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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

OR

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 001-36279

CARA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

Delaware

75-3175693

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

4 Stamford Plaza

107 Elm Street, 9th Floor

Stamford, Connecticut

06902

(Address of registrant’s principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (203) 406-3700

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.001 per share

CARA

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

 

  

Accelerated Filer

Non-Accelerated Filer

 

  

Smaller Reporting Company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No.

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of May 7, 2020 was: 46,796,059.

Table of Contents

CARA THERAPEUTICS, INC.

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

PART I –FINANCIAL INFORMATION

PAGE

NUMBER

Item 1.

Financial Statements (Unaudited):

Condensed Balance Sheets as of March 31, 2020 and December 31, 2019

1

Condensed Statements of Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019

2

Condensed Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019

3

Condensed Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019

4

Notes to Condensed Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

50

Item 4.

Controls and Procedures

51

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

52

Item 1A

Risk Factors

52

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

95

Item 3.

Defaults Upon Senior Securities

95

Item 4.

Mine Safety Disclosures

95

Item 5.

Other Information

95

Item 6.

Exhibits

96

SIGNATURES

98

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1.Financial Statements.

CARA THERAPEUTICS, INC.

CONDENSED BALANCE SHEETS

(amounts in thousands, excluding share and per share data)

(unaudited)

    

March 31, 2020

    

December 31, 2019

Assets

 

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

17,036

$

18,305

Marketable securities

 

103,160

 

136,701

Income tax receivable

 

938

 

816

Other receivables

 

847

 

971

Prepaid expenses

 

10,688

 

8,863

Total current assets

 

132,669

 

165,656

Operating lease right-of-use asset

2,876

3,036

Marketable securities, non-current

 

59,568

 

63,159

Property and equipment, net

 

652

 

700

Restricted cash

 

408

 

408

Total assets

$

196,173

$

232,959

Liabilities and stockholders’ equity

 

 

  

Current liabilities:

 

 

  

Accounts payable and accrued expenses

$

17,371

$

19,665

Operating lease liability, current

991

967

Current portion of deferred revenue

 

14,241

 

22,262

Total current liabilities

 

32,603

 

42,894

Operating lease liability, non-current

3,096

3,352

Commitments and contingencies (Note 15)

 

 

Stockholders’ equity:

 

 

  

Preferred stock; $0.001 par value; 5,000,000 shares authorized at March 31, 2020 and December 31, 2019, zero shares issued and outstanding at March 31, 2020 and December 31, 2019

 

 

Common stock; $0.001 par value; 100,000,000 shares authorized at March 31, 2020 and December 31, 2019, 46,727,725 shares and 46,720,225 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

47

 

47

Additional paid-in capital

 

590,144

 

587,223

Accumulated deficit

 

(429,649)

 

(400,727)

Accumulated other comprehensive income (loss)

 

(68)

 

170

Total stockholders’ equity

 

160,474

 

186,713

Total liabilities and stockholders’ equity

$

196,173

$

232,959

See Notes to Condensed Financial Statements.

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CARA THERAPEUTICS, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(amounts in thousands, excluding share and per share data)

(unaudited)

Three Months Ended

    

March 31, 2020

    

March 31, 2019

    

Revenue:

License and milestone fees

$

8,021

$

4,242

Clinical compound revenue

 

72

 

140

Total revenue

 

8,093

 

4,382

Operating expenses:

 

  

 

  

Research and development

 

33,536

 

23,608

General and administrative

 

4,558

 

3,908

Total operating expenses

 

38,094

 

27,516

Operating loss

 

(30,001)

 

(23,134)

Other income, net

 

957

 

1,089

Loss before benefit from income taxes

 

(29,044)

 

(22,045)

Benefit from income taxes

 

122

 

85

Net loss

$

(28,922)

$

(21,960)

Net loss per share:

 

  

 

  

Basic and Diluted

$

(0.62)

$

(0.56)

Weighted average shares:

 

  

 

  

Basic and Diluted

 

46,724,951

 

39,552,277

Other comprehensive income (loss), net of tax of $0:

 

  

 

  

Change in unrealized gains (losses) on available-for-sale marketable securities

 

(238)

 

187

Total comprehensive loss

$

(29,160)

$

(21,773)

See Notes to Condensed Financial Statements.

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CARA THERAPEUTICS, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(amounts in thousands except share and per share data)

(unaudited)

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Income (Loss)

    

Equity

Balance at December 31, 2018

39,547,558

$

39

$

428,059

$

(294,354)

$

(114)

$

133,630

Stock-based compensation expense

 

 

 

2,234

 

 

 

2,234

Shares issued upon exercise of stock options

 

17,291

 

 

234

 

 

 

234

Shares issued for consulting services

10,195

197

197

Net loss

 

 

 

 

(21,960)

 

 

(21,960)

Other comprehensive income

 

 

 

 

 

187

 

187

Balance at March 31, 2019

39,575,044

$

39

$

430,724

$

(316,314)

$

73

$

114,522

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Income (Loss)

    

Equity

Balance at December 31, 2019

46,720,225

$

47

$

587,223

$

(400,727)

$

170

$

186,713

Stock-based compensation expense

 

 

 

2,846

 

 

 

2,846

Shares issued upon exercise of stock options

 

7,500

 

 

75

 

 

 

75

Net loss

 

 

 

 

(28,922)

 

 

(28,922)

Other comprehensive loss

 

 

 

 

 

(238)

 

(238)

Balance at March 31, 2020

46,727,725

$

47

$

590,144

$

(429,649)

$

(68)

$

160,474

See Notes to Condensed Financial Statements.

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CARA THERAPEUTICS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

Three Months Ended

    

March 31, 2020

    

March 31, 2019

Operating activities

 

  

 

  

Net loss

$

(28,922)

$

(21,960)

Adjustments to reconcile net loss to net cash used in operating activities:

 

  

 

Stock-based compensation expense

 

2,846

 

2,234

Depreciation and amortization

 

48

 

50

Amortization expense component of lease expense

 

160

 

145

Accretion of available-for-sale marketable securities, net

(65)

(478)

Deferred revenue

 

(8,021)

 

(4,242)

Changes in operating assets and liabilities:

 

 

Income tax receivable

 

(122)

 

(85)

Other receivables

 

124

 

(93)

Prepaid expenses

 

(1,825)

 

(2,574)

Accounts payable and accrued expenses

 

(2,294)

 

(312)

Operating lease liability

(232)

(211)

Net cash used in operating activities

 

(38,303)

 

(27,526)

Investing activities

 

  

 

  

Proceeds from maturities of available-for-sale marketable securities

 

55,475

 

79,295

Proceeds from redemptions of available-for-sale marketable securities, at par

2,500

Purchases of available-for-sale marketable securities

 

(21,016)

 

(52,885)

Purchases of property and equipment

 

 

(11)

Net cash provided by investing activities

 

36,959

 

26,399

Financing activities

 

  

 

  

Proceeds from the exercise of stock options

 

75

 

234

Net cash provided by financing activities

 

75

 

234

Net decrease in cash, cash equivalents and restricted cash

 

(1,269)

 

(893)

Cash, cash equivalents and restricted cash at beginning of period

 

18,713

 

15,850

Cash, cash equivalents and restricted cash at end of period

$

17,444

$

14,957

Noncash investing and financing activities

Shares of common stock issued in exchange for consulting services

$

$

197

See Notes to Condensed Financial Statements.

