Quarterly Report (10-q)

Date : 08/08/2019 @ 10:51AM
Source : Edgar (US Regulatory)
Stock : Reata Pharmaceuticals Inc (RETA)
Quote : 199.54  -5.58 (-2.72%) @ 12:59AM
After Hours
Last Trade
Last $ 200.00 ▲ 0.46 (0.23%)

Quarterly Report (10-q)

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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 June 30, 2019

OR

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: 001-37785

 

Reata Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

DELAWARE

 

11-3651945

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

2801 Gateway Dr, Suite 150
Irving, Texas

 

75063

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (972) 865-2219

 

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class A Common Stock, Par Value $0.001 Per Share

 

RETA

 

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, an emerging growth company, or a smaller reporting 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 August 5, 2019, the registrant had 24,481,663 shares of Class A common stock, $0.001 par value per share, and 5,624,681 shares of Class B common stock, $0.001 par value per share, outstanding.

 

 

 

 


TABLE OF CONTENTS

 

 

 

Page

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

1

DEFINED TERMS

3

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

4

 

Consolidated Balance Sheets

4

 

Consolidated Statements of Operations

5

 

Consolidated Statements of Stockholders’ Equity (Deficit)

6

 

Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Consolidated Financial Statements

8

Item 2.

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

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

32

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

33

Item 4.

Mine Safety Disclosures

33

Item 5.

Other Information

33

Item 6.

Exhibits

34

Signatures

35

 

 

 

 

i


 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties.  We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws.  All statements, other than statements of historical or present facts, including statements regarding our future financial condition, future revenues, projected costs, prospects, business strategy, and plans and objectives of management for future operations, are forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as “believe,” “will,” “may,” “might,” “estimate,” “continue,” “anticipate,” “intend,” “target,” “project,” “model,” “should,” “would,” “plan,” “expect,” “predict,” “could,” “seek,” “goals,” “potential,” and similar terms or expressions that concern our expectations, strategy, plans, or intentions.  These forward-looking statements include, but are not limited to, statements about:

 

our expectations regarding the timing, costs, conduct, and outcome of our clinical trials, including statements regarding the timing of the initiation and availability of data from such trials;

 

the timing and likelihood of regulatory filings and approvals for our product candidates;

 

our ability to obtain funding for our operations, including funding necessary to complete further development and commercialization of our product candidates;

 

our plans to research, develop, and commercialize our product candidates;

 

the commercialization of our product candidates, if approved;

 

the rate and degree of market acceptance of our product candidates;

 

our expectations regarding the potential market size and the size of the patient populations for our product candidates, if approved for commercial use, and the potential market opportunities for commercializing our product candidates;

 

the success of competing therapies that are or may become available;

 

our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates;

 

the ability to license additional intellectual property relating to our product candidates and to comply with our existing license agreements;

 

our ability to maintain and establish relationships with third parties, such as contract research organizations, suppliers, and distributors;

 

our ability to maintain and establish collaborators with development, regulatory, and commercialization expertise;

 

our ability to attract and retain key scientific or management personnel;

 

our ability to grow our organization and increase the size of our facilities to meet our anticipated growth;

 

the accuracy of our estimates regarding expenses, future revenue, capital requirements, and needs for additional financing;

 

our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;

 

our expectations related to the use of our available cash;

 

our ability to develop, acquire, and advance product candidates into, and successfully complete, clinical trials;

 

the initiation, timing, progress, and results of future preclinical studies and clinical trials, and our research and development programs;

1


 

 

the impact of governmental laws and regulations and regulatory developments in the United States and foreign countries;

 

developments and projections relating to our competitors and our industry; and

 

other risks and uncertainties, including those described under the heading “Risk Factors” included in our most recent Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements.  Factors that may cause actual results to differ materially from current expectations include, among other things, those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 and in this Quarterly Report on Form 10-Q under “Part II, Item 1A. Risk Factors.”  Given these uncertainties, you should not place undue reliance on these forward-looking statements.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.  Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

2


 

DEFINED TERMS

Unless the context requires otherwise, references to “Reata,” “the Company,” “we,” “us,” or “our” in this Quarterly Report on Form 10-Q refer to Reata Pharmaceuticals, Inc. and its subsidiaries.  We also have used several other terms in this Quarterly Report on Form 10-Q, most of which are explained or defined below.

