SEC Filing • Karuna Therapeutics

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krtx-10q_20210331.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 March 31, 2021

☐	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.)
99 High Street, 26^th Floor 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 April 30, 2021, the registrant had 29,457,896 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Consolidated Financial Statements (Unaudited)	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Comprehensive Loss	3
	Consolidated Statements of Stockholders’ Equity	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
PART II.	OTHER INFORMATION	27
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	28
Signatures		29

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

KARUNA THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

	March 31, 2021			December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	353,685		$	53,048
Investment securities, available-for-sale		217,610			269,282
Prepaid expenses and other current assets		18,318			21,864
Deferred offering costs		405			405
Total current assets		590,018			344,599
Restricted cash		261			157
Right-of-use lease assets - operating, net		1,576			2,420
Property and equipment, net		403			449
Other non-current assets		1,006			—
Total assets	$	593,264		$	347,625
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,298		$	865
Accrued expenses		4,433			5,144
Current portion of operating lease liability		862			844
Deferred rent		35			—
Total current liabilities		6,628			6,853
Operating lease liability, net of current portion		1,618			1,841
Other non-current liabilities		104			—
Total liabilities		8,350			8,694
Commitments and Contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized and 0 shares outstanding as of March 31, 2021 and December 31, 2020		—			—
Common stock, $0.0001 par value; 150,000,000 shares authorized at March 31, 2021 and December 31, 2020; 29,441,168 and 26,988,458 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively		3			3
Additional paid-in capital		759,465			482,955
Accumulated deficit		(174,563	)		(144,066	)
Accumulated other comprehensive income		9			39
Total stockholders’ equity		584,914			338,931
Total liabilities and stockholders’ equity	$	593,264		$	347,625

The accompanying notes are an integral part of these consolidated financial statements

Karuna Therapeutics, Inc.

CONSOLIDATED Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

	Three Months Ended March 31,
	2021			2020
Revenue		—			—
Operating expenses:
Research and development	$	20,186		$	4,420
General and administrative		9,777			5,635
Total operating expenses		29,963			10,055
Loss from operations		(29,963	)		(10,055	)
Other income (loss), net:
Impairment loss on right-of-use assets		(677	)		—
Interest income		143			1,397
Total other income (loss), net		(534	)		1,397
Net loss before income taxes		(30,497	)		(8,658	)
Income tax provision		—			—
Net loss attributable to common stockholders	$	(30,497	)	$	(8,658	)
Net loss per share, basic and diluted (Note 5)	$	(1.10	)	$	(0.33	)
Weighted average common shares outstanding used in computing net loss per share, basic and diluted		27,786,538			26,042,434

The accompanying notes are an integral part of these consolidated financial statements

Karuna Therapeutics, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2021			2020
Net loss	$	(30,497	)	$	(8,658	)
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale investments		(30	)		1,566
Comprehensive loss	$	(30,527	)	$	(7,092	)

The accompanying notes are an integral part of these consolidated financial statements

Karuna Therapeutics, Inc.

CONSOLIDATED Statements of Stockholders’ Equity

(In thousands, except share data)

(Unaudited)

	Common Stock				Additional Paid-in		Accumulated			Accumulated Other Comprehensive			Total Stockholders’
	Shares		Value		Capital		Deficit			Income			Equity
Balance, December 31, 2020		26,988,458	$	3	$	482,955	$	(144,066	)	$	39		$	338,931
Issuance of common stock upon public offering, net of $17,250 in under-writing discounts and commissions and $233 in offering costs		2,395,834		—		270,017		—			—			270,017
Stock-based compensation expense		—		—		5,822		—			—			5,822
Exercise of common options		56,876		—		671		—			—			671
Other comprehensive loss		—		—		—		—			(30	)		(30	)
Net loss		—		—		—		(30,497	)		—			(30,497	)
Balance, March 31, 2021		29,441,168	$	3	$	759,465	$	(174,563	)	$	9		$	584,914

	Common Stock				Additional Paid-in			Accumulated			Accumulated Other Comprehensive		Total Stockholders’
	Shares		Value		Capital			Deficit			Income		Equity
Balance, December 31, 2019		26,012,754	$	3	$	465,420		$	(75,512	)	$	5	$	389,916
Follow-on offering costs		—		—		(34	)		—			—		(34	)
Stock-based compensation expense		—		—		1,634			—			—		1,634
Exercise of common options		82,138		—		517			—			—		517
Other comprehensive income		—		—		—			—			1,566		1,566
Net loss		—		—		—			(8,658	)		—		(8,658	)
Balance, March 31, 2020		26,094,892	$	3	$	467,537		$	(84,170	)	$	1,571	$	384,941

The accompanying notes are an integral part of these consolidated financial statements

Karuna Therapeutics, Inc.