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

1. Business

Cara Therapeutics, Inc., or the Company, is a clinical-stage biopharmaceutical corporation formed on July 2, 2004. The Company is focused on developing and commercializing new chemical entities designed to alleviate pruritus by selectively targeting peripheral kappa opioid receptors. The Company’s primary activities to date have been organizing and staffing the Company, developing its product candidates and raising capital.

As of March 31, 2020, the Company had raised aggregate net proceeds of approximately $519,600 from several rounds of equity financing, including its initial public offering, or IPO, which closed in February 2014 and four follow-on public offerings of common stock, which closed in July 2019, July 2018, April 2017 and August 2015, respectively, and the issuance of convertible preferred stock and debt prior to the IPO. The Company had also received approximately $89,000 under its license agreements for CR845/difelikefalin, primarily with Vifor Fresenius Medical Care Renal Pharma Ltd., or VFMCRP, Maruishi Pharmaceutical Co. Ltd., or Maruishi, and Chong Kun Dang Pharmaceutical Corp., or CKDP, and an earlier product candidate for which development efforts ceased in 2007. Additionally, in May 2018, the Company received net proceeds of $14,556 from the issuance and sale of 1,174,827 shares of the Company’s common stock to Vifor (International) Ltd., or Vifor, in connection with the Company’s license agreement with VFMCRP (see Note 10, Collaboration and Licensing Agreements).

As of March 31, 2020, the Company had unrestricted cash and cash equivalents and marketable securities of $179,764 and an accumulated deficit of $429,649. The Company has incurred substantial net losses and negative cash flows from operating activities in nearly every fiscal period since inception and expects this trend to continue for the foreseeable future. The Company recognized net losses of $28,922 and $21,960 for the three months ended March 31, 2020 and 2019, respectively, and had net cash used in operating activities of $38,303 and $27,526 for the three months ended March 31, 2020 and 2019, respectively.

The Company is subject to risks common to other life science companies including, but not limited to, uncertainty of product development and commercialization, lack of marketing and sales history, development by its competitors of new technological innovations, dependence on key personnel, market acceptance of products, product liability, protection of proprietary technology, ability to raise additional financing, and compliance with Food and Drug Administration, or FDA, and other government regulations. If the Company does not successfully commercialize any of its product candidates, it will be unable to generate recurring product revenue or achieve profitability.

2. Basis of Presentation

The unaudited interim condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States of America, or GAAP. In the opinion of management, these unaudited interim financial statements reflect all adjustments, consisting primarily of normal recurring accruals, necessary for a fair presentation of results for the periods presented. The results of operations for interim periods are not necessarily indicative of the results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by SEC rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. The condensed balance sheet data as of December 31, 2019 were derived from audited financial statements, but do not include all disclosures required by GAAP. These unaudited interim condensed financial statements should be read in conjunction with the audited financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

Use of Estimates

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, as of the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of marketable securities that are classified as level 2 of the fair value hierarchy, useful lives of fixed assets, the periods over which certain revenues will be recognized, including licensing and collaborative revenue recognized from non-refundable up-front and milestone payments, the determination of prepaid research and development, or R&D, clinical costs and accrued research projects, the amount of non-cash compensation costs related to share-based payments to employees and non-employees and the periods over which those costs are expensed, the incremental borrowing rate used in lease calculations and the likelihood of realization of deferred tax assets.

The COVID-19 pandemic is expected to result in a slowdown of economic activity that is likely to interrupt business operations across the globe. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these condensed financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, assumptions and judgments or revise the reported amounts of assets and liabilities or the disclosure of contingent assets and liabilities. These estimates, however, may change as new events occur and additional information is obtained, and are recognized in the condensed financial statements as soon as they become known.

Actual results could differ materially from the Company’s estimates and assumptions.

Significant Accounting Policies

There have been no material changes to the significant accounting policies previously disclosed in Note 2 to the Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, except for the recent adoption of new accounting pronouncements as disclosed below.

Accounting Pronouncements Recently Adopted

On January 1, 2020, the Company adopted Accounting Standards Update, or ASU, No. 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, or ASU 2016-13, which replaces the incurred loss impairment methodology in prior GAAP that delays recognition of a credit loss until it is probable that such loss has been incurred, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The Company deems certain of its investments to be marketable securities if the investment, or in the case of money market funds, the securities underlying the money market fund, meet the definition of a debt security in Accounting Standards Codification, or ASC, section 320-10-20. The Company considers its marketable securities to be available-for-sale, which are its only financial instruments that are within the scope of ASU 2016-13 as of March 31, 2020. The Company’s investments in marketable securities, including U.S. Treasury securities, U.S. government agency obligations, corporate bonds, commercial paper and municipal bonds, are highly rated by Moody’s and S&P and have maturities primarily of less than one year but no longer than two years. Accordingly, credit risk associated with the Company’s available-for-sale debt security portfolio is mitigated.

ASU 2016-13 modifies the prior other-than-temporary impairment model for available-for-sale debt securities by requiring (1) estimating expected credit losses (the portion of the amortized cost basis of a financial asset that the

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

Company does not expect to collect) only when the fair value is below the amortized cost of the asset; (2) recording a credit loss without regard to the length of time a security has been in an unrealized loss position; (3) limiting the measurement of the credit loss to the difference between the security’s amortized cost basis and its fair value; and (4) presenting credit losses as an allowance rather than as a write-down, which will allow the Company to record reversals of credit losses in current period net income, a practice that was previously prohibited. In April and November 2019, respectively, codification improvements were issued to help clarify and correct certain portions of ASU 2016-13.

The Company reviews each of its available-for-sale marketable securities for unrealized losses (declines in fair value below its amortized cost basis) at each balance sheet date presented in its financial statements and whenever events or changes in circumstances indicate that the amortized cost basis of an asset may not be recoverable. In accordance with the adoption of ASU 2016-13, the Company is required to determine whether any portion of the unrealized loss for any available-for-sale debt security is due to a credit loss, and if so, to measure the amount of the credit loss.

The Company will rely on both qualitative and quantitative factors to determine whether the unrealized loss for each available-for-sale debt security at any balance sheet date is due to a credit loss.

Qualitative factors may include a credit downgrade, severity of the decline in fair value below amortized cost and other adverse conditions related specifically to the security, as well as the intent to sell the security, or whether the Company will more likely than not be required to sell the security before recovery of its amortized cost basis. The Company’s assessment of whether a security is impaired could change in the future due to new developments or changes in assumptions related to any particular security. If material qualitative factors indicate that a credit loss has occurred, the Company will determine the magnitude of that credit loss using a discounted cash flow model or other quantitative method.

