SEC Filing • Karuna Therapeutics

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10-Q

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, 2023

☐ 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, 26th 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 24, 2023, the registrant had 37,443,954 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	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
PART II.	OTHER INFORMATION	30
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	31
Signatures		32

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, 2023			December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	562,660		$	248,329
Restricted cash		261			—
Investment securities, available-for-sale		909,761			875,715
Short-term investments, other		2,033			—
Accounts receivable		—			57
Prepaid expenses and other current assets		32,419			30,100
Deferred offering costs		625			568
Total current assets		1,507,759			1,154,769
Restricted cash, net of current portion		—			261
Right-of-use lease assets - operating, net		4,209			4,674
Property and equipment, net		3,721			3,201
Other non-current assets		479			429
Total assets	$	1,516,168		$	1,163,334
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	476		$	2,379
Accrued expenses		22,694			29,285
Current portion of operating lease liability		2,067			2,282
Total current liabilities		25,237			33,946
Operating lease liability, net of current portion		2,692			3,046
Other non-current liabilities		104			104
Total liabilities		28,033			37,096
Commitments and Contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized and 0 shares outstanding as of March 31, 2023 and December 31, 2022		—			—
Common stock, $0.0001 par value; 150,000,000 shares authorized as of March 31, 2023 and December 31, 2022; 37,398,019 and 34,473,905 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively		4			3
Additional paid-in capital		2,151,527			1,693,732
Accumulated deficit		(661,781	)		(564,207	)
Accumulated other comprehensive loss		(1,615	)		(3,290	)
Total stockholders’ equity		1,488,135			1,126,238
Total liabilities and stockholders’ equity	$	1,516,168		$	1,163,334

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,
	2023			2022
License and other revenue	$	654		$	—
Operating expenses:
Research and development		85,467			43,806
General and administrative		24,253			14,788
Total operating expenses		109,720			58,594
Loss from operations		(109,066	)		(58,594	)
Other income, net:
Interest income		11,345			237
Sublease income		147			139
Total other income, net		11,492			376
Net loss before income taxes		(97,574	)		(58,218	)
Income tax provision		—			—
Net loss attributable to common stockholders	$	(97,574	)	$	(58,218	)
Net loss per share, basic and diluted (Note 6)	$	(2.80	)	$	(1.95	)
Weighted average common shares outstanding used in computing net loss per share, basic and diluted		34,800,643			29,805,961

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,
	2023			2022
Net loss	$	(97,574	)	$	(58,218	)
Other comprehensive gain (loss):
Unrealized gains (losses) on available-for-sale investments		1,675			(2,038	)
Comprehensive loss	$	(95,899	)	$	(60,256	)

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			Loss			Equity
Balance, December 31, 2022		34,473,905	$	3	$	1,693,732	$	(564,207	)	$	(3,290	)	$	1,126,238
Issuance of common stock upon public offering, net of $23,000 in under-writing discounts and commissions and $281 in offering costs		2,851,299		1		436,719		—			—			436,720
Stock-based compensation expense		—		—		15,507		—			—			15,507
Exercise of common options		72,815		—		5,569		—			—			5,569
Other comprehensive gain		—		—		—		—			1,675			1,675
Net loss		—		—		—		(97,574	)		—			(97,574	)
Balance, March 31, 2023		37,398,019	$	4	$	2,151,527	$	(661,781	)	$	(1,615	)	$	1,488,135


	Common Stock				Additional Paid-in		Accumulated			Accumulated Other Comprehensive			Total Stockholders’
	Shares		Value		Capital		Deficit			Loss			Equity
Balance, December 31, 2021		29,770,558	$	3	$	790,391	$	(287,871	)	$	(497	)	$	502,026
Stock-based compensation expense		—		—		10,636		—			—			10,636
Exercise of common options		60,700		—		1,282		—			—			1,282
Other comprehensive loss		—		—		—		—			(2,038	)		(2,038	)
Net loss		—		—		—		(58,218	)		—			(58,218	)
Balance, March 31, 2022		29,831,258	$	3	$	802,309	$	(346,089	)	$	(2,535	)	$	453,688

