UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~September 30, 2017~~March 31, 2019

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

For the transition period from to

Commission File Number: 001-37785

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

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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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”~~filer,” “smaller reporting company,” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐☒
Non-accelerated filer	☒ ~~(Do not check if a small reporting company)~~☐	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 ☒

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

As of ~~November 9, 2017,~~May 6, 2019, the registrant had ~~19,842,134~~24,416,773 shares of Class A common stock, $0.001 par value per share, and ~~6,272,335~~5,639,204 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	67
	Notes to Unaudited Consolidated Financial Statements	78
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1514
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3329
Item 4.	Controls and Procedures	3430
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	3530
Item 1A.	Risk Factors	3530
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3530
Item 3.	Defaults Upon Senior Securities	3530
Item 4.	Mine Safety Disclosures	3530
Item 5.	Other Information	3530
Item 6.	Exhibits	3731
Signatures		3832

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, ~~contained in this Quarterly Report on Form 10-Q,~~ including statements regarding our ~~strategy, future operations,~~ future financial ~~position,~~condition, future revenues, projected costs, prospects, business strategy, and plans and objectives of management for future operations, are forward-looking statements. ~~The words “anticipate,”~~In some cases, you can identify forward-looking statements by terminology such as “believe,” ~~“goals,” “continue,” “could,” “estimate,” “model,” “expect,” “intend,~~“will,” “may,” “might,” “estimate,” “continue,” “anticipate,” “intend,” “target,” “project,” “model,” “should,” “would,” “plan,” ~~“potential,~~“expect,” “predict,” ~~“project,~~“could,” “seek,” ~~“should,~~“goals,” ~~“target,” “will,” “would,~~“potential,” and similar terms or expressions ~~are intended to identify forward-looking statements.~~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;

~~estimates of our expenses, future revenue, capital requirements, and our needs for additional financing;~~

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;

~~the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates;~~

~~our ability to maintain and establish collaborations or obtain additional funding;~~

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

~~our expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act;~~

~~our ability to establish and maintain arrangements for manufacture of our product candidates;~~

~~our ability to attract collaborators with development, regulatory, and commercialization expertise;~~

~~the impact of governmental laws and regulations;~~

•

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, ~~2016,~~2018, filed with the SEC on ~~March 3, 2017, as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 10, 2017.~~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, ~~2016, and under the heading “Risk Factors” in Part II, Item 1A, of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.~~2018. 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.

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
ASU		Accounting Standards Update
Bard		Bardoxolone methyl
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
KHK		Kyowa Hakko Kirin Co., Ltd.
mFARS		Modified Friedreich’s Ataxia Rating Scale
NDA		New Drug Application
Omav		Omaveloxolone
PAH		Pulmonary arterial hypertension
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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Reata Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

							March 31, 2019			December 31, 2018
	September 30, 2017 (unaudited)			December 31, 2016			(unaudited)
Assets
Cash and cash equivalents	$	154,600		$	84,732		$	313,056		$	337,790
Prepaid expenses and other current assets		3,246			2,551			4,416			4,483
Total current assets		157,846			87,283			317,472			342,273
Property and equipment, net		774			819			2,693			1,445
Other assets		1,760			991			11,120			1,490
Total assets	$	160,380		$	89,093		$	331,285		$	345,208
Liabilities and stockholders’ deficit
Liabilities and stockholders’ (deficit) equity
Accounts payable	$	2,527		$	3,830			3,500			4,473
Accrued direct research liabilities		10,014			6,151			16,263			15,416
Other current liabilities		6,474			3,047			10,107			4,696
Current portion of deferred revenue		30,588			46,603			31,335			31,335
Total current liabilities		49,603			59,631			61,205			55,920
Other long-term liabilities		7			72			8,472			524
Term loan, net of discounts and debt issuance costs		19,833			—
Term loan, net of current portion and debt issuance costs								79,558			79,219
Deferred revenue, net of current portion		223,359			244,438			186,660			194,386
Total noncurrent liabilities		243,199			244,510			274,690			274,129
Commitments and contingencies
Stockholders’ deficit:
Common stock A, $0.001 par value: 500,000,000 shares authorized; issued and outstanding – 18,630,799 and 11,687,974 shares at September 30, 2017 and December 31, 2016		19			12
Common stock B, $0.001 par value: 150,000,000 shares authorized; issued and outstanding – 7,483,670 and 10,656,920 shares at September 30, 2017 and December 31, 2016		7			11
Stockholders’ (deficit) equity:
Common stock A, $0.001 par value: 500,000,000 shares authorized; issued and outstanding – 24,403,477 and 24,000,683 shares at March 31, 2019 and December 31, 2018								24			24
Common stock B, $0.001 par value: 150,000,000 shares authorized; issued and outstanding – 5,639,666 and 5,728,175 shares at March 31, 2019 and December 31, 2018								6			6
Additional paid-in capital		188,030			74,298			444,837			435,452
Shareholder notes receivable		(15	)		(15	)
Accumulated deficit		(320,463	)		(289,354	)		(449,477	)		(420,323	)
Total stockholders’ deficit		(132,422	)		(215,048	)
Total liabilities and stockholders’ deficit	$	160,380		$	89,093
Total stockholders’ (deficit) equity								(4,610	)		15,159
Total liabilities and stockholders’ (deficit) equity							$	331,285		$	345,208

See accompanying notes.