If the Company intends to sell the security or it is more likely than not that the Company will be forced to sell the security before recovery of the amortized cost of the security, the entire unrealized loss is deemed to be a credit loss, which is recognized in net income (loss). Otherwise, the portion of the unrealized loss that is due to a credit loss will be recorded as an Allowance for Credit Loss, which will offset the balance of Marketable Securities on the Condensed Balance Sheets and as credit loss expense within other income, net on the Condensed Statements of Comprehensive Loss. The portion of the unrealized loss that is not due to a credit loss as well as all unrealized gains will be recorded in Accumulated Other Comprehensive Income (Loss), or AOCI, net of taxes, on the Condensed Balance Sheets. There was no cumulative effect adjustment as a result of the adoption of ASU 2016-13 on January 1, 2020 (see Note 3, Available-for-Sale Marketable Securities, and Note 5, Fair Value Measurements).

Accrued interest receivables are excluded from the Company’s amortized cost bases for its available-for-sale marketable securities and are included within Other Receivables on the Company’s Condensed Balance Sheets. The Company’s policy is to not measure an allowance for credit losses on accrued interest receivable balances at each reporting period since it elects to write off uncollectible accrued interest receivable balances as credit loss expense in a timely manner, which is by maturity date for all categories of its debt securities.

On January 1, 2020, the Company adopted ASU 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606), or ASU 2019-08, which requires the Company to measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction to the transaction price is required to be measured on the basis of the grant-date fair value of the share-based payment award in accordance with Topic 718. The grant date is the date at which a grantor (supplier) and a grantee (customer) reach a mutual understanding of the key terms and conditions of a share-based payment award. The classification and subsequent measurement of the award are subject to the guidance in Topic 718 unless the share-based payment award is subsequently modified and the grantee is no longer a customer. The adoption of ASU 2019-08 did not

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

have a material effect on its results of operations, financial position or cash flows since the Company has not historically granted share-based payment awards to customers.

On January 1, 2020, the Company adopted ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, or ASU 2018-18, which clarifies the interaction between Topic 808 and Topic 606 by (1) clarifying that certain transactions between collaborative arrangement participants should be accounted for under Topic 606; (2) adding unit-of-account guidance in Topic 808 to align with the guidance in Topic 606; and (3) clarifying presentation guidance for transactions with a collaborative arrangement participant that are not accounted for under Topic 606. The adoption of ASU 2018-18 did not have any effect on its financial position, results of operations or cash flows since all three of its collaboration and licensing agreements are accounted for under Topic 606 (see Note 10, Collaboration and Licensing Agreements and Note 11, Revenue Recognition).

On January 1, 2020, the Company adopted ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13, which modifies the disclosure requirements on fair value measurements in Topic 820 to remove the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. ASU 2018-13 also amends Topic 820 to clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 also requires additional disclosure for changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period as well as the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Upon adoption of ASU 2018-13, the Company did not have any assets or liabilities that are included in Level 3 fair value measurements and no retrospective treatment was applicable. As a result, the adoption of ASU 2018-13 did not have a material effect on its results of operations, financial position or cash flows.

Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), or ASU 2019-12, which removes specific exceptions to the general principles in Topic 740. ASU 2019-12 eliminates the need for an organization to analyze whether the following apply in a given period: i) exception to the incremental approach for intra-period tax allocation; ii) exceptions to accounting for basis differences when there are ownership changes in foreign investments; and iii) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss. ASU 2019-12 also simplifies the accounting for income taxes for: i) franchise taxes that are partially based on income; ii) transactions with a government that result in a step up in the tax basis of goodwill; (iii) separate financial statements of legal entities that are not subject to tax; and iv) enacted changes in tax laws in interim periods. The amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period and must adopt all the amendments in the same period. The amendments in ASU 2019-12 related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. As such, the Company expects to adopt ASU 2019-12 on January 1, 2021 and is currently evaluating the effect it will have on its results of operations, financial position and cash flows.

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

3. Available-for-Sale Marketable Securities

As of March 31, 2020 and December 31, 2019, the Company’s available-for-sale marketable securities consisted of debt securities issued by the U.S. Treasury, U.S. government-sponsored entities and investment grade institutions as well as municipal bonds.

The following tables summarize the Company’s available-for-sale marketable securities by major type of security as of March 31, 2020 and December 31, 2019:

As of March 31, 2020

Gross Unrealized

Estimated Fair

Type of Security

    

Amortized Cost

    

Gains

    

Losses

    

Value

U.S. Treasury securities

$

16,065

$

249

$

$

16,314

U.S. government agency obligations

 

17,601

 

39

 

(1)

 

17,639

Corporate bonds

 

93,681

 

79

 

(460)

 

93,300

Commercial paper

 

31,949

 

26

 

 

31,975

Municipal bonds

 

3,500

 

 

 

3,500

Total available-for-sale marketable securities

$

162,796

$

393

$

(461)

$

162,728

As of December 31, 2019

Gross Unrealized

Estimated Fair

Type of Security

    

Amortized Cost

    

Gains

    

Losses

    

Value

U.S. Treasury securities

$

16,052

$

31

$

(2)

$

16,081

U.S. government agency obligations

 

25,803

 

14

 

(1)

 

25,816

Corporate bonds

 

115,788

 

125

 

(23)

 

115,890

Commercial paper

 

38,547

 

27

 

(1)

 

38,573

Municipal bonds

3,500

3,500

Total available-for-sale marketable securities

$

199,690

$

197

$

(27)

$

199,860

The following tables summarize the fair value and gross unrealized losses of the Company’s available-for-sale marketable securities by investment category and disaggregated by the length of time that individual debt securities have been in a continuous unrealized loss position.

As of March 31, 2020

Less than 12 Months

12 Months or Greater

Total

Gross

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Fair 

Unrealized

    

 Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

U.S. government agency obligations

$

4,248

$

(1)

$

$

$

4,248

$

(1)

Corporate bonds

63,046

(460)

63,046

(460)

Total

$

67,294

$

(461)

$

$

$

67,294

$

(461)

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

As of December 31, 2019

Less than 12 Months

12 Months or Greater

Total

Gross

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

    

 Value

    

Losses

    

 Value

    

Losses

    

 Value

    

Losses

U.S. Treasury securities

$

3,185

$

(2)

$

$

$

3,185

$

(2)

U.S. government agency obligations

 

2,400

 

(1)

 

 

 

2,400

 

(1)

Corporate bonds

 

28,895

 

(23)

 

 

 

28,895

 

(23)

Commercial paper

 

4,264

 

(1)

 

 

 

4,264

 

(1)

Total

$

38,744

$

(27)

$

$

$

38,744

$

(27)

As of March 31, 2020 and December 31, 2019, respectively, no allowance for credit losses were recognized on the Company’s available-for-sale debt securities as no portion of the unrealized losses associated with those securities were due to credit losses. The information that the Company considered in reaching the conclusion that an allowance for credit losses was not necessary for the following categories of securities is as follows:

As of March 31, 2020 and December 31, 2019, the Company held a total of 29 out of 68 positions and 16 out of 81 positions, respectively, that were in an unrealized loss position, none of which had been in an unrealized loss position for 12 months or greater. Unrealized losses individually and in aggregate were not considered to be material for each respective period. Based on the Company’s review of these securities, the Company believes that the cost basis of its available-for-sale marketable securities is recoverable.