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,
	2023			2022
Cash flows from operating activities
Net loss	$	(97,574	)	$	(58,218	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		15,507			10,636
Amortization of premiums and accretion of discounts on investment securities		(7,305	)		285
Depreciation and amortization expense		327			248
Changes in operating assets and liabilities:
Accrued interest on investment securities		(322	)		(65	)
Accounts receivable		57			1,750
Prepaid expenses and other current assets		(2,319	)		166
Right-of-use assets		465			432
Other non-current assets		(50	)		28
Accounts payable		(1,903	)		(481	)
Accrued expenses		(6,943	)		(4,059	)
Operating lease liability		(569	)		(525	)
Net cash used in operating activities		(100,629	)		(49,803	)

Cash flows from investing activities
Purchases of investment securities		(318,644	)		(48,303	)
Purchase of short-term investments (certificates of deposit)		(2,033	)		—
Maturities of investment securities		293,900			66,099
Acquisition of property and equipment		(714	)		—
Net cash (used in) provided by investing activities		(27,491	)		17,796

Cash flows from financing activities
Proceeds from public offering, net of underwriting discounts and commissions		437,001			—
Payment of offering costs		(119	)		(25	)
Proceeds from exercise of stock options		5,569			1,282
Net cash provided by financing activities		442,451			1,257
Net increase (decrease) in cash, cash equivalents and restricted cash		314,331			(30,750	)
Cash, cash equivalents and restricted cash at beginning of period		248,590			207,214
Cash, cash equivalents and restricted cash at end of period	$	562,921		$	176,464

Supplemental disclosures of cash flows information
Deferred offering costs included in accounts payable and accrued expenses	$	219		$	—
Purchases of property and equipment included in accounts payable and accrued expenses	$	133		$	206

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, preparing for the potential commercialization of KarXT, 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 ongoing and evolving COVID-19 coronavirus pandemic, and the need to obtain adequate additional financing to fund the development of its product candidates.

On July 2, 2020, the Company filed an automatically effective registration statement on Form S-3 (the "Registration Statement"), with the Securities and Exchange Commission ("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. In March 2023, the Company completed a follow-on public offering under the Registration Statement and a related prospectus supplement in which it issued and sold 2,851,299 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 371,908 shares of common stock, at a public offering price of $161.33 per share. The aggregate net proceeds to the Company from the offering, inclusive of proceeds from the option exercise, were $436.7 million after deducting underwriting discounts and commissions of $23.0 million and offering expenses of $0.3 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 $100.6 million for the three months ended March 31, 2023 and had an accumulated deficit of $661.8 million as of March 31, 2023. The Company expects to continue to generate operating losses for the foreseeable future.

The Company expects that its cash, cash equivalents, available-for-sale investments and short-term investments of $1,474.5 million as of March 31, 2023 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.

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 Karuna Therapeutics, Inc. 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, 2023 and the consolidated statements of operations, comprehensive loss, cash flows, and stockholders’ equity for the three months ended March 31, 2023 and 2022 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, 2023 and the results of its operations and cash flows for the three months ended March 31, 2023 and 2022. 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, 2022. The results for the three months ended March 31, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023, 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, 2022, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K. During the three months ended March 31, 2023, there were no material changes to the Company’s significant accounting policies, notwithstanding the following policies.

Acquired In-Process Research and Development (IPR&D) and Development Milestones

Acquired IPR&D and development milestones include the initial costs of externally developed IPR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use. Prior to regulatory approval of the compound, initial costs are expensed when incurred, and milestone payment obligations related to these transactions are expensed when the event triggering an obligation to pay the milestone occurs. Milestone payments made upon or after regulatory approval are capitalized and amortized over the remaining useful life of the related asset.

Recently Issued Accounting Pronouncements

New pronouncements issued but not effective until after March 31, 2023 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, 2023		December 31, 2022
Research and development expenses	$	24,271	$	25,285
Insurance		1,216		2,472
Other		6,932		2,343
Total prepaid expenses and other current assets	$	32,419	$	30,100

The Company also had other non-current assets of $0.5 million as of March 31, 2023 and $0.4 million as of December 31, 2022. As of March 31, 2023, other non-current assets consisted of a security deposit of $0.4 million and $0.1 million in prepaid expenses. As of December 31, 2022, other non-current assets consisted of a security deposit of $0.4 million and less than $0.1 million in prepaid expenses.

Accrued expenses consisted of the following (in thousands):


	March 31, 2023		December 31, 2022
Research and development expenses	$	14,586	$	11,962
Payroll and related expenses		3,776		11,950
Professional fees		2,769		2,943
Other		1,563		2,430
Total accrued expenses	$	22,694	$	29,285

Note 4. Stockholders’ Equity

Preferred Stock

On July 2, 2019, in connection with the closing of the Company’s initial public offering of its common stock ("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. Through March 31, 2023, no preferred stock has been issued.