 

Abbreviated Term

 

Defined Term

6MWD

 

6-minute walk distance

AbbVie

 

AbbVie Inc.

ADPKD

 

Autosomal dominant polycystic kidney disease

ANCOVA

 

Analysis of Covariance

ASU

 

Accounting Standards Update

Bard

 

Bardoxolone methyl

CGIC

 

Clinician Global Impression of Change

CKD

 

Chronic kidney disease

CRO

 

Contract research organization

CTD-PAH

 

Pulmonary arterial hypertension associated with connective tissue disease

DMC

 

Data monitoring committee

DSMB

 

Data safety monitoring board

eGFR

 

Estimated glomerular filtration rate

ESKD

 

End stage kidney disease

Exchange Act

 

Securities Exchange Act of 1934

FA

 

Friedreich’s ataxia

FASB

 

Financial Accounting Standards Board

FDA

 

Food and Drug Administration

FSGS

 

Focal segmental glomerulosclerosis

GFR

 

Glomerular filtration rate

IgAN

 

IgA nephropathy

I-PAH

 

Idiopathic form of PAH

IPO

 

Initial public offering

IRS

 

Internal Revenue Service

JOBS Act

 

Jumpstart Our Business Startups Act

KKC

 

Kyowa Kirin Co., Ltd. (formerly KHK or Kyowa Hakko Kirin Co., Ltd.)

mFARS

 

Modified Friedreich’s Ataxia Rating Scale

NDA

 

New Drug Application

Omav

 

Omaveloxolone

PAH

 

Pulmonary arterial hypertension

PGIC

 

Patient Global Impression of Change

Retained eGFR

 

eGFR change after a four-week withdrawal of drug

SAE

 

Serious adverse event

Sarbanes-Oxley Act

 

The Sarbanes-Oxley Act of 2002

SEC

 

Securities and Exchange Commission

T1D CKD

 

Type 1 diabetic CKD

T2D CKD

 

Type 2 diabetic CKD

UACR

 

Urinary albumin-to-creatinine ratio

 

3


 

PART I - FINANCIAL INFORMATION

 

 

Item 1. Financial Statements.

Reata Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

280,449

 

 

$

337,790

 

Prepaid expenses and other current assets

 

 

6,762

 

 

 

4,483

 

Total current assets

 

 

287,211

 

 

 

342,273

 

Property and equipment, net

 

 

2,814

 

 

 

1,445

 

Other assets

 

 

10,463

 

 

 

1,490

 

Total assets

 

$

300,488

 

 

$

345,208

 

Liabilities and stockholders’ (deficit) equity

 

 

 

 

 

 

 

 

Accounts payable

 

 

4,361

 

 

 

4,473

 

Accrued direct research liabilities

 

 

20,871

 

 

 

15,416

 

Other current liabilities

 

 

11,056

 

 

 

4,696

 

Current portion of deferred revenue

 

 

31,421

 

 

 

31,335

 

Total current liabilities

 

 

67,709

 

 

 

55,920

 

Other long-term liabilities

 

 

7,594

 

 

 

524

 

Term loan, net of current portion and debt issuance costs

 

 

79,897

 

 

 

79,219

 

Deferred revenue, net of current portion

 

 

178,761

 

 

 

194,386

 

Total noncurrent liabilities

 

 

266,252

 

 

 

274,129

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ (deficit) equity:

 

 

 

 

 

 

 

 

Common stock A, $0.001 par value:

   500,000,000 shares authorized; issued and outstanding – 24,466,407

   and 24,000,683 shares at June 30, 2019 and December 31, 2018

 

 

24

 

 

 

24

 

Common stock B, $0.001 par value:

   150,000,000 shares authorized; issued and outstanding – 5,631,527

   and 5,728,175 shares at June 30, 2019 and December 31, 2018

 

 

6

 

 

 

6

 

Additional paid-in capital

 

 

450,354

 

 

 

435,452

 

Accumulated deficit

 

 

(483,857

)

 

 

(420,323

)

Total stockholders’ (deficit) equity

 

 

(33,473

)

 

 

15,159

 

Total liabilities and stockholders’ (deficit) equity

 

$

300,488

 

 

$

345,208

 

 

 

See accompanying notes.