U.S. government agency obligations. The unrealized losses on the Company’s investments in direct obligations of U.S. government agencies were caused by reduced liquidity in this category of debt securities due to the COVID-19 pandemic. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases. As of March 31, 2020, the Company held 1 out of 6 positions in an unrealized loss position for its U.S. government agency obligations.

Corporate bonds. The unrealized losses on the Company’s investments in corporate bonds relate to increased volatility and reduced liquidity in the investment grade corporate debt market due to the COVID-19 pandemic. The credit ratings of the corporate bonds in the Company’s portfolio have not been downgraded below investment grade status as a result of the pandemic. The Company expects to recover the entire amortized cost bases of those securities as the pandemic subsides and markets normalize. The Company does not intend to sell its investments in corporate bonds, and it is not more likely than not that the Company will be required to sell those investments before recovery of their amortized cost bases. As of March 31, 2020, the Company held 28 out of 42 positions in an unrealized loss position for its corporate bonds.

The Company classifies its marketable debt securities based on their contractual maturity dates. As of March 31, 2020, the Company’s marketable debt securities mature at various dates through December 2021. The amortized cost and fair values of marketable debt securities by contractual maturity were as follows.

As of March 31, 2020

As of December 31, 2019

Contractual maturity

    

Amortized Cost

    

Fair Value

    

Amortized Cost

    

Fair Value

Less than one year

$

103,142

$

103,160

$

136,565

$

136,701

One year to two years

 

59,654

 

59,568

 

63,125

 

63,159

Total

$

162,796

$

162,728

$

199,690

$

199,860

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

All available-for-sale marketable securities are classified as Marketable securities, current or Marketable securities, non-current depending on the contractual maturity date of the individual available-for-sale security. Other income includes interest and dividends, accretion/amortization of discounts/premiums, realized gains and losses on sales of securities and credit loss expense due to declines in the fair value of securities, if any. The cost of securities sold is based on the specific identification method.

There were no sales of available-for-sale marketable securities during the three months ended March 31, 2020 and 2019, respectively.

As of March 31, 2020 and December 31, 2019, accrued interest receivables on our available-for-sale debt securities were $847 and $971, respectively.

4. Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in AOCI, net of tax, from unrealized gains (losses) on available-for-sale marketable securities, the Company’s only component of AOCI, for the three months ended March 31, 2020 and March 31, 2019.

    

Total Accumulated

Other Comprehensive 

Income (Loss)

Balance, December 31, 2019

$

170

Other comprehensive loss before reclassifications

 

(238)

Amount reclassified from accumulated other comprehensive income

 

Net current period other comprehensive loss

 

(238)

Balance, March 31, 2020

$

(68)

Balance, December 31, 2018

$

(114)

Other comprehensive income before reclassifications

 

187

Amount reclassified from accumulated other comprehensive income

 

Net current period other comprehensive income

 

187

Balance, March 31, 2019

$

73

Amounts reclassified out of AOCI into net loss are determined by specific identification. There were no reclassifications out of AOCI and into net loss during the three months ended March 31, 2020 and 2019, respectively.

5. Fair Value Measurements

As of March 31, 2020 and December 31, 2019, the Company’s financial instruments consisted of cash, cash equivalents, available-for-sale marketable securities, prepaid expenses, restricted cash, accounts payable and accrued liabilities. The fair values of cash, cash equivalents, prepaid expenses, restricted cash, accounts payable and accrued liabilities approximate their carrying values due to the short-term nature of these financial instruments. Available-for-sale marketable securities are reported on the Company’s Condensed Balance Sheets as Marketable Securities at their fair values, based upon pricing of securities with the same or similar investment characteristics as provided by third-party pricing services, as described below.

Current accounting guidance defines fair value, establishes a framework for measuring fair value in accordance with ASC section 820, and requires certain disclosures about fair value measurements. The valuation techniques included in

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

the guidance are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.

The Company classifies its investments in a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is divided into three levels based on the source of inputs as follows:

Level 1 – Observable inputs – quoted prices in active markets for identical assets and liabilities.
Level 2 – Observable inputs other than the quoted prices in active markets for identical assets and liabilities – such as quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require the Company to develop relevant assumptions.

Valuation Techniques - Level 2 Inputs

The Company estimates the fair values of its financial instruments categorized as level 2 in the fair value hierarchy, including U.S. Treasury securities, U.S. government agency obligations, corporate bonds, commercial paper and municipal bonds, by taking into consideration valuations obtained from third-party pricing services. The pricing services use industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, benchmark yields, issuer credit spreads, benchmark securities, and other observable inputs. The Company obtains a single price for each financial instrument and does not adjust the prices obtained from the pricing service.

The Company validates the prices provided by its third-party pricing services by reviewing their pricing methods, obtaining market values from other pricing sources and comparing them to the share prices presented by the third-party pricing services. After completing its validation procedures, the Company did not adjust or override any fair value measurements provided by its third-party pricing services as of March 31, 2020 or December 31, 2019.

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

The following tables summarize the Company’s financial assets measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.

Fair value measurement as of March 31, 2020:

Quoted prices in

Significant other

Significant

Financial assets

active markets for

observable

unobservable

identical assets

inputs

inputs

Type of Instrument

    

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

Cash and cash equivalents:

 

  

 

  

 

  

 

  

Money market funds and checking accounts

$

17,036

$

17,036

$

$

Available-for-sale marketable securities:

 

  

 

  

 

  

 

  

U.S. Treasury securities

 

16,314

 

 

16,314

 

U.S. government agency obligations

 

17,639

 

 

17,639

 

Corporate bonds

 

93,300

 

 

93,300

 

Commercial paper

 

31,975

 

 

31,975

 

Municipal bonds

 

3,500

 

 

3,500

 

Restricted cash:

 

  

 

  

 

  

 

  

Commercial money market account

 

408

 

408

 

 

Total financial assets

$

180,172

$

17,444

$

162,728

$

Fair value measurement as of December 31, 2019:

Quoted prices in

Significant other

Significant

Financial assets

active markets for

observable

unobservable

identical assets

inputs

inputs

Type of Instrument

    

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

Cash and cash equivalents:

 

  

 

  

 

  

 

  

Money market funds and checking accounts

$

18,305

$

18,305

$

$

Available-for-sale marketable securities:

 

  

 

  

 

  

 

  

U.S. Treasury securities

16,081

16,081

U.S. government agency obligations

 

25,816

 

 

25,816

 

Corporate bonds

 

115,890

 

 

115,890

 

Commercial paper

 

38,573

 

 

38,573

 

Municipal bonds

3,500

3,500

Restricted cash:

 

  

 

  

 

  

 

  

Commercial money market account

 

408

 

408

 

 

Total financial assets

$

218,573

$

18,713

$

199,860

$

There were no purchases, sales or maturities of Level 3 financial assets and no unrealized gains or losses related to Level 3 available-for-sale marketable securities during the three months ended March 31, 2020 and 2019, respectively. There were no transfers of financial assets into or out of Level 3 classification during the three months ended March 31, 2020 and 2019, respectively.