Common Stock

As of March 31, 2023, 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, 2023, no cash dividends have been declared or paid.

As of March 31, 2023, there were 37,398,019 shares of common stock outstanding.

Note 5. Zai License Agreement

Terms of Agreement

On November 8, 2021, the Company and Zai Lab (Shanghai) Co., Ltd. ("Zai") entered into a license agreement (the "Zai License Agreement"), pursuant to which Karuna granted to Zai the right to exclusively develop, manufacture and commercialize KarXT in Greater China, including mainland China, Hong Kong, Macau, and Taiwan (the “Licensed Territory”). Zai will fund substantially all development, regulatory, and commercialization activities in the Licensed Territory.

Under the terms of the Zai License Agreement, the Company received a non-refundable $35.0 million upfront payment and payment of certain taxes on its behalf. The Zai License Agreement also provides that the Company is eligible to receive total development and regulatory milestone payments of up to $80.0 million, total sales milestone payments of up to $72.0 million and low double-digit to high-teens tiered royalties based on annual net sales of KarXT in the Licensed Territory, subject to reduction under specified circumstances. Receipt of sales milestone payments and royalties are not contingent on any further participation by the Company in the development of KarXT in the Licensed Territory.

The Zai License Agreement will expire upon the latest of the following dates with respect to the last licensed product in any region in the Licensed Territory: (i) the date of expiration of the last valid claim covering such licensed product in such region, (ii) the date that is a specific period after the date of the first commercial sale of such licensed product in such region and (iii) the expiration date of any regulatory exclusivity for such licensed product in such region. Zai may terminate the Zai License Agreement for convenience, subject to the terms thereto, by providing written notice to the Company, which termination will be effective following a prescribed notice period. In addition, the Company may terminate the Zai License Agreement under specified circumstances if Zai or certain other parties challenge the Company’s patent rights or if Zai or its affiliates fail to complete certain development activities with respect to the licensed product for a specified period of time, subject to specified exceptions. Either party may terminate the Zai License Agreement for the other party’s uncured material breach, with a customary notice and cure period, or insolvency.

After termination or expiration, the Company is entitled to retain a worldwide, exclusive, and perpetual license from Zai to exploit the licensed product, which license would be non-exclusive after expiration (but not termination), subject to a reasonable royalty to be agreed by the parties if terminated for the Company’s uncured material breach.

Revenue Recognition

The Company concluded that the distinct units of account within the agreement are reflective of a vendor-customer relationship and therefore within the scope of ASC 606, Revenue From Contracts with Customers.

Under the provisions of ASC 606, the Company identified one performance obligation. The Company provided an exclusive license to intellectual property, bundled with the associated know-how and certain professional services that are not substantive.

Under the terms of the Zai License Agreement, Zai has the sole right to manufacture, or have manufactured, KarXT for use in development and commercialization in the Licensed Territory. At the election of Zai, the Company may supply KarXT to Zai at the fully burdened manufacturing cost plus a specified margin, as defined within the Zai License Agreement. This provision was determined to be an option to acquire additional goods or services at a price that approximates the stand-alone selling price for that good or service, and therefore does not represent a material right, or separate performance obligation, within the context of the Zai License Agreement. For the three months ended March 31, 2023, the Company recognized $0.7 million in revenue associated with sales of clinical drug supply to Zai. For the three months ended March 31, 2022, no revenue was recognized for sales of clinical drug supply.

The Company determined the transaction price of the Zai License Agreement was equal to $37.0 million, which includes the upfront fee of $35.0 million and payments to taxing authorities on the Company’s behalf. In estimating the stand-alone selling price, the Company determined that there were no significant financing components, noncash consideration or amounts that may be refunded to the customer, and as such the total unconstrained consideration of $37.0 million was included in the total transaction price.

License of Intellectual Property. The license to the Company's intellectual property represents a distinct performance obligation. The license and associated know-how was transferred to Zai in the fourth quarter of 2021 to satisfy this performance obligation. The Company allocated the full transaction price to the license of the Company's intellectual property and accordingly recognized revenue of $37.0 million as license revenue in its Consolidated Statement of Operations for the year ended December 31, 2021.

Milestone Payments. The potential development and regulatory milestone payments, as well as sales milestone payments, are paid upon achievement of certain milestones as defined in the Zai License Agreement. For the three months ended March 31, 2023 and 2022 there was no revenue related to milestone payments recognized pursuant to the Zai License Agreement.

For all remaining development and regulatory milestones, which, as of March 31, 2023, can total up to $70.0 million, it was determined that their achievement is highly dependent on factors outside of the Company's control. These payments have been fully constrained until the Company concludes that achievement of the milestone is probable, and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods, and as such have been excluded from the transaction price. At the end of each subsequent reporting period, the Company will re-evaluate the probability of achievement of each milestone and any related constraint and, if necessary, adjust its estimate of the overall transaction price.

As of March 31, 2023, the Company has not recognized any revenue associated with sales milestones.

Royalties. Any consideration related to royalties will be recognized if and when the related sales occur, as they were determined to relate predominantly to the license granted to Zai and, therefore, have also been excluded from the transaction price. As of March 31, 2023, the Company has not recognized any revenue associated with royalties.

There was no deferred revenue as of March 31, 2023 or December 31, 2022 related to the Zai License Agreement.

Note 6. 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, 2023 and 2022 (in thousands, except share and per share data):


	Three Months Ended March 31,
	2023			2022
Net Loss	$	(97,574	)	$	(58,218	)
Weighted-average shares used in computing net loss per share		34,800,643			29,805,961
Net loss per share, basic and diluted	$	(2.80	)	$	(1.95	)

The Company’s potentially dilutive securities, which consist of stock options and restricted stock units ("RSUs"), have been excluded from the computation of diluted net loss per share because including them would have had an anti-dilutive impact. 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.

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:


	March 31,
	2023		2022
Stock options to purchase common stock		5,809,983		5,923,147
Restricted stock units		209,433		—
		6,019,416		5,923,147

Note 7. License Agreements

Acquisition of KAR-2618 and other TRPC4/5 candidates

In January 2023, the Company entered into an exclusive license agreement (the "GFB Agreement"), with GFB (ABC), LLC ("GFB"), assignee of the assignment estate of Goldfinch Bio, Inc., pursuant to which GFB granted to the Company the exclusive right and license to develop, manufacture, and commercialize GFB’s TRPC4/5 candidates (the "GFB Compounds"), including the lead clinical-stage candidate known as KAR-2618 (formerly GFB-887). The Company agreed to use commercially reasonable efforts to develop, obtain regulatory approval for, and commercialize at least one licensed product that contains or comprises a GFB Compound in at least two indications in the United States.

Under the terms of the GFB Agreement, the Company paid to GFB a $15.0 million upfront payment, and agreed to pay a total of up to $520.0 million for each GFB Compound upon the achievement of certain development, regulatory and commercial milestones with respect to such GFB Compound, of which $110.0 million, $150.0 million, and $260.0 million are related to development, regulatory, and commercial sales milestones, respectively. The Company also agreed to pay GFB a flat low-single digit royalty on aggregate net sales of each licensed product on a country-by-country basis until the expiration of the applicable royalty term, which ends on the later of (i) the expiration date of the last valid claim covering the licensed product in such country, (ii) the expiration date of regulatory exclusivity with respect to such licensed product in such country, and (iii) the date that is a specific period after the first commercial sale of such licensed product in such country. The royalty rate is subject to reduction on a licensed product-by-licensed product and country-by-country basis under certain circumstances. In the event that the Company sublicenses to a third party any of the rights to the licensed intellectual property granted under the GFB Agreement, the Company will be obligated to pay GFB royalties within the range of 25% to 35% on any consideration the Company receives from the sublicensee, excluding royalties and certain other payments.

Unless earlier terminated, the GFB Agreement will expire on the expiration of the last to expire royalty term. Unless the GFB Agreement is earlier terminated, on expiration of each applicable royalty term, the Company will have a fully paid-up, irrevocable and perpetual license to develop, manufacture and commercialize each applicable licensed product in the applicable country. Either party may terminate the GFB Agreement for the other party’s material breach, following a customary notice and cure period, or insolvency. The Company may terminate the GFB Agreement for any reason upon 90 days written notice to GFB.

The upfront payment of $15.0 million was accounted for as an asset acquisition and recorded as IPR&D in our consolidated statements of operations for the three months ended March 31, 2023, as KAR-2618 is prior to regulatory approval and has no alternative future use. The Company incurred no expenses related to development, regulatory, or commercial milestones under the GFB Agreement during the three months ended March 31, 2023.