4


 

Reata Pharmaceuticals, Inc.

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Collaboration revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License and milestone

 

$

7,813

 

 

$

7,519

 

 

$

15,539

 

 

$

39,686

 

Other revenue

 

 

20

 

 

 

52

 

 

 

64

 

 

 

276

 

Total collaboration revenue

 

 

7,833

 

 

 

7,571

 

 

 

15,603

 

 

 

39,962

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

29,554

 

 

 

23,429

 

 

 

55,668

 

 

 

44,835

 

General and administrative

 

 

11,706

 

 

 

10,689

 

 

 

21,744

 

 

 

17,317

 

Depreciation

 

 

232

 

 

 

105

 

 

 

401

 

 

 

206

 

Total expenses

 

 

41,492

 

 

 

34,223

 

 

 

77,813

 

 

 

62,358

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

 

1,705

 

 

 

357

 

 

 

3,502

 

 

 

693

 

Interest expense

 

 

(2,413

)

 

 

(903

)

 

 

(4,810

)

 

 

(1,413

)

Loss on extinguishment of debt

 

 

 

 

 

(1,007

)

 

 

 

 

 

(1,007

)

Other income (expense)

 

 

7

 

 

 

 

 

 

7

 

 

 

 

Total other income (expense)

 

 

(701

)

 

 

(1,553

)

 

 

(1,301

)

 

 

(1,727

)

Loss before taxes on income

 

 

(34,360

)

 

 

(28,205

)

 

 

(63,511

)

 

 

(24,123

)

Provision for taxes on income

 

 

20

 

 

 

6

 

 

 

23

 

 

 

6

 

Net loss

 

$

(34,380

)

 

$

(28,211

)

 

$

(63,534

)

 

$

(24,129

)

Net loss per share—basic and diluted

 

$

(1.14

)

 

$

(1.08

)

 

$

(2.12

)

 

$

(0.92

)

Weighted-average number of common shares used in

   net loss per share basic and diluted

 

 

30,069,048

 

 

 

26,178,793

 

 

 

29,950,241

 

 

 

26,167,033

 

 

 

See accompanying notes.

5


 

Reata Pharmaceuticals, Inc.

Unaudited Consolidated Statements of Stockholders’ (Deficit) Equity

(in thousands, except share and per share data)

 

 

 

Three Months Ended June 30, 2018

 

 

 

Common Stock A

 

 

Common Stock B

 

 

Additional

Paid-In

 

 

Shareholder

Notes

 

 

Total

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Receivable

 

 

Deficit

 

 

(Deficit) Equity

 

Balance at March 31, 2018

 

 

19,991,082

 

 

$

20

 

 

 

6,171,517

 

 

$

7

 

 

$

192,962

 

 

$

(2

)

 

$

(335,688

)

 

$

(142,701

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(28,211

)

 

 

(28,211

)

Compensation expense

   related to stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,552

 

 

 

 

 

 

(14

)

 

 

2,538

 

Exercise of options

 

 

 

 

 

 

 

 

43,259

 

 

 

(1

)

 

 

493

 

 

 

 

 

 

 

 

 

492

 

Proceeds from payments of

   shareholder promissory

    notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

2

 

 

 

 

 

 

 

8

 

Conversion of common stock

   Class B to Class A

 

 

253,593

 

 

 

 

 

 

(253,593

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

 

20,244,675

 

 

$

20

 

 

 