6. Restricted Cash

The Company is required to maintain a stand-by letter of credit as a security deposit under its lease for its office space in Stamford, Connecticut (refer to Note 15, Commitments and Contingencies: Leases). The fair value of the letter of credit approximates its contract value. The Company’s bank requires the Company to maintain a restricted cash

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

balance to serve as collateral for the letter of credit issued to the landlord by the bank. As of March 31, 2020, the restricted cash balance for the Stamford Lease was invested in a commercial money market account.

As of March 31, 2020 and December 31, 2019, the Company had $408 of restricted cash related to the Stamford Lease in long-term assets.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Balance Sheets that sum to the total of the same such amounts shown in the Condensed Statements of Cash Flows.

March 31, 2020

December 31, 2019

Cash and cash equivalents

$

17,036

$

18,305

Restricted cash, long-term assets

 

408

 

408

Total cash, cash equivalents, and restricted cash shown in the Condensed Statements of Cash Flows

$

17,444

$

18,713

7. Prepaid expenses

As of March 31, 2020, prepaid expenses were $10,688, consisting of $8,707 of prepaid R&D clinical costs, $1,705 of prepaid insurance and $276 of other prepaid costs. As of December 31, 2019, prepaid expenses were $8,863, consisting of $8,498 of prepaid R&D clinical costs, $181 of prepaid insurance, and $184 of other prepaid costs.

8. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

March 31, 2020

December 31, 2019

Accounts payable

$

9,309

$

9,100

Accrued research projects

 

5,699

 

6,637

Accrued professional fees

 

736

 

635

Accrued compensation and benefits

 

1,627

 

3,293

Total

$

17,371

$

19,665

9. Stockholders’ Equity

On March 20, 2019, or the Effective Date, the Company entered into a consulting agreement with an existing stockholder. In accordance with the agreement, the stockholder provided various consulting services to the Company in exchange for 10,195 unregistered shares of the Company’s common stock. The closing price of the Company’s common stock on the Effective Date was $19.37 per share. The services provided by the consultant were performed during the six-month period following the Effective Date. The Company recorded a prepaid expense of $197 with a corresponding offset to Additional Paid-In Capital as of March 31, 2019. The Company amortized the entire amount of the prepaid expense on a straight-line basis as stock compensation expense within general and administrative expense over the six-month period in 2019 as services were performed. No expense was recorded for the three months ended March 31, 2019 within in the Statement of Comprehensive Loss.

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

10. Collaboration and Licensing Agreements

Vifor Fresenius Medical Care Renal Pharma Ltd.

On May 17, 2018, the Company entered into a license agreement, or the VFMCRP Agreement, with VFMCRP under which the Company granted VFMCRP an exclusive, royalty-bearing license, or the VFMCRP License, to seek regulatory approval to commercialize, import, export, use, distribute, offer for sale, promote, sell and otherwise commercialize CR845/difelikefalin injection, or the Licensed Product, for all therapeutic uses to prevent, inhibit or treat itch associated with pruritus in hemodialysis and peritoneal-dialysis patients, or the Field, worldwide (excluding the United States, Japan and South Korea), or the Territory.

Upon entry into the VFMCRP Agreement, VFMCRP made a non-refundable, non-creditable $50,000 upfront payment to the Company and Vifor purchased 1,174,827 shares of the Company’s common stock, or the Vifor Shares, for $20,000 at a price of $17.024 per share, which represents a premium over a pre-determined average closing price of the Company’s common stock. The purchase of the Company’s common stock was governed by a separate stock purchase agreement. The excess of the stock purchase price over the cost of the Vifor Shares at the closing price of the Company’s common stock on the purchase date of $5,444 was added to the upfront payment for accounting purposes.

The Company is eligible to receive from VFMCRP regulatory and commercial milestone payments in the aggregate of up to $470,000, consisting of up to $30,000 in regulatory milestones and up to $440,000 in tiered commercial milestones, all of which are sales-related. The Company is also eligible to receive tiered double-digit royalty payments based on annual net sales, as defined in the VFMCRP Agreement, of CR845/difelikefalin injection in the Licensed Territories. The Company retains full commercialization rights for CR845/difelikefalin injection for the treatment of CKD-aP in the United States except in the dialysis clinics of Fresenius Medical Care North America, or FMCNA, where VFMCRP and the Company will promote CR845/difelikefalin injection under a profit-sharing arrangement (subject to the terms and conditions of the VFMCRP Agreement) based on net FMCNA clinic sales recorded by the Company.

At inception of the VFMCRP Agreement, the transaction price of $55,444 was allocated entirely to the one combined performance obligation, as described above, and was initially recorded as deferred revenue. License and milestone revenue will be recognized proportionately as the R&D services are conducted (i.e., prior to submission of a New Drug Application, or NDA).

The license also requires VFMCRP to promote and take orders in the U.S. for sale by the Company to FMC U.S. Dialysis Clinics and allows VFMCRP to grant sub-licenses, which, in certain cases, requires the Company’s prior written consent. The Company retains the rights to import, distribute, promote, sell and otherwise commercialize the Licensed Product outside of the Field and outside of the Territory.

The Company retains the rights to make and have made the Licensed Product in the Territory for commercial sale by VFMCRP in the Field in or outside the Territory and for supply of Licensed Product to VFMCRP under the terms of a supply agreement, or the Supply Agreement. The supply price will be the Company’s cost of goods sold, as calculated under U.S. GAAP, plus an agreed upon margin. The Supply Agreement will co-terminate with the VFMCRP Agreement. In regards to a supply agreement, the VFMCRP Agreement only includes a requirement for the Company to negotiate in good faith with VFMCRP. After the execution of the VFMCRP Agreement, a separate agreement to supply them with the Licensed Product would be entered into, although the Company has no obligation to execute a supply agreement. In the event that the parties fail to enter into a Supply Agreement or if the Company fails to provide Licensed Product on a timely basis, VFMCRP has the right to manufacture or have manufactured the Licensed Product in and outside the Territory.

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

The Supply Agreement will be accounted for as a customer option that is not a material right because the selling price of the Licensed Product under the Supply Agreement is the Company’s cost of goods sold plus an agreed upon margin, which is commensurate with the “cost of goods sold plus” model that the Company would charge other parties under similar agreements (the standalone selling price) and not at a discount. Therefore, the sale of clinical compound to VFMCRP is not a performance obligation under the VFMCRP Agreement but rather the Supply Agreement is a separate agreement from the VFMCRP Agreement. The only performance obligation under the Supply Agreement is the delivery of the Licensed Product to VFMCRP for commercialization. Revenue from the sale of the Licensed Product to VFMCRP will be recognized as Clinical Supply revenue in the Company’s Statements of Comprehensive Loss as sales of the Licensed Product occur. As of March 31, 2020, no supply agreement has been entered into between the Company and VFMCRP.