Intellectual Property License with Eli Lilly and Company

In May 2012, the Company entered into an exclusive license agreement (the “Lilly License Agreement”), with Eli Lilly and Company (“Eli Lilly”), pursuant to which Eli Lilly assigned to the Company all of its rights to certain patents (now expired), regulatory documentation, data records and materials related to xanomeline. The Company is also entitled to sublicense or otherwise transfer the rights granted in connection with the Lilly License Agreement.

Under the Lilly License Agreement, the Company is obligated to use commercially reasonable efforts to develop, manufacture, commercialize and seek and maintain regulatory approval for xanomeline, in any formulation, for use in humans.

The Company paid Eli Lilly an upfront payment of $0.1 million and has agreed to make milestone payments to Eli Lilly of up to an aggregate of $16.0 million upon the achievement of specified regulatory milestones and up to an aggregate of $54.0 million in commercial milestones. In addition, the Company is obligated to pay Eli Lilly tiered royalties, at rates in the low to mid single-digit percentages, on the worldwide net sales of any commercialized product on a country-by-country basis until the expiration of the applicable royalty term, which is the longer of six years from the date of first commercial sale of each licensed product within a country or data package exclusivity in such country. During the royalty term, Eli Lilly is prohibited from granting any third party rights to the patents, regulatory documentation, data records and materials that have been licensed to the Company under the Lilly License Agreement.

The Lilly License Agreement will expire on the later of (i) the expiration of the last-to-expire royalty term on a licensed product-by-licensed product basis or (ii) the date on which the Company has made all milestone payments pursuant to the terms of the Lilly License Agreement, unless terminated earlier by the parties. In no event will the term of the Lilly License Agreement exceed 15 years past the anniversary of the first commercial sale of a xanomeline product. The Company may terminate the Lilly License Agreement for any reason with proper prior notice to Eli Lilly. Either party may terminate the Lilly License Agreement upon an uncured material breach by the other party.

The initial upfront payment of $0.1 million was expensed when incurred in May 2012. As of March 31, 2023, no regulatory or commercial milestones have been reached and, accordingly, no milestone payments have been made.

Intellectual Property License with PureTech Health

In March 2011, the Company entered into an exclusive license agreement (the “Patent License Agreement”) with PureTech Health, pursuant to which PureTech Health granted the Company an exclusive license to patent rights relating to combinations of a muscarinic activator with a muscarinic inhibitor for the treatment of central nervous system disorders.

In connection with the Patent License Agreement, the Company has agreed to make milestone payments to PureTech Health of up to an aggregate of $10.0 million upon the achievement of specified development and regulatory milestones. In addition, the Company is obligated to pay PureTech Health low single-digit royalties on the worldwide net sales of any commercialized product covered by the licenses granted under the Patent License Agreement.

In the event that the Company sublicenses any of the patent rights granted under the Patent License Agreement, the Company will be obligated to pay PureTech Health royalties within the range of 15% to 25% on any income the Company receives from the sublicensee, excluding royalties.

The Company may terminate the Patent License Agreement for any reason with proper prior notice to PureTech Health. Either party may terminate the Patent License Agreement upon an uncured material breach by the other party.

The Company incurred no expenses related to the Patent License Agreement during the three months ended March 31, 2023 and 2022. As of March 31, 2023, the remaining development and regulatory milestone payments under the Patent License Agreement total up to $8.0 million. The Company had no outstanding liabilities to PureTech Health related to the Patent License Agreement as of March 31, 2023 and December 31, 2022.

Note 8. Stock-based Compensation

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 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, 2023, there were 2,112,180 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, RSUs, 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 underlying awards that expire, or are terminated, surrendered, canceled or forfeited without having been fully exercised under the 2009 Plan will be added to the shares of common stock available for issuance under the 2019 Plan. In addition, 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, 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. As of March 31, 2023, there were 2,628,784 common shares available for issuance, 3,697,803 options outstanding, and 209,433 RSUs outstanding under the 2019 Plan.

Stock Options

Option awards under the 2019 Plan generally vest based on the grantee’s continued service with the Company during a specified period following a grant 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, 2022		5,570,355		$	63.82		7.2		$	744,097
Granted		404,098			191.49
Exercised		(72,815	)		76.47			<