CONSOLIDATED Statements of Cash Flows

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2021			2020
Cash flows from operating activities
Net loss	$	(30,497	)	$	(8,658	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		5,822			1,634
Impairment loss on right-of-use assets		677			-
Amortization of premiums and accretion of discounts on investment securities		221			(21	)
Depreciation and amortization expense		112			21
Changes in operating assets and liabilities:
Change in accrued interest on investment securities		277			(441	)
Prepaid expenses and other current assets		3,546			132
Right-of-use assets		167			121
Other non-current assets		(1,006	)		—
Accounts payable		322			24
Accrued expenses		(754	)		(1,051	)
Operating lease liability		(205	)		(102	)
Deferred rent		35			—
Other non-current liabilities		104			—
Net cash used in operating activities		(21,179	)		(8,341	)

Cash flows from investing activities
Purchases of investment securities		(80,856	)		(70,350	)
Maturities of investment securities		132,000			60,000
Acquisition of property and equipment		(47	)		(76	)
Net cash provided by (used in) investing activities		51,097			(10,426	)

Cash flows from financing activities
Proceeds from public offering, net of underwriting discounts and commissions		270,250			—
Payment of offering costs		(98	)		—
Proceeds from exercise of stock options		671			517
Net cash provided by financing activities		270,823			517
Net increase (decrease) in cash, cash equivalents and restricted cash		300,741			(18,250	)
Cash, cash equivalents and restricted cash at beginning of period		53,205			209,052
Cash, cash equivalents and restricted cash at end of period	$	353,946		$	190,802

Supplemental disclosures of cash flows information
Lease liabilities arising from obtaining right-of-use assets	$	-		$	2,851
Deferred offering costs included in accounts payable and accrued expenses	$	135		$	34
Purchases of property and equipment included in accounts payable and accrued expenses	$	19		$	121

The accompanying notes are an integral part of these consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Nature of the Business and Basis of Presentation

Description 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 an innovative clinical-stage biopharmaceutical company driven to create and deliver transformative medicines for people living with psychiatric and neurological conditions.

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, the impact of the COVID-19 coronavirus pandemic, and the need to obtain adequate additional financing to fund the development of its product candidates.

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.

On November 20, 2019, the Company’s registration statement on Form S-1 relating to its follow-on public offering of its common stock was declared effective by the SEC. In this offering, which closed on November 25, 2019, the Company issued and sold 2,600,000 shares of common stock at a public offering price of $96.00 per share. The aggregate net proceeds were $234.2 million after deducting underwriting discounts and commissions of $15.0 million and offering expenses of $0.4 million.

On July 2, 2020, the Company filed an automatically effective registration statement on Form S-3 (the “Registration Statement”) with the SEC which registers the offering, issuance and sale of an unspecified amount of common stock, preferred stock, debt securities, warrants and/or units of any combination thereof. The Company simultaneously entered into an equity distribution agreement with Goldman Sachs & Co. LLC, as sales agent, to provide for the issuance and sale by the Company of up to $150.0 million of common stock from time to time in “at-the-market” offerings under the Registration Statement and related prospectus filed with the Registration Statement (the “ATM Program”). As of March 31, 2021, no sales had been made pursuant to the ATM Program.

On March 4, 2021, the Company completed a follow-on public offering under the Registration Statement and a related prospectus supplement in which it issued and sold 2,395,834 shares of common stock, including full exercise of the underwriters’ over-allotment option to purchase an additional 312,500 shares of common stock, at a public offering price of $120 per share. The aggregate net proceeds to the Company from the offering, inclusive of proceeds from the over-allotment exercise, were $270.0 million after deducting underwriting discounts and commissions of $17.3 million and offering expenses of $0.2 million.