5,961,183

 

 

$

6

 

 

$

196,013

 

 

$

 

 

$

(363,913

)

 

$

(167,874

)

 

 

 

Six Months Ended June 30, 2018

 

 

 

Common Stock A

 

 

Common Stock B

 

 

Additional

Paid-In

 

 

Shareholder

Notes

 

 

Total

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Receivable

 

 

Deficit

 

 

(Deficit) Equity

 

Balance at December 31, 2017

 

 

19,975,340

 

 

$

20

 

 

 

6,166,166

 

 

$

7

 

 

$

190,145

 

 

$

(2

)

 

$

(337,143

)

 

$

(146,973

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24,129

)

 

 

(24,129

)

Compensation expense

   related to stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,037

 

 

 

 

 

 

(7

)

 

 

5,030

 

Exercise of options

 

 

 

 

 

 

 

 

64,352

 

 

 

(1

)

 

 

825

 

 

 

 

 

 

 

 

 

824

 

Proceeds from payments of

   shareholder promissory

    notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

2

 

 

 

 

 

 

 

8

 

Conversion of common stock

   Class B to Class A

 

 

269,335

 

 

 

 

 

 

(269,335

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adoption of new accounting

   guidance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,634

)

 

 

(2,634

)

Balance at June 30, 2018

 

 

20,244,675

 

 

$

20

 

 

 

5,961,183

 

 

$

6

 

 

$

196,013

 

 

$

 

 

$

(363,913

)

 

$

(167,874

)

 

 

 

Three Months Ended June 30, 2019

 

 

 

Common Stock A

 

 

Common Stock B

 

 

Additional

Paid-In

 

 

Shareholder

Notes

 

 

Total

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Receivable

 

 

Deficit

 

 

(Deficit) Equity

 

Balance at March 31, 2019

 

 

24,403,477

 

 

$

24

 

 

 

5,639,666

 

 

$

6

 

 

$

444,837

 

 

$

 

 

$

(449,477

)

 

$

(4,610

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(34,380

)

 

 

(34,380

)

Compensation expense

   related to stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,483

 

 

 

 

 

 

 

 

 

4,483

 

Exercise of options

 

 

 

 

 

 

 

 

54,791

 

 

 

 

 

 

1,034

 

 

 

 

 

 

 

 

 

1,034

 

Conversion of common stock

   Class B to Class A

 

 

62,930

 

 

 

 

 

 

(62,930

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

 

 

24,466,407

 

 

$

24

 

 

 

5,631,527

 

 

$

6

 

 

$

450,354

 

 

$

 

 

$

(483,857

)

 

$

(33,473

)

 

 

 

Six Months Ended June 30, 2019

 

 

 

Common Stock A

 

 

Common Stock B

 

 

Additional

Paid-In

 

 

Shareholder

Notes

 

 

Total

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Receivable

 

 

Deficit

 

 

(Deficit) Equity

 

Balance at December 31, 2018

 

 

24,000,683

 

 

$

24

 

 

 

5,728,175

 

 

$

6

 

 

$

435,452

 

 

$

 

 

$

(420,323

)

 

$

15,159

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(63,534

)

 

 

(63,534

)

Compensation expense

   related to stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,710

 

 

 

 

 

 

 

 

 

8,710

 

Exercise of options

 

 

 

 

 

 

 

 

369,076

 

 

 

 

 

 

6,085

 

 

 

 

 

 

 

 

 

6,085

 

Conversion of common stock

   Class B to Class A

 

 

465,724

 

 

 

 

 

 

(465,724

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other shareholder

   transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

107

 

 

 

 

 

 

 

 

 

107

 

Balance at June 30, 2019

 

 

24,466,407

 

 

$

24

 

 

 

5,631,527

 

 

$

6

 

 

$

450,354

 

 

$

 

 

$

(483,857

)

 

$

(33,473

)

 

6


 

Reata Pharmaceuticals, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(63,534

)

 

$

(24,129

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

401

 

 

 

206

 

