SEC Filing • Karuna Therapeutics

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krtx-10q_20190930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

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

For the transition period from __________ to ____________

Commission File Number: 001-38958

Karuna Therapeutics, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	27-0605902
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
33 Arch Street, Suite 3110 Boston, Massachusetts	02110
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (857) 449-2244

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.0001 par value per share		KRTX		Nasdaq Global Market

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, smaller reporting company, or an emerging growth company. See the definitions 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 ☒

As of October 31, 2019, the registrant had 23,412,754 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (Unaudited)	1
	Balance Sheets	1
	Statements of Operations	2
	Statements of Comprehensive Loss	3
	Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)	4
	Statements of Cash Flows	5
	Notes to Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II.	OTHER INFORMATION	34
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	35
Signatures		36

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

KARUNA THERAPEUTICS, INC.

BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	54,144		$	8,904
Short-term investments		107,461			4,983
Prepaid expenses and other current assets		2,323			1,709
Total current assets		163,928			15,596
Restricted cash		123			123
Property and equipment, net		176			138
Total assets	$	164,227		$	15,857
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable (includes $10 and $112 at September 30, 2019 and December 31, 2018, respectively, due to related parties)	158			$	269
Accrued expenses		1,319			538
Deferred lease obligation, short term portion		56			—
Derivative liability		—			389
Total current liabilities		1,533			1,196
Non-current convertible notes, net of discount		—			2,516
Deferred lease obligation, long term portion		164			102
Total liabilities		1,697			3,814
Commitments and Contingencies (Note 11)
Redeemable convertible preferred stock
Redeemable convertible preferred stock, Series Seed, $0.0001 par value; 0 and 4,412,500 shares authorized and outstanding at September 30, 2019 and December 31, 2018, respectively		—			1
Redeemable convertible preferred stock, Series A, $0.0001 par value; 0 and 3,126,700 shares authorized and outstanding at September 30, 2019 and December 31, 2018, respectively		—			41,964
Redeemable convertible preferred stock, Series B, $0.0001 par value; 0 shares authorized and outstanding at September 30, 2019 and December 31, 2018		—			—
Stockholders’ equity (deficit):
Preferred stock, $0.0001 par value; 10,000,000 and 0 shares authorized as of September 30, 2019 and December 31, 2018, respectively; 0 shares outstanding at September 30, 2019 and December 31, 2018		—			—
Common stock, $0.0001 par value; 150,000,000 and 12,337,650 shares authorized at September 30, 2019 and December 31, 2018, respectively; 23,412,754 and 12 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		2			—
Additional paid-in capital		230,216			1,633
Accumulated deficit		(67,738	)		(31,555	)
Accumulated other comprehensive income		50			—
Total stockholders’ equity (deficit)		162,530			(29,922	)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)	$	164,227		$	15,857

The accompanying notes are an integral part of these financial statements

Karuna Therapeutics, Inc.

Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue		—			—			—			—
Operating expenses:
Research and development	$	5,793		$	1,417		$	19,544		$	4,816
General and administrative		4,103			1,056			16,995			1,548
Total operating expenses		9,896			2,473			36,539			6,364
Loss from operations		(9,896	)		(2,473	)		(36,539	)		(6,364	)
Other income (expense):
Interest income (expense) (Note 4)		—			192			11			(396	)
Interest income		858			—			1,425			—
Accretion of debt discount		—			(1,324	)		(945	)		(1,996	)
Change in fair value of derivative		—			(2,633	)		(135	)		(429	)
Total other income (expense), net		858			(3,765	)		356			(2,821	)
Net loss before income taxes		(9,038	)		(6,238	)		(36,183	)		(9,185	)
Income tax provision		—			—			—			—
Net loss attributable to common stockholders	$	(9,038	)	$	(6,238	)	$	(36,183	)	$	(9,185	)
Net loss per share, basic and diluted (Note 8)	$	(0.39	)	$	(1,247,600	)	$	(4.67	)	$	(4,592,500	)
Weighted average common shares outstanding used in computing net loss per share, basic and diluted		22,907,349			5			7,755,137			2

The accompanying notes are an integral part of these financial statements

Karuna Therapeutics, Inc.

STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net loss	$	(9,038	)	$	(6,238	)	$	(36,183	)	$	(9,185	)
Other comprehensive income (loss):
Unrealized (losses) gains on short-term investments		(21	)		—			50			—
Comprehensive loss	$	(9,059	)	$	(6,238	)	$	(36,133	)	$	(9,185	)

The accompanying notes are an integral part of these financial statements

Karuna Therapeutics, Inc.

Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(In thousands, except share data)

(Unaudited)

	Series Seed Redeemable Convertible Preferred Stock						Series A Redeemable Convertible Preferred Stock						Series B Redeemable Convertible Preferred Stock						Common Stock				Additional Paid-in		Accumulated			Accumulated Other Comprehensive			Total Stockholders’ Equity
	Shares			Value			Shares			Value			Shares			Value			Shares		Value		Capital		Deficit			Income			(Deficit)
Balance, December 31, 2018		4,412,500		$	1			3,126,700		$	41,964			—		$	—			12	$	—	$	1,633	$	(31,555	)	$	—		$	(29,922	)
Issuance of Series B redeemable convertible preferred stock, net of issuance costs of $175		—			—			—			—			5,422,845			81,927			—		—		—		—			—			—
Stock-based compensation expense		—			—			—			—			—			—			—		—		9,945		—			—			9,945
Exercise of common warrants		—			—			—			—			—			—			19,986		—		58		—			—			58
Exercise of common options		—			—			—			—			—			—			38,961		—		4		—			—			4
Vesting of restricted stock units		—			—			—			—			—			—			105,163		—		—		—			—			—
Other comprehensive income		—			—			—			—			—			—			—		—		—		—			71			71
Net loss		—			—			—			—			—			—			—		—		—		(27,145	)		—			(27,145	)
Balance, June 30, 2019		4,412,500		$	1			3,126,700		$	41,964			5,422,845		$	81,927			164,122	$	—	$	11,640	$	(58,700	)	$	71		$	(46,989	)
Issuance of common stock upon initial public offering, net of $7.2 million in under- writing discounts and commissions and $2.4 million in offering costs		—			—			—			—			—			—			6,414,842		1		93,043		—			—			93,044
Automatic conversion of preferred stock		(4,412,500	)		(1	)		(3,126,700	)		(41,964	)		(5,422,845	)		(81,927	)		16,833,790		1		123,891		—			—			123,892
Stock-based compensation expense		—			—			—			—			—			—			—		—		1,642		—			—			1,642
Other comprehensive loss		—			—			—			—			—			—			—		—		—		—			(21	)		(21	)
Net loss		—			—			—			—			—			—			—		—		—		(9,038	)		—			(9,038	)
Balance, September 30, 2019		—			—			—			—			—			—			23,412,754		2		230,216		(67,738	)		50			162,530

	Series Seed Redeemable Convertible Preferred Stock				Series A Redeemable Convertible Preferred Stock				Series B Redeemable Convertible Preferred Stock				Common Stock				Additional Paid-in		Accumulated			Accumulated Other Comprehensive		Total Stockholders’ Equity
	Shares		Value		Shares		Value		Shares		Value		Shares		Value		Capital		Deficit			Income		(Deficit)
Balance, December 31, 2017		4,412,500	$	1		—	$	—		—	$	—		—	$	—	$	675	$	(14,043	)	$	—	$	(13,368	)
Stock-based compensation expense		—		—		—		—		—		—		—		—		128		—			—		128
Net loss		—		—		—		—		—		—		—		—		—		(2,947	)		—		(2,947	)
Balance, June 30, 2018		4,412,500		1		—		—		—		—		—		—		803		(16,990	)		—		(16,187	)
Issuance of Series A redeemable convertible preferred stock, net of issuance costs of $121		—		—		3,126,700		41,964		—		—		—		—		—		—			—		—
Stock-based compensation expense		—		—		—		—		—		—		—		—		415		—			—		415
Exercise of common warrants		—		—		—		—		—		—		12		—		—		—			—		—
Net loss		—		—		—		—		—		—		—		—		—		(6,238	)		—		(6,238	)
Balance, September 30, 2018		4,412,500	$	1		3,126,700	$	41,964		—	$	—		12	$	—	$	1,218	$	(23,228	)	$	—	$	(22,010	)

The accompanying notes are an integral part of these financial statements

Karuna Therapeutics, Inc.

Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities
Net loss	$	(36,183	)	$	(9,185	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		11,587			517
Accretion of debt discount		945			1,996
Non-cash interest income		(787	)		—
Change in fair value of derivative liability		135			429
Depreciation and amortization expense		37			2
Non-cash interest (income) expense		(11	)		396
Warrant expense		—			26
Changes in operating assets and liabilities:
Accrued expenses		781			(16	)
Prepaid expenses and other current assets		(614	)		(2,076	)
Deferred lease obligation		118			—
Accounts payable		(111	)		(602	)
Net cash used in operating activities		(24,103	)		(8,513	)

Cash flows from investing activities
Purchases of short-term investments		(131,641	)		—
Maturities of short-term investments		30,000			—
Acquisition of property and equipment		(75	)		—
Net cash used in investing activities		(101,716	)		—

Cash flows from financing activities
Proceeds from initial public offering, net of $7.2 million in underwriting discounts and commissions		95,453			—
Payment of initial public offering costs		(2,409	)		—
Proceeds from issuance of Series B redeemable convertible preferred stock, net of issuance costs		74,825			—
Proceeds from issuance of Series A redeemable convertible preferred stock, net of issuance costs		—			15,877
Proceeds from issuance of convertible notes		3,128			9,000
Proceeds from exercise of warrant		58			—
Proceeds from exercise of stock options		4			—
Net cash provided by financing activities		171,059			24,877
Net increase in cash, cash equivalents and restricted cash		45,240			16,364
Cash, cash equivalents and restricted cash at beginning of period		9,027			1,942
Cash, cash equivalents and restricted cash at end of period	$	54,267		$	18,306

Supplemental disclosures of cash flows information
Conversion of redeemable convertible preferred stock into common stock	$	123,892		$	-
Conversion of convertible notes, accrued interest and discount upon conversion to preferred stock	$	7,102		$	26,087

The accompanying notes are an integral part of these financial statements

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note 1. Nature of the Business

Karuna Therapeutics, Inc. (the “Company”) was incorporated under the laws of the State of Delaware in July 2009 as Karuna Pharmaceuticals, Inc. and is headquartered in Boston, Massachusetts. In March 2019, the Company changed its name to Karuna Therapeutics, Inc. The Company is focused on the development of novel therapies to address disabling neuropsychiatric conditions characterized by significant unmet medical need.

Since the Company’s inception, it has focused substantially all of its efforts and financial resources on organizing and staffing the Company, acquiring and developing its technology, raising capital, building its intellectual property portfolio, undertaking preclinical studies and clinical trials and providing general and administrative support for these activities. The Company has not generated any product revenue related to its primary business purpose to date and is subject to a number of risks similar to those of other early stage companies, including dependence on key individuals, regulatory approval of products, uncertainty of market acceptance of products, competition from substitute products and larger companies, compliance with government regulations, protection of proprietary technology, dependence on third parties, product liability and the need to obtain adequate additional financing to fund the development of its product candidates.

Forward Stock Split

On June 14, 2019, the Company effected a one-for-1.2987 stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s redeemable convertible preferred stock (see Note 5). Accordingly, all share and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this stock split and adjustment of the redeemable convertible preferred stock conversion ratios.

Initial Public Offering

On June 27, 2019, the Company’s registration statement on Form S-1 relating to its initial public offering of its common stock (“IPO”) was declared effective by the Securities and Exchange Commission (“SEC”). In the IPO, which closed on July 2, 2019, the Company issued and sold 6,414,842 shares of common stock, including full exercise of the underwriters’ over-allotment option to purchase an additional 836,718 shares, at a public offering price of $16.00 per share. The aggregate net proceeds to the Company from the IPO, inclusive of proceeds from the over-allotment exercise, were approximately $93.0 million after deducting underwriting discounts and commissions of $7.2 million and offering expenses of $2.4 million. Upon closing of the IPO, all 12,962,045 shares of the Company’s redeemable convertible preferred stock then outstanding converted into an aggregate of 16,833,790 shares of common stock.

Liquidity

The Company’s financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company experienced negative operating cash flows of $24.1 million for the nine months ended September 30, 2019 and had an accumulated deficit of $67.7 million as of September 30, 2019. The Company expects to continue to generate operating losses for the foreseeable future.

The Company expects that its cash and cash equivalents and short-term investments of $161.6 million as of September 30, 2019 will be sufficient to fund its operating expenses and capital expenditure requirements through at least 12 months from the date of issuance of these financial statements. The future viability of the Company beyond that point is dependent on its ability to raise additional capital to fund its operations.

If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Use of Estimates

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASUs”) of the Financial Accounting Standards Board (“FASB”