The VFMCRP Agreement terminates upon the expiration of all royalty terms with respect to the Licensed Products, which expire on a Product-by-Product and country-by-country basis, at the latest of (a) the expiration of all patent rights licensed to VFMCRP covering such Licensed Product; (b) the expiration of all regulatory and data exclusivity applicable to such Licensed Product in such country and (c) the tenth anniversary of the first commercial sale of such Product in such country.

The VFMCRP Agreement may be terminated earlier by either party for material breach that is not cured within 60 days, bankruptcy by either party and by both parties upon mutual written consent. The Company may terminate the VFMCRP Agreement if VFMCRP challenges the validity of any licensed patent rights, except if such patent challenge results from the Company’s action against VFMCRP for infringement of any licensed patent in the Territory. In addition, upon the earlier of (1) the acceptance for filing of an NDA covering Licensed Product filed with the FDA (after completion of the Phase 3 program) or (2) the third anniversary of the Effective Date, the VFMCRP Agreement may be terminated by VFMCRP in its entirety or with respect to any countries within the Territory upon written notice to the Company. Such termination will be effective twelve months following the date of such notice.

If the VFMCRP Agreement terminates early for any reason stated above, VFMCRP’s licenses will terminate, VFMCRP’s rights to use the Company’s confidential information and the Company’s know-how will revert to the Company and VFMCRP will assign and transfer to the Company all right, title and interest in all regulatory applications (IND’s and NDA’s), regulatory approval applications and regulatory approvals in the Territory covering Licensed Product.

Maruishi Pharmaceutical Co., Ltd.

In April 2013, the Company entered into a license agreement with Maruishi, or the Maruishi Agreement, under which the Company granted Maruishi an exclusive license to develop, manufacture, and commercialize drug products containing CR845/difelikefalin for acute pain and/or uremic pruritus in Japan. Maruishi has the right to grant sub-licenses in Japan, which entitles the Company to receive sub-license fees, net of prior payments made by Maruishi to the Company. Under the Maruishi Agreement, the Company and Maruishi are required to use commercially reasonable efforts, at their own expense, to develop, obtain regulatory approval for and commercialize CR845/difelikefalin in the United States and Japan, respectively. In addition, the Company provided Maruishi specific clinical development services for CR845/difelikefalin used in Maruishi’s field of use.

Under the terms of the Maruishi Agreement, the Company is eligible to receive milestone payments upon the achievement of defined clinical and regulatory events as well as tiered, low double-digit royalties with respect to any sales of the licensed product sold in Japan by Maruishi, if any, and share in any sub-license fees.

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

During the three months ended March 31, 2020 and 2019, the Company recognized clinical compound revenue of $72 and $140, respectively, from the sale of clinical compound to Maruishi and as a result, the Company incurred R&D expense of $65 and $126, respectively, during these respective periods.

Chong Kun Dang Pharmaceutical Corporation

In April 2012, the Company entered into a license agreement, or the CKDP Agreement, with Chong Kun Dang Pharmaceutical Corporation, or CKDP, in South Korea, under which the Company granted CKDP an exclusive license to develop, manufacture and commercialize drug products containing CR845/difelikefalin in South Korea. The Company and CKDP are each required to use commercially reasonable efforts, at their respective expense, to develop, obtain regulatory approval for and commercialize CR845/difelikefalin in the United States and South Korea, respectively. The Company identified the granting of the license as its only performance obligation under the CKDP Agreement.

Under the terms of the CKDP Agreement, the Company is eligible to receive milestone payments upon the achievement of defined clinical and regulatory events as well as tiered royalties, with percentages ranging from the high single digits to the high teens, based on net sales of products containing CR845/difelikefalin in South Korea, if any, and share in any sub-license fees.

11. Revenue Recognition

The Company currently recognizes revenue in accordance with ASC 606, as amended, for the VFMCRP, Maruishi and CKDP agreements (see Note 10, Collaboration and Licensing Agreements). Under each of these agreements, the Company has recognized revenue from upfront payments and, under the Maruishi Agreement and the CKDP Agreement, from clinical development milestone payments. The Company has also recognized revenue from a sub-license payment earned under the Maruishi Agreement. Under the Maruishi Agreement and the CKDP Agreement, the Company may earn additional future milestone payments upon the achievement of defined clinical events, and under the VFMCRP Agreement, the Maruishi Agreement and the CKDP Agreement, upon the achievement of defined regulatory events, and under the VFMCRP Agreement and the Maruishi Agreement, from sales milestones. The Company may also recognize revenue in the future from royalties on net sales under all three agreements. In addition, the Company has recognized revenue upon the delivery of clinical compound to Maruishi in accordance with separate supply agreements.

Contract balances

As of March 31, 2020, the Company had deferred revenue, current of $14,241 related to the performance obligations from the VFMCRP Agreement and had no balances of receivables, other assets or deferred revenue, non-current related to the VFMCRP Agreement. There were no balances of receivables, other assets or deferred revenue relating to the Maruishi and CKDP agreements as of March 31, 2020. As of December 31, 2019, the Company had deferred revenue, current of $22,262 related to the performance obligations from the VFMCRP Agreement and had no balances of receivables, other assets or deferred revenue, non-current related to the VFMCRP Agreement. There were no balances of receivables, other assets or deferred revenue relating to the Maruishi and CKDP agreements as of December 31, 2019.

Performance obligations

Under the VFMCRP Agreement, the Company’s performance obligations of granting a license to allow VFMCRP to commercialize CR845/difelikefalin injection worldwide, except in the United States, Japan and South Korea, which occurred at inception of the contract in May 2018, and performing R&D services by the Company to obtain sufficient clinical data which will be shared with VFMCRP to allow them to receive regulatory approval to sell

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

CR845/difelikefalin in the licensed territory, are not distinct, and are accounted for as a single performance obligation during the period that the R&D services are rendered (see Note 10, Collaboration and Licensing Agreements).

The Company’s distinct performance obligations under the Maruishi Agreement include transfer of the license to the Company’s IP, which allowed Maruishi to develop and commercialize CR845/difelikefalin, for acute pain and uremic pruritus indications in Japan, which occurred at inception of the contract in 2013, and performance of R&D services, which occurred from 2013 to 2015, as those services were rendered. The Company agreed to conduct limited work on an oral tablet formulation of CR845/difelikefalin and to conduct Phase 1 and proof-of-concept Phase 2 clinical trials of an intravenous formulation of CR845/difelikefalin to be used to treat patients with uremic pruritus. The Company agreed to transfer the data and information from such development to Maruishi for its efforts to obtain regulatory approval in Japan. These activities are referred to as R&D services.

The Company’s only performance obligation under the supply agreement with Maruishi is to deliver clinical compound to Maruishi in accordance with the receipt of purchase orders. If and when the Company enters into a supply agreement with VFMCRP, the Company’s only performance obligation under this supply agreement would be to deliver CR845/difelikefalin injection to VFMCRP in accordance with the receipt of purchase orders.

Under the CKDP Agreement, the Company’s only performance obligation is to transfer the license to the Company’s IP related to CR845/difelikefalin, which occurred at inception of the contract in 2012.