The Company’s consolidated 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 $21.2 million for the three months ended March 31, 2021 and had an accumulated deficit of $174.6 million as of March 31, 2021. The Company expects to continue to generate operating losses for the foreseeable future.

The Company expects that its cash, cash equivalents and available-for-sale investments of $571.3 million as of March 31, 2021 will be sufficient to fund its operating expenses and capital expenditure requirements through at least 12 months from the date of issuance of these consolidated financial statements.

If the Company is unable to obtain funding when needed, 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.

Basis of Presentation

The accompanying consolidated 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 U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASUs”) of the Financial Accounting Standards Board (“FASB”).

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Karuna Securities Corporation, a Massachusetts corporation. All inter-company transactions and balances have been eliminated in consolidation.

The accompanying consolidated balance sheet as of March 31, 2021, the consolidated statements of operations, comprehensive loss, consolidated statements of cash flows, and stockholders’ equity for the three months ended March 31, 2021 and 2020 are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of March 31, 2021 and the results of its operations for the three months ended March 31, 2021 and 2020 and the results of its cash flows for the three months ended March 31, 2021 and 2020. Certain information and footnote disclosures typically included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these unaudited consolidated interim financial statements should be read in conjunction with the Company’s consolidated financial statements as of and for the year ended December 31, 2020. The results for the three months ended March 31, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, any other interim periods, or any future year or period.

Note 2. Summary of Significant Accounting Policies

The significant accounting policies and estimates used in preparation of the consolidated financial statements are described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2020, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K. During the three months ended March 31, 2021, there were no material changes to the Company’s significant accounting policies, notwithstanding the following policy.

Impairment of Long-Lived Assets

The Company continually evaluates long-lived assets for potential impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Recoverability is measured by comparing the carrying values of the assets to the expected future net undiscounted cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the book values of the assets exceed their fair value.

Recently Adopted Accounting Pronouncements

New pronouncements issued but not effective until after March 31, 2021 are not expected to have a material impact on the Company’s consolidated financial statements.

Note 3. Prepaid Expenses and Other Assets and Accrued Expenses

Prepaid expenses and other current assets consisted of the following (in thousands):

	March 31, 2021		December 31, 2020
Prepaid research and development expenses	$	16,730	$	18,660
Prepaid insurance		1,053		2,116
Other		535		1,088
Total prepaid expenses and other current assets	$	18,318	$	21,864

The Company also had other non-current assets of $1.0 million as of March 31, 2021, which consisted of $0.6 million in prepaid research and development expenses and a security deposit of $0.4 million.

Accrued expenses consisted of the following (in thousands):

	March 31, 2021		December 31, 2020
Accrued payroll and related expenses	$	1,047	$	2,654
Accrued research and development expenses		2,755		1,829
Professional fees		375		458
Other		256		203
Total accrued expenses	$	4,433	$	5,144

Note 4. Stockholders’ Equity

Preferred Stock

On July 2, 2019, in connection with the closing of the Company’s IPO, the Company filed its amended and restated Certificate of Incorporation, which authorizes the Company to issue up to 10,000,000 shares of preferred stock, $0.0001 par value per share. There were no shares of preferred stock outstanding as of March 31, 2021 or December 31, 2020.

Common Stock

As of March 31, 2021, the Company’s amended and restated Certificate of Incorporation authorized the Company to issue 150,000,000 shares of common stock, $0.0001 par value per share.

Holders of the common stock are entitled to one vote for each share of common stock held at all meetings of stockholders and written actions in lieu of meetings. The holders of common stock are entitled to receive dividends out of funds legally available, as declared by the board of directors. These dividends are subject to the preferential dividend rights of the holders of the Company’s preferred stock. Through March 31, 2021, no cash dividends have been declared or paid.

Note 5. Net Loss per Share

The following table sets forth the computation of basic and diluted net loss per share of common stock for the three months ended March 31, 2021 and 2020 (in thousands, except share and per share data):

	Three Months Ended March 31,
	2021			2020
Net Loss	$	(30,497	)	$	(8,658	)
Weighted-average shares used in computing net loss per share		27,786,538			26,042,434
Net loss per share, basic and diluted	$	(1.10	)	$	(0.33	)

The Company’s potentially dilutive securities, which consist of stock options, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted

average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same.