Amortization of debt issuance costs

 

 

678

 

 

 

210

 

Stock-based compensation expense

 

 

8,710

 

 

 

5,037

 

Loss on extinguishment of debt

 

 

 

 

 

1,007

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Amounts earned or due from collaboration agreements

 

 

933

 

 

 

(29,438

)

Prepaid expenses and other current assets

 

 

(3,212

)

 

 

(969

)

Other assets

 

 

8

 

 

 

13

 

Accounts payable

 

 

312

 

 

 

46

 

Accrued direct research and other current and long-term liabilities

 

 

9,802

 

 

 

8,275

 

Deferred revenue

 

 

(15,539

)

 

 

(9,686

)

Net cash used in operating activities

 

 

(61,441

)

 

 

(49,428

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,092

)

 

 

(268

)

Net cash used in investing activities

 

 

(2,092

)

 

 

(268

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

 

 

 

60,000

 

Payments on deferred issuance costs

 

 

 

 

 

(2,240

)

Exercise of options

 

 

6,085

 

 

 

832

 

Other shareholder transactions

 

 

107

 

 

 

 

Net cash provided by financing activities

 

 

6,192

 

 

 

58,592

 

Net (decrease) increase in cash and cash equivalents

 

 

(57,341

)

 

 

8,896

 

Cash and cash equivalents at beginning of year

 

 

337,790

 

 

 

129,780

 

Cash and cash equivalents at end of period

 

$

280,449

 

 

$

138,676

 

Supplemental disclosures

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

4,153

 

 

$

1,354

 

Purchases of equipment in accounts payable and other current liabilities

 

$

170

 

 

$

41

 

Non-cash activity:

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for lease obligations

 

$

8,981

 

 

$

 

 

See accompanying notes.

 

7


 

Reata Pharmaceuticals, Inc.

Notes to Unaudited Consolidated Financial Statements

 

 

1. Description of Business

The Company’s mission is to develop innovative therapies that change patients’ lives for the better.  The Company focuses on developing small-molecule therapeutics with novel mechanisms of action for the treatment of severe, life-threatening diseases with few or no approved therapies.  The Company’s lead product candidates, bardoxolone methyl (Bard) and omaveloxolone (Omav), activate the transcription factor Nrf2, which plays an important role in regulating the cellular response to injury.  By activating Nrf2, Bard and Omav normalize mitochondrial function, restore redox balance, and resolve inflammation.  The Company has fully enrolled two registrational clinical trials: CARDINAL, studying Bard in chronic kidney disease (CKD) caused by Alport syndrome, and MOXIe, studying Omav in Friedreich’s ataxia (FA).  CKD caused by Alport syndrome and FA are rare, serious diseases with no approved therapy.  The Company designed CARDINAL and MOXIe based on the results of earlier clinical studies and guidance from the FDA on a potential path to approval.  The Company expects to have top-line data from both of these clinical trials in the second half of 2019.  With each of these indications, FDA approval may provide expansion opportunities into other related indications.  The Company is also conducting two additional registrational trials, CATALYST, to study Bard in patients with a rare and serious form of pulmonary arterial hypertension caused by connective tissue disease (CTD-PAH) and FALCON, to study Bard in patients with autosomal dominant polycystic kidney disease (ADPKD).  The Company expects to have top-line data from CATALYST during the first half of 2020 and initiated enrollment in FALCON in May 2019.  The Company expects its current cash to fund its operations through data readouts for CARDINAL, MOXIe, and CATALYST.  In addition to its lead programs, the Company is currently exploring a battery of additional clinical and preclinical programs in diseases that may include meaningful expansion opportunities for Bard and Omav.

The Company’s consolidated financial statements include the accounts of all majority-owned subsidiaries.  Accordingly, the Company’s share of net earnings and losses from these subsidiaries is included in the consolidated statements of operations.  Intercompany profits, transactions, and balances have been eliminated in consolidation. 

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.  The consolidated balance sheet at December 31, 2018, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  For further information, refer to the annual consolidated financial statements and footnotes thereto of the Company.