Upon execution of the VFMCRP Agreement, the Maruishi Agreement and the CKDP Agreement, the Company received a single fixed payment from each counterparty in exchange for granting the respective licenses and performing its other obligations. In addition, each of the counterparties made an equity investment in the Company’s common stock.

Transaction price allocated to the remaining performance obligations

At inception of the VFMCRP Agreement, the entire transaction price of $55,444 was allocated to the one combined performance obligation, as described above. For the three months ended March 31, 2020, $8,021 was recognized as license and milestone fees revenue based on the percentage of R&D services that were completed during the period. As of March 31, 2020, $41,203 of the $55,444 has been recognized as license and milestone fees revenue based on the percentage of R&D services that has been completed since the inception of the VFMCRP Agreement. As of March 31, 2020, there were no remaining performance obligations under either the Maruishi Agreement or the CKDP Agreement, although the Company is eligible to receive milestone payments and sales royalties in the future.

Significant judgments

In applying ASC 606, as amended, to its three contracts, the Company made the following judgments that significantly affect the timing and amount of revenue recognition:

1.

Determination of the number of distinct performance obligations in a contract

The VFMCRP Agreement contains one combined performance obligation, which includes the Company’s two performance obligations to grant a license to VFMCRP and conduct R&D services. Both of those performance obligations are inputs to the promise, within the context of the contract, to transfer a combined output for which VFMCRP has contracted (the ability of VFMCRP to commercialize the Licensed Product) (see Note 10, Collaboration and Licensing Agreements, for further discussion).

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

The Maruishi Agreement contains two distinct performance obligations: the granting of the license and the promise to deliver defined R&D services. Under the Maruishi Agreement, the license and the R&D services represent distinct goods or services from each other because Maruishi is able to benefit from the license on its own or together with other resources that are readily available to it (i.e., capable of being distinct). Maruishi’s ability to benefit from the license without the R&D services is indicated by its ability to conduct clinical trials of CR845/difelikefalin on its own and by the provision in the Maruishi Agreement whereby if the Company suspends or discontinues its development activity, the Company will provide information regarding its development efforts up to that point so that Maruishi may continue development and commercialization of the product in Japan. Therefore, the R&D services do not significantly affect Maruishi’s ability to use and benefit from the license.

In addition, the Company’s promise in the Maruishi contract to transfer the license is separately identifiable from the promise to provide defined R&D services (i.e., distinct within the context of the contract) because the Company is not using the goods or services as inputs to produce or deliver the combined output or outputs specified by the customer. The combined output specified by Maruishi is its right to conduct development activities related to CR845/difelikefalin in Japan, which could result in regulatory approval in Japan. That right is derived from the Company’s grant of the license. Maruishi is conducting clinical trials on its own and does not require the R&D services provided by the Company. Furthermore, the R&D services do not significantly modify or customize the license and vice versa. Finally, the license and R&D services are not highly interdependent or highly interrelated because the Company is able to fulfill its promise to transfer the initial license independently from its promise to subsequently provide the R&D services, which Maruishi can obtain on its own.

The only performance obligation in the CKDP Agreement is the granting of the license.

2.

Determination of the transaction price, including whether any variable consideration is included at inception of the contract

The transaction price is the amount of consideration that the Company expects to be entitled to in exchange for transferring promised goods or services to the customer. The transaction price must be determined at inception of a contract and may include amounts of variable consideration. However, there is a constraint on inclusion of variable consideration, such as milestone payments or sales-based royalty payments, in the transaction price related to licenses of IP, if there is uncertainty at inception of the contract as to whether such consideration will be recognized in the future.

The decision as to whether or not it is probable that a significant reversal of revenue will occur in the future, depends on the likelihood and magnitude of the reversal and is highly susceptible to factors outside the entity’s influence (for example, the Company cannot determine the outcome of clinical trials; the Company cannot determine if or when they or the counterparty will initiate or complete clinical trials; and the Company’s ability to obtain regulatory approval is difficult). In addition, the uncertainty is not expected to be resolved for a long period of time (in the order of years) and finally, the Company has limited experience in the field.

Therefore, at inception of the VFMCRP Agreement, the Maruishi Agreement and the CKDP Agreement, milestones and sales-based royalty payments were not included in the transaction price based on the factors noted above.

Under the VFMCRP Agreement, the single combined performance obligation will be satisfied as the R&D services are rendered and the transaction price, including the upfront payment of $50,000 and the premium on the common stock purchased by VFMCRP of $5,444, will be recognized as revenue as the R&D services are performed based on the costs incurred as a percentage of the estimated total costs to be incurred to complete the performance obligation. The remaining potential consideration was considered to be variable consideration and was constrained at inception of the

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

contract, including regulatory and sales milestones and sales royalties (see Note 10, Collaboration and Licensing Agreements).

All performance obligations under the Maruishi Agreement and the CKDP Agreement were satisfied by the end of 2015. In the future, any milestone event will be recognized as milestone and license fee revenue and collaboration revenue based upon the relative standalone selling prices of the two performance obligations at inception of the Maruishi Agreement, and as milestone and license fee revenue under the CKDP Agreement.

Under the Maruishi Agreement, the transaction price includes only the non-refundable and non-creditable upfront license fee of $15,337, including the premium of $337 from the sale of Company stock to Maruishi, that was paid to the Company at inception of the contract. The remaining potential consideration was considered to be variable consideration and was constrained at inception of the contract, including an aggregate of up to $10,500, which the Company is eligible to receive upon achievement of clinical development and regulatory milestones, a one-time sales milestone of one billion Yen when a certain sales level is attained; a mid-double-digit percentage of all non-royalty payments received by Maruishi from its sub-licensees, if any; and tiered royalties based on net sales of products containing CR845/difelikefalin in Japan, if any, with minimum royalty rates in the low double digits and maximum royalty rates in the low twenties.

Under the CKDP Agreement, the transaction price includes only the non-refundable and non-creditable upfront license fee of $646, including the premium of $83 from the sale of Company stock to CKDP, that was paid to the Company at inception of the contract. The remaining consideration was considered to be variable consideration and was constrained at inception of the contract, including an aggregate of up to $3,750, which the Company is eligible to earn upon achievement of clinical development and regulatory milestones. The Company is also eligible to receive a mid-double-digit percentage of all non-royalty payments received by CKDP from its sub-licensees, if any, and tiered royalties ranging from the high single digits to the high teens based on net sales of products containing CR845/difelikefalin in South Korea, if any.

3.

Determination of the estimate of the standalone selling price of performance obligations

In order to recognize revenue under ASC 606, as amended, for contracts for which more than one distinct performance obligation has been identified, the Company must allocate the transaction price to the performance obligations based upon their standalone selling prices. The best evidence of standalone selling price is an observable price of a good or service when sold separately by an entity in similar circumstances to similar customers. If such evidence is not available, standalone selling price should be estimated so that the amount that is allocated to each performance obligation equals the amount that the entity expects to receive for transferring goods or services. The Company has identified more than one performance obligation only in the Maruishi Agreement. Since evidence based on observable prices is not available for the performance obligations under the Maruishi Agreement, the Company considered market conditions and entity-specific factors, including those contemplated in negotiating the agreements, as well as certain internally developed estimates.