Reata Pharmaceuticals, Inc.

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share data)

	Three Months ended						Nine Months ended						Three Months Ended
	September 30,						September 30,						March 31,
	2017			2016			2017			2016			2019			2018
Collaboration revenue
License and milestone	$	12,501		$	12,500		$	37,594		$	37,230		$	7,726		$	32,168
Other revenue		56			51			500			125			44			224
Total collaboration revenue		12,557			12,551			38,094			37,355			7,770			32,392
Expenses
Research and development		18,326			9,300			50,830			27,681			26,114			21,407
General and administrative		6,151			4,039			17,312			11,783			10,038			6,628
Depreciation and amortization		98			170			336			537
Depreciation														170			101
Total expenses		24,575			13,509			68,478			40,001			36,322			28,136
Other income (expense)
Investment income		198			62			352			113			1,797			335
Interest expense		(484	)		—			(956	)		—			(2,397	)		(509	)
Other income (expense)		(3	)		—			(3	)		—
Total other income (expense)		(289	)		62			(607	)		113			(600	)		(174	)
Loss before taxes on income		(12,307	)		(896	)		(30,991	)		(2,533	)
Provision (benefit) for taxes on income		1			1			2			(442	)
Net loss	$	(12,308	)	$	(897	)	$	(30,993	)	$	(2,091	)
Net loss per share—basic and diluted	$	(0.50	)	$	(0.04	)	$	(1.34	)	$	(0.11	)
Weighted-average number of common shares used in net loss per share basic and diluted		24,845,364			22,324,374			23,196,293			18,970,128
(Loss) income before taxes on income														(29,152	)		4,082
Provision for taxes on income														2			—
Net (loss) income													$	(29,154	)	$	4,082
Net (loss) income per share—basic													$	(0.98	)	$	0.16
Net (loss) income per share—diluted													$	(0.98	)	$	0.15
Weighted-average number of common shares used in net (loss) income per share basic														29,830,114			26,155,141
Weighted-average number of common shares used in net (loss) income per share diluted														29,830,114			26,633,521

See accompanying notes.

Reata Pharmaceuticals, Inc.

Unaudited Consolidated Statements of Stockholders’ (Deficit) Equity

(in thousands, except share and per share data)

	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		—		—		—			—		—		—		(29,154	)		(29,154	)
Compensation expense related to stock options		—		—		—			—		4,227		—		—			4,227
Exercise of options		—		—		314,285			—		5,051		—		—			5,051
Conversion of common stock Class B to Class A		402,794		—		(402,794	)		—		—		—		—			—
Other shareholder transactions		—		—		—			—		107		—		—			107
Balance at March 31, 2019		24,403,477	$	24		5,639,666		$	6	$	444,837	$	—	$	(449,477	)	$	(4,610	)

	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 income		—		—		—			—		—		—			4,082			4,082
Compensation expense related to stock options		—		—		—			—		2,485		—			7			2,492
Exercise of options		—		—		21,093			—		332		—			—			332
Conversion of common stock Class B to Class A		15,742		—		(15,742	)		—		—		—			—			—
Adoption of new accounting guidance		—		—		—			—		—		—			(2,634	)		(2,634	)
Balance at March 31, 2018		19,991,082	$	20		6,171,517		$	7	$	192,962	$	(2	)	$	(335,688	)	$	(142,701	)

Reata Pharmaceuticals, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

	Nine Months ended						Three Months Ended
	September 30,						March 31,
	2017			2016			2019			2018
Operating activities
Net loss	$	(30,993	)	$	(2,091	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		414			537
Net (loss) income							$	(29,154	)	$	4,082
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation								170			101
Amortization of debt issuance costs								339			59
Stock-based compensation expense		4,730			1,451			4,227			2,485
Loss on disposal of property and equipment		3			—
Changes in operating assets and liabilities:
Amounts earned or due from collaboration agreements								573			(25,307	)
Prepaid expenses and other current assets		(695	)		(2,899	)		(506	)		(174	)
Other assets		(769	)		(451	)		6			273
Accounts payable		(1,409	)		(2,235	)		(522	)		(1,065	)
Accrued direct research and other current liabilities		7,355			2,869
Other liabilities		(65	)		—
Federal income tax receivable/payable		—			31,926
Accrued direct research and other current and long-term liabilities								3,861			2,636
Deferred revenue		(37,094	)		(37,230	)		(7,726	)		(7,111	)
Net cash used in operating activities		(58,523	)		(8,123	)		(28,732	)		(24,021	)
Investing activities
Purchases of property and equipment		(208	)		(281	)		(1,160	)		(151	)
Net cash used in investing activities		(208	)		(281	)		(1,160	)		(151	)
Financing activities
Proceeds from issuance of common stock		108,910			64,705
Payments on deferred offering costs		(386	)		(2,531	)
Proceeds from long-term debt		20,000			—
Payments on deferred discount and issuance costs		(251	)		—
Payments on deferred issuance costs								—			(3	)
Exercise of options		371			(73	)		5,051			332
Payment of capital lease obligation		(45	)		(45	)
Other shareholder transactions								107			—
Net cash provided by financing activities		128,599			62,056			5,158			329
Net increase in cash and cash equivalents		69,868			53,652
Net decrease in cash and cash equivalents								(24,734	)		(23,843	)
Cash and cash equivalents at beginning of year		84,732			42,008			337,790			129,780
Cash and cash equivalents at end of period	$	154,600		$	95,660		$	313,056		$	105,937
Supplemental disclosures
Cash paid for interest	$	727		$	—		$	2,052		$	445
Purchases of equipment in accounts payable and other current liabilities	$	106		$	13		$	750		$	74
Accrued deferred offering costs	$	18		$	348
Income taxes paid	$	—		$	18
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations							$	9,636		$	—