The Company’s significant accounting policies are described in Note 2 of Notes to Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2018 (2018 Annual Report on Form 10-K).  During the first quarter of 2019, the Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). As a result of the adoption of Topic 842, the Company has updated its Leases accounting policies. There were no other changes to its significant accounting policies from those disclosed in its 2018 Annual Report on Form 10-K.

Leases

At the inception of an arrangement, the Company determines if an arrangement is, or contains, a lease based on the unique facts and circumstances present in that arrangement. Lease assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized at the lease commencement date based on

8


 

the present value of lease payments over the lease term calculated using its incremental borrowing rate based on the information available at commencement unless the implicit rate is readily determinable.  Lease assets also include upfront lease payments, lease incentives paid, and direct costs incurred and exclude lease incentives received.  The lease term used to calculate the lease assets and related lease liabilities includes the options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. Lease expense for operating leases is recognized on a straight-line basis over the expected lease term as an operating expense while the expense for finance leases is recognized as depreciation expense over the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise.

The Company will account for each separate lease component separately from the nonlease components.  The depreciable life of lease assets and leasehold improvements is limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of its exercise.

Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expenses for these short-term leases and operating leases are recognized on a straight-line basis over the lease term.

Recently Adopted Accounting Pronouncements

The Company is an “emerging growth company,” as defined in the JOBS Act.  Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.  The Company has irrevocably elected not to avail itself of this exemption from new or revised accounting standards, and, therefore, will be subject to the same new or revised accounting standards as public companies that are not emerging growth companies.

In February 2016, the Financial Accounting Standards Board (FASB) issued Topic 842, amended by ASU 2018-11, Leases (Topic 842): Targeted Improvements . The new guidance requires a lessee to recognize assets and liabilities for all leases with lease terms of more than 12 months and provide additional disclosures. Topic 842 requires adoption using a modified retrospective transition approach with either 1) transition provisions at the beginning of the earliest comparative period records its cumulative adjustment to retained earnings at the beginning of the earliest period presented or 2) a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption.  We adopted this standard on January 1, 2019 using the cumulative-effect adjustment approach. We elected the package of practical expedients in transition for leases that commenced prior to January 1, 2019 whereby these contracts were not reassessed or reclassified from their previous assessment as of December 31, 2018.  

As a result of implementing Topic 842, the Company recognized an operating lease right-of-use asset of $1,544,000 and an operating lease liability of $1,659,000 on January 1, 2019, with no impact on its beginning retained earnings, consolidated statements of operations, or cash flows.  See Note 5, Leases , for further details.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements (ASU 2018-09).  This ASU provided various minor codification updates and improvements to address comments that the FASB had received regarding unclear or vague accounting guidance.  The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year.  The adoption of this guidance did not have a material impact on our financial position, results of operations or disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808) (ASU 2018-18).  This update provides clarification on the interaction between Revenue Recognition (Topic 606) and Collaborative Arrangements (Topic 808) including the alignment of unit of account guidance between the two topics.  This update is effective in fiscal years, including interim periods, beginning after December 15, 2020, and early adoption is permitted.  The Company is currently evaluating the impact on its financial statements of adopting this guidance.

3. Collaboration Agreements

AbbVie

In December 2011, the Company entered into a collaboration agreement with AbbVie Inc. (AbbVie) (the AbbVie Collaboration Agreement) to jointly research, develop, and commercialize the Company’s portfolio of second and later generation oral Nrf2 activators.  The terms of the agreement include payment to the Company of a

9


 

nonrefundable, up-front payment of $ 400,000,000 . The Company is also participating with AbbVie on joint steering committees.  