At inception of the Maruishi Agreement, the Company determined the estimate of standalone selling price for the license performance obligation by using the adjusted market assessment approach. Under this method, the Company forecasted and analyzed CR845/difelikefalin in the Japanese market, the phase of clinical development as well as considered recent similar license arrangements within the same phase of clinical development, therapeutic area, type of agreement, etc. To estimate the standalone selling price of the R&D services, the Company forecasted its expected costs of satisfying that performance obligation and added a margin for that service.

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

4.

Determination of the method of allocation of the transaction price to the distinct performance obligations

At inception of the Maruishi Agreement, the Company allocated the transaction price of $15,337 between the two performance obligations based on their relative standalone selling prices, determined as described above. The Company determined that the license and the R&D services had estimated standalone selling prices of $10,200 and $6,200, respectively. The resulting percentage allocations were applied to the $15,337 of total transaction price, which resulted in $9,637 being allocated to the license performance obligation, which was recognized immediately as license revenue, while $5,700 was allocated to the R&D services performance obligation. The amount allocated to the R&D services performance obligation was initially recorded as deferred revenue and was recognized as collaborative revenue as the R&D services were provided through July 2015.

Since both the VFMCRP Agreement and the CKDP Agreement each contain only one distinct performance obligation, at the inception of each of those agreements, the entire transaction price was allocated to the respective performance obligation.

5.

Determination of the timing of revenue recognition for contracts

Revenue should be recognized when, or as, an entity satisfies a performance obligation by transferring a promised good or service to a customer; i.e., when the customer obtains control of the good or service. The licenses granted to both Maruishi and CKDP are being accounted for as distinct performance obligations. As discussed below, both licenses relate to functional IP for which revenue is recognized at a point in time – in the case of these two license agreements, the point in time is at inception of the contract because the customer obtained control of the license at that point.

The licenses grant Maruishi and CKDP the right to use the Company’s IP relating to CR845/difelikefalin as it existed at the point in time that the licenses were granted. That IP has significant standalone functionality as it provides the customer with the ability to perform a function or task, such as to manufacture CR845/difelikefalin and conduct clinical trials, and is considered to be functional IP.

During the license periods, the Company is continuing to develop and advance CR845/difelikefalin by conducting clinical trials. Those development efforts are for its own benefit and do not substantively change the significant standalone functionality of the licensed IP granted to Maruishi or CKDP. Therefore, the Company’s ongoing development efforts do not significantly affect the IP’s utility to which Maruishi or CKDP have rights. Furthermore, if the Company abandons its development efforts, Maruishi or CKDP may still continue to develop CR845/difelikefalin in their respective countries.

The R&D services performance obligation under the Maruishi Agreement represents a separate performance obligation. The R&D services were provided to Maruishi by the Company from inception of the agreement in 2013 through the third quarter of 2015, at which time the Company had fulfilled its promise related to the R&D services. Revenue related to the R&D services performance obligation was recognized as services were performed based on the costs incurred as a percentage of the estimated total costs to be incurred to complete the performance obligation.

Similarly, under the VFMCRP Agreement, revenue related to the single distinct performance obligation, which includes both granting of the license and performance of the R&D services, will be recognized as the R&D services are performed, based on the costs incurred as a percentage of the estimated total costs to be incurred to complete the performance obligation. The Company expects that the remaining amount of the transaction price that was allocated to the combined performance obligation of $14,241 at March 31, 2020 will be recognized by 2020, as the R&D services are performed, subject to certain development and regulatory uncertainties.

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

6.

Determination of consideration as variable consideration, including factors related to inclusion in the transaction price at inception of the contract and timing of recognition as revenue.

The VFMCRP Agreement, the Maruishi Agreement and the CKDP Agreement contain potential payments related to achievement of defined milestone events and royalties upon net sales of future products, which are considered to be variable consideration because of the uncertainty of occurrence of any of those events specified in those agreements at inception of the agreements. Therefore, those potential payments were not included in the transaction price at the inception of the agreements.

Revenue related to achievement of milestone events is recognized when the Company has determined that it is probable that a milestone event will be achieved and there will not be a significant reversal of revenue in future periods. Upon probability of achievement of a milestone event, the most likely amount of variable consideration is included in the transaction price. Subsequent changes to the transaction price, after contract initiation, are allocated to the performance obligations in the contract on the same basis as at contract inception. Revenue for variable consideration is recognized in the same manner (point in time or over time) as for the performance obligations to which the payment amounts were allocated.

The Maruishi Agreement and the CKDP Agreement specify that certain development milestones will be achieved at pre-specified defined phases of a clinical trial (such as initiation or completion or other pre-specified time during a clinical trial as specified in the agreements).

During the three months ended March 31, 2020 and 2019, no milestone events were probable of occurrence or achieved.

Sublicense payments

VFMCRP’s, Maruishi’s and CKDP’s right to grant sub-licenses is explicitly stated in their respective license agreements. The amount of any potential sub-license fees to be received by the Company, which is based on a formula, is considered to be variable consideration and is constrained from inclusion in the transaction price at inception of the contract since at that time it was probable that there would be a reversal of such revenue in the future because the Company did not know if a sublicense would be granted in the future.

Sales-based Royalty Payments

The VFMCRP Agreement, CKDP Agreement and Maruishi Agreement each allow the Company to earn sales-based royalty payments in exchange for a license of intellectual property. In that case, the Company will recognize revenue for a sales-based royalty only when (or as) the later of the following events occurs:

a.The subsequent sale or usage occurs.
b.The performance obligation to which some or all of the sales-based royalty has been allocated has been satisfied (or partially satisfied).

Since the sale (item a, above) occurs after the license was delivered (item b, above), the sales-based royalty exception, to exclude such royalty payments from the transaction price, applies to the overall revenue stream. Therefore, sales-based royalty payments are recognized as revenue when the customer’s sales occur. To date, no royalties have been earned or were otherwise due to the Company.

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CARA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

12. Net Loss Per Share

The Company computes basic net income (loss) per share by dividing net income (loss) by the weighted-average number of shares of common stock outstanding. Diluted net income per share includes the potential dilutive effect of common stock equivalents as if such securities were exercised during the period, when the effect is dilutive. Common stock equivalents may include outstanding stock options or restricted stock units, which are included using the treasury stock method when dilutive. For the three months ended March 31, 2020 and 2019, the Company excluded the effects of potentially dilutive shares that were outstanding during those respective periods from the denominator as their inclusion would be anti-dilutive due to the Company’s net losses during those periods.

The denominators used in the net loss per share computations are as follows:

Three Months Ended

March 31, 

    

2020

    

2019

    

Basic:

 

  

 

  

 

Weighted average common shares outstanding

 

46,724,951

 

39,552,277

 

Diluted:

 

  

 

  

 

Weighted average common shares outstanding - Basic

 

46,724,951

 

39,552,277

 

Common stock options*

 

 

 

Denominator for diluted net loss per share

 

46,724,951

 

39,552,277

 

*

No amounts were considered as their effects would be anti-dilutive.

Basic and diluted net loss per share are computed as follows: