preferred Stock at an offering price of $16,873.54 per share, for gross and net proceeds of approximately $70.0 million and $66.3 million, respectively. The Common Offering and the Preferred Offering were made pursuant to the Company’s registration statement on Form S-3, declared effective by the Securities and Exchange Commission on May 26, 2020 (Registration No. 333-238273). In December 2020, the Company filed a shelf registration statement on Form S-3, declared effective by the Securities and Exchange Commission on December 18, 2020 (Registration No. 333-251224) (the “Shelf Registration Statement”). The Shelf Registration Statement permits: (i) the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $300 million of common stock, preferred stock, debt securities and warrants in one or more offerings and in any combination. No securities have been sold to date under the Shelf Registration Statement. NOTE 9 – 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 December 31, 2020, 460,650 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 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 Merger, no additional awards will be made under the 2017 Equity Incentive Plan. F- 25 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 9 – STOCK-BASED COMPENSATION (Continued) 2014 Equity Incentive Plan On October 3, 2014, the stockholders approved 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 December 31, 2020, 227,850 shares remain available to be issued under the Amended 2014 Plan. On January 1, 2021, pursuant to the Amended 2014 Plan’s annual evergreen feature, the number of shares authorized under the Amended 2014 Plan was increased by 812,889 shares to 1,861,189 shares. 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. 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 December 31, 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 years ended December 31, 2020 and 2019, no shares were issued under the 2014 ESPP. On January 1, 2021, pursuant to the increase per the 2014 ESPP, the number of share authorized under the 2014 ESPP was increased by 7,025 shares to 25,037 shares. F- 26 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 9 – STOCK-BASED COMPENSATION (Continued) Restricted Stock Units Awards to Directors The following restricted stock units (“RSUs”) were granted pursuant to the Amended 2014 Plan. Settlement for the RSUs is deferred until the earliest to occur of (i) the director’s termination of service, (ii) death, (iii) disability or (iv) a change in control of the Company. In the event of a change in control of the Company, the RSUs will vest in full. During the year ended December 31, 2020, the Board of Directors granted an aggregate of 316,000 RSUs to directors of the Company. Of these RSUs, 254,000 vest 12.5% on the date of grant and in twenty-one equal monthly installments thereafter and the remaining 62,000 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 $9,480. Awards to Others During the year ended December 31, 2019, the Board of Directors granted of 5,245 RSUs to a consultant. The RSUs were granted under the Company’s 2017 Equity Incentive Plan. The RSUs vested in five equal installments of 1,049 units on the 15th and 30th of each month, beginning on October 30, 2019. The grant date fair value of this RSU was $36. During the year December 31, 2020, Board of Directors granted an aggregate of 163,325 RSUs to employees of the Company. These RSUs will vest 25% on each of the first, second, third and fourth year anniversaries of the date of grant. The grant date fair value of these RSUs was $4,887. Following is a summary of restricted stock unit activities for the year ended December 31, 2020: Restricted Stock Units Weighted Average Grant Date Fair Value Non-vested 1/1/2020 - $ - Granted 479,325 29.97 Forfeited (56,375 ) 30.00 Vested (148,334 ) 30.00 Non-vested 12/31/2020 274,616 $ 29.95 F- 27 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 9 – STOCK-BASED COMPENSATION (Continued) Restricted Stock Units (Continued) 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 December 31, 2020, the unamortized value of RSUs was $6,299. As of December 31, 2020, the weighted average remaining amortization period was 1.81 years. As of December 31, 2020 and 2019, 132,709 and 5,245 RSUs, respectively, have vested that have not yet been settled into shares of the Company’s Common Stock. During the year ended December 31, 2020, the Company issued 20,870 shares of Common Stock from the settlement of RSUs. Restricted Stock Units Modification On July 23, 2020, the Company agreed to accelerate the vesting of 5,687 RSUs of a former executive. The Company recorded a charge of $152 during the year ended December 31, 2020 to research and development expense within the Company’s consolidated statements of operations in connection with the modification of this award. Stock Option Grants Options to Directors During the year ended December 31, 2019, the Board of Directors granted options for the purchase of 47,114 shares of the Company’s common stock to members of the board of directors. These options were granted under the Company’s 2017 Equity Incentive Plan, had an exercise price of $9.18 per share and a term of 10 years. These options vest ratably over approximately four years. The options had a grant date fair value of $317. During the year ended December 31, 2020, the Board of Directors granted options for the purchase of 80,250 shares of the Company’s common stock to members of the board of directors. These options were granted under the Company’s 2014 Equity Incentive Plan, had an exercise price ranging from $26.70 to $35.00 per share and a term of 10 years. These options vest ratably over approximately one year. The options had a grant date fair value of $1,903. Options to Employees During the year ended December 31, 2019, the Board of Directors granted options for the purchase of 50,549 shares of the Company’s common stock to employees of the Company. These options were granted under the Company’s 2017 Equity Incentive Plan, had an exercise price of $9.18 per share and a term of 10 years. These options vest ratably over approximately four years. The options had a grant date fair value of $322. During the year ended December 31, 2020, the Board of Directors granted options for the purchase of 484,850 shares of the Company’s common stock to employees of the Company. These options were granted under the Company’s 2014 Equity Incentive Plan, had an exercise price ranging from $17.84 to $51.12 per share and a term of 10 years. These options vest ratably over approximately four years. The options had a grant date fair value of $10,867. F- 28 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 9 – STOCK-BASED COMPENSATION (Continued) Stock Option Modifications Effective July 20, 2020, a former director notified the Company of his resignation from the Company’s Board of Directors. In connection with his resignation, the Compensation Committee approved the accelerated vesting of all stock options issued to him prior to the Merger, and to extend the post-termination exercise period of vested options to 12 months from the date of resignation. Due to the modification of his options, the Company recorded the incremental value of $501 during the year ended December 31, 2020 to general and administrative expense within the Company’s consolidated statements of operations. Stock Options The Company determined the fair value of stock options granted based upon the assumptions as provided below. For the Years Ended December 31, 2020 2019 Stock price $ 17.84 - $ 51.12 $ 6.81 - $ 8.65 Exercise price $ 17.84 - $ 51.12 $ 9.18 Dividend yield 0.00% 0.00% Expected volatility 95.00% - 101.00% 97.00% Risk-free interest rate 0.28% - 1.69% 1.71% - 2.37% Expected life (in years) 5.27 - 6.08 5.58 - 6.02 Following is a summary of stock option activities for the year ended December 31, 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 565,100 22.61 29.23 - - Exercised (57,767 ) 6.72 9.18 - - Forfeited (52,886 ) 14.08 18.91 - - Outstanding 12/31/2020 674,039 $ 20.60 $ 25.23 9.06 $ 2,311 Exercisable as of 12/31/2020 109,117 $ 11.44 $ 15.63 8.25 $ 1,201 The weighted average grant date fair value of the options granted during the year ended December 31, 2019 was $6.55 per share. The fair value of stock options is amortized on a straight line basis over the requisite service periods of the respective awards. As of December 31, 2020, the unamortized value of stock options was $9,973. As of December 31, 2020, the weighted average remaining amortization period was 3.00 years. F- 29 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 9 – STOCK-BASED COMPENSATION (Continued) Summary of Stock-Based Compensation Expense The following tables summarize total stock-based compensation costs recognized: For the Years Ended December 31, 2020 2019 Restricted stock $ - $ 75 RSUs 6,357 36 Stock options 3,389 313 Total $ 9,746 $ 424 Stock-based compensation expense was reflected within the statements of operations as: For the Years Ended December 31, 2020 2019 Research and development $ 741 $ 200 General and administrative 9,005 224 Total $ 9,746 $ 424 NOTE 10 – INCOME TAXES Federal and State income tax expense is as follows: For the Years Ended December 31, 2020 2019 Current Federal $ - $ - State - - Total current - - Deferred Federal (6,211 ) (1,614 ) State (2,439 ) (930 ) Total deferred (8,650 ) (2,544 ) Change in valuation allowance 8,650 2,544 Total income tax expense (benefit) $ - $ - F- 30 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 10 – INCOME TAXES (Continued) Deferred income taxes, if applicable, are provided for the differences between the basis of assets and liabilities for financial reporting and income tax purposes. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows: As of December 31, 2020 2019 Deferred tax assets: Net operating loss carry forwards $ 19,371 $ 3,806 Organization costs/legal fees 8 9 Stock option expense 443 111 Research and development credits 70 - Operating lease liability 330 - Restricted stock expense - 238 RSU expense 1,796 12 Charitable contributions 2 2 Total deferred tax assets 22,020 4,178 Valuation allowance (21,698 ) (4,176 ) Deferred tax assets, net of valuation allowance 322 2 Deferred tax liabilities: Operating right-of-use asset (322 ) - Depreciation - (2 ) Total deferred tax liabilities (322 ) (2 ) Deferred tax assets, net of valuation allowance and deferred tax liabilities $ - $ - A reconciliation of the provision for income taxes with the amounts computed by applying the statutory Federal income tax to income before provision for income taxes is as follows: For the Years Ended December 31, 2020 2019 U.S. federal statutory rate (21.0 )% (21.0 )% State taxes, net of federal benefit (9.4 )% (12.1 )% Option expense 1.2 % 0.5 % Other 1.9 % 0.1 % True-up to prior years return 1.8 % - % Change in valuation allowance 25.5 % 32.5 % Effective tax rate - % - % F- 31 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 10 – INCOME TAXES (Continued) As of December 31, 2020 for U.S. federal and state income tax reporting purposes, the Company has approximately $63.7 million of unused net operating losses (“NOLs”) available for carry forward to future years. The 2018 - 2020 federal NOLs may be carried forward indefinitely. The Company does not have the ability to carry any of these losses back. The New York state and city NOLs may be carried forward through the year 2040 and may be applied against future taxable income. Because United States tax laws limit the time during which NOL carry forwards may be applied against future taxable income, the Company may be unable to take full advantage of its NOLs for federal and state income tax purposes when the Company does generate taxable income. Further, the benefit from utilization of NOL carry forwards could be subject to limitations due to material ownership changes that could occur as the Company continues to issue additional shares of common stock pursuant to its capital raising plans. Based on such limitations, the Company has significant NOLs for which realization of tax benefits is uncertain. On January 9, 2020, the Company completed the Merger. In connection with the Merger, the Company acquired NOL’s from Proteon of $41.6 million. These NOLs were determined to be impaired by $12.4 million, with an annual limitation of $0.5 million on the remaining $29.2 million of NOLs. The general business credits of $3.6 million acquired in the merger were determined to be fully impaired. As a result of the Merger, the company performed a study to review the application of IRC §382 to the Company. It was determined there was an ownership change as of January 9, 2020 and the Company’s NOLs generated prior to January 9, 2020 would be limited. The annual limitation of the Company’s NOL’s after application of the IRC §382 are $1.4 million. The Company remains subject to examination by tax authorities for tax years 2018 through 2020. The Company has identified its federal tax return and its state tax return in New York state and New York City as its “major” tax jurisdictions. Based on a history of cumulative losses at the Company and the results of operations for the years ended December 31, 2020 and 2019, the Company determined that it is more likely than not that it will not realize benefits from the net deferred tax assets. The Company will not record income tax benefits in the financial statements until it is determined that it is more likely than not that the Company will generate sufficient taxable income to realize the deferred income tax assets. As a result of the analysis, the Company determined that a full valuation allowance against the deferred tax assets was required. As of December 31, 2020 and 2019, the Company has recorded a valuation allowance of $21.7 million and $4.2 million, respectively. As of December 31, 2020 and 2019, management does not believe that the Company has any material uncertain tax positions that would require it to measure and reflect the potential lack of sustainability of a position on audit in its consolidated financial statements. The Company will continue to evaluate its uncertain tax positions in future periods to determine if measurement and recognition in its financial statements is necessary. The Company does not believe there will be any material changes in its unrecognized tax positions over the next year. F- 32 Protara Therapeutics, Inc. and Consolidated Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) NOTE 11 – 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 401(k) Plan was implemented in June of 2020. For the year ended December 31, 2020, the Company recorded expense of $69 under the 401(k) Plan. NOTE 12 – 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 has experienced minimal delays, but may experience future delays that impact its business, research and development activities, healthcare systems and the global economy as a whole. However, the Company will continue to monitor the COVID-19 situation closely should the effects have a material impact on its operations, liquidity and capital resources. 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 parties that the Company has contracted with to conduct studies for TARA-002. The effects of the orders and the Company’s related adjustments in its business are 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. F-33