The up-front payment and the Company’s collaboration on research, development, and commercialization are accounted for as a single unit of accounting.  Revenue is being recognized ratably through December 2026, which is the estimated minimum period that is needed to complete the performance obligations under the terms of the AbbVie Collaboration Agreement.  The Company began recognizing revenue related to the up-front payment upon execution of the agreement. During the three months ended June 30, 2019 and 2018, the Company recognized approximately $6,644,000, and during the six months ended June 30, 2019 and 2018, recognized $13,214,000, as collaboration revenue.  As of June 30, 2019, the Company recorded deferred revenue totaling approximately $198,430,000 of which approximately $26,720,000 is reflected as the current portion of deferred revenue.

KKC

In December 2009, the Company entered a license agreement with Kyowa Kirin Co., Ltd. (KKC) (the KKC agreement), which granted KKC an exclusive license to develop and commercialize Bard in the licensed territory.  The Company received a nonrefundable, up-front license fee of $35,000,000 in 2009 and regulatory milestones totaling $45,000,000 in 2010, 2012, and 2018 and could receive additional regulatory milestones of $52,000,000 and commercial milestones of $140,000,000, as well as tiered royalties ranging from the low teens to the low 20 percent range, depending on the country of sale and the amount of annual net sales, on net sales by KKC in the licensed territory.  

The up-front payment and regulatory milestones are accounted for as a single unit of accounting.  Revenue is being recognized ratably through December 2021, which is the estimated minimum period that is needed to complete the deliverables under the terms of the KKC agreement.  The Company began recognizing revenue related to the up-front payment upon execution of the agreement. During the three months ended June 30, 2019 and 2018, the Company recognized approximately $1,169,000 and $875,000, respectively, and during the six months ended June 30, 2019 and 2018, recognized $2,325,000 and $26,472,000, respectively, as collaboration revenue.  As of June 30, 2019, the Company recorded deferred revenue totaling approximately $11,752,000 of which approximately $4,701,000 is reflected as the current portion of deferred revenue.

 

4. Term Loan

On June 14, 2018, the Company entered into an Amended and Restated Loan and Security Agreement (Restated Loan Agreement) with Oxford Finance LLC and Silicon Valley Bank (collectively, the Lenders), which amended and restated the Loan and Security Agreement entered into among Reata and the Lenders on March 31, 2017, as amended on November 3, 2017 (Loan Agreement).

Under the Restated Loan Agreement, the Term A Loan was increased to $80,000,000, and the Term B Loan availability was increased to $45,000,000, available to be drawn within 30 days, but no later than December 31, 2019, after the achievement of one of two milestones.  If the Company is entitled to draw the Term B Loan but does not draw the Term B Loan by December 31, 2019, the Company is obligated to pay a non-utilization fee of $450,000.

All outstanding Term Loans will mature on June 1, 2023.  Under the Term A Loan, the Company will make interest-only payments for 24 months through June 1, 2020; however, if the Company draws the Term B Loan, the Company will make interest-only payments for 36 months through June 1, 2021.  The interest-only payment period will be followed by 36 equal monthly payments, or 24 equal monthly payments if the Company draws the Term B Loan, of principal and interest payments. The Term Loans will bear interest at a floating per annum rate calculated as 7.79% plus the greater of the 30-day U.S. Dollar LIBOR rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or 1.91%, with a minimum rate of 9.7% and maximum rate of 12.29%.

The Company has the option to prepay all, but not less than all, of the borrowed amounts, provided that the Company will be obligated to pay a prepayment fee equal to (a) the aggregate amount of interest that the Company would have paid through the maturity date if prepayment is made on or before the first anniversary of the applicable funding date of the Term Loan, (b) 4.0% of the outstanding principal balance of the applicable Term Loan if prepayment is made after the first anniversary date and on or before the second anniversary of the applicable

10


 

funding date, (c) 3.0 % of the outstanding principal balance of the applicable Term Loan if prepayment is made after the second anniversary date and on or before the third anniversary of the applicable funding date, or (d) 1.5 % of the outstanding principal balance of the applicable Term Loan if prepayment is made after the third anniversary date and on or before the fourth anniversary of the applicable funding dat e .   The Company will also be required to make a final exit fee payment of 6.5% of the principal balance of the Term A Loan and