Common Stock Equivalents

The following common stock equivalents, presented based on amounts outstanding at each period end, have been excluded from the calculation of diluted net loss per share because including them would have had an anti-dilutive impact:

	March 31,
	2021		2020
Stock options to purchase common stock		5,171,914		4,974,356

Note 6. Stock-based Compensation

Stock Options

In September 2009, the Company’s board of directors approved the 2009 Stock Incentive Plan (the “2009 Plan”) which provided for the grant of incentive stock options to employees and non-statutory stock options to directors, consultants, and non-employees of the Company. The aggregate common shares issuable were 3,911,138 under the 2009 Plan, as amended. The 2009 Plan terminated in July 2019 effective upon the completion of the Company’s IPO. No additional options will be granted under the 2009 Plan. As of March 31, 2021, there were 2,618,016 options outstanding under the 2009 Plan.

In May 2019, the Company’s board of directors approved the 2019 Stock Option and Incentive Plan (the “2019 Plan”) which became effective on June 26, 2019, the date immediately prior to the date on which the registration statement related to the IPO was declared effective by the SEC. The 2019 Plan will expire in May 2029. Under the 2019 Plan, the Company may grant incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units and other stock-based awards. There were 1,709,832 shares of the Company’s common stock initially reserved for issuance under the 2019 Plan. The number of shares of common stock that may be issued under the 2019 Plan automatically increases on January 1 of each calendar year, commencing on January 1, 2020 and each January 1 thereafter, by 4% of the number of shares of common stock outstanding on the immediately preceding December 31 or such lesser amount determined by the Company’s board of directors or the compensation committee of the board of directors. In addition, any shares of common stock underlying any awards from the 2009 Plan that are forfeited, cancelled, held back, reacquired, or otherwise terminated shall be added back to the shares of stock available for issuance under the 2019 Plan. As of March 31, 2021, there were 1,412,344 common shares available for issuance and 2,553,898 options outstanding under the 2019 Plan.

Options under the 2019 Plan generally vest based on the grantee’s continued service with the Company during a specified period following a grant as determined by the board of directors and expire ten years from the grant date. Awards typically vest in four years, but vesting conditions can vary based on the discretion of the Company’s board of directors.

A summary of the Company’s stock option activity and related information is as follows:

	Number of Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2020		4,612,790		$	28.63		8.3	$	336,740
Granted		644,625			128.50
Exercised		(56,876	)		11.80
Forfeited		(28,625	)		38.73
Outstanding as of March 31, 2021		5,171,914		$	41.21		8.3	$	415,257
Options vested and expected to vest as of March 31, 2021		5,171,914		$	41.21		8.3	$	415,257
Options exercisable as of March 31, 2021		3,099,022		$	14.12		7.7	$	328,828

The aggregate intrinsic values of options outstanding, exercisable, vested and expected to vest were calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of March 31, 2021.

As of March 31, 2021, there was $86.0 million of unrecognized compensation cost, which is expected to be recognized over a weighted-average period of 3.4 years.

Stock-based Compensation Expense

Stock-based compensation expense is classified in the statements of operations for the three months ended March 31, 2021 and 2020 as follows (in thousands):

	Three Months Ended March 31,
	2021		2020
General and administrative	$	3,741	$	1,285
Research and development		2,081		349
Total stock-based compensation expense	$	5,822	$	1,634

Note 7. Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s assets as of March 31, 2021 and December 31, 2020 that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):

	Fair Value Measurement
	at March 31, 2021 Using
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market fund	$	335,151	$	—	$	—	$	335,151
Commercial paper		—		12,000		—		12,000
Investment securities:
U.S. Treasuries		99,912		—		—		99,912
Corporate debt securities		—		28,762		—		28,762
Commercial paper		—		88,936		—		88,936
Total	$	435,063	$	129,698	$	—	$	564,761

	Fair Value Measurement
	at December 31, 2020 Using
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market fund	$	50,141	$	—	$	—	$	50,141
Investment securities:
U.S. Treasuries		172,295		—		—		172,295
Corporate debt securities		—		36,817		—		36,817
Commercial paper		—		60,170		—		60,170
Total	$