See accompanying notes.

Reata Pharmaceuticals, Inc.

Notes to Unaudited Consolidated Financial Statements

1. Description of Business

~~Reata Pharmaceuticals, Inc. (the Company)~~The Company’s mission is ~~a clinical stage biopharmaceutical company located in Irving, Texas focused~~to develop innovative therapies that change patients’ lives for the better. The Company focuses on ~~identifying,~~ developing ~~and commercializing product candidates to address serious and~~small-molecule therapeutics with novel mechanisms of action for the treatment of severe, life-threatening diseases with few or no approved ~~therapies by targeting molecular pathways that regulate cellular metabolism and inflammation. The Company operates as a single segment of business.~~

therapies. The Company’s lead product candidates, bardoxolone methyl (Bard) and omaveloxolone (Omav), activate the ~~important~~ transcription factor Nrf2, which plays an important role in regulating the cellular response to ~~restore~~injury. By activating Nrf2, Bard and Omav normalize mitochondrial function, ~~reduce oxidative stress,~~restore redox balance, and resolve inflammation.

The Company ~~is currently conducting three Phase 3 or other potentially~~has fully enrolled two registrational ~~trials. Bardoxolone methyl is being studied~~clinical trials: CARDINAL, studying Bard in ~~a single, pivotal Phase 2/3 trial, known as CARDINAL, for the treatment of~~ 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 ~~Phase 3 trial, known as~~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, ~~for the treatment~~to study Bard in patients with a rare and serious form of pulmonary arterial hypertension ~~associated with~~caused by connective tissue disease (CTD-PAH) and FALCON, to study Bard in patients with autosomal dominant polycystic kidney disease (ADPKD). The Company began enrolling patients in the Phase 3 portion of CARDINAL in August 2017, after having announced preliminary results from the trial. On November 3, 2017, the Company announced primary endpoint and other 12 weekexpects to have top-line data from CATALYST during the ~~ongoing Phase 2 portion~~first half of ~~CARDINAL. Omaveloxolone is being studied~~2020 and to initiate enrollment in ~~a two-part Phase 2 trial, known as MOXIe, for the treatment of Friedreich’s ataxia.~~FALCON in May 2019. The Company ~~announced~~expects its current cash to fund its operations through data ~~from part 1 of~~readouts for CARDINAL, MOXIe, ~~in June 2017~~ and ~~began enrolling patients in October 2017 in part 2 of the trial, which is potentially registrational.~~

The Company is also currently conducting trials in four other areas. In October 2017, we began activating sites in a Phase 2 trial, known as PHOENIX, to test bardoxolone methyl in the treatment of other rare kidney diseases. Bardoxolone methyl is currently being studied in a Phase 2 trial, known as LARIAT, for the treatment of PAH and pulmonary hypertension due to interstitial lung disease (PH-ILD). Omaveloxolone is being studied in a two-part Phase 2 trial for the treatment of mitochondrial myopathies, known as MOTOR, and a Phase 1b/2 trial for the treatment of metastatic melanoma, known as REVEAL.

CATALYST. In addition to these ongoing trials, the Company conducted a Phase 1 trial of RTA 901 in healthy volunteers, with no safety or tolerability issues, and is evaluating various options in the design and timing of a Phase 2 trial. Beyond its ~~clinical~~lead programs, the Company ~~has~~is currently exploring a battery of additional ~~promising preclinical development programs. The Company believes its product candidates~~clinical and preclinical programs ~~have the potential to improve clinical outcomes~~ in ~~numerous underserved patient populations.~~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 that are required to be consolidated.~~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.

On May 25, 2016, the Company’s registration statement on Form S-1 (File No. 333-208843) relating to its initial public offering (IPO) of its common stock was declared effective by the U.S. Securities and Exchange Commission. The shares began trading on The NASDAQ Global Market on May 26, 2016. The public offering price of the shares sold in the offering was $11.00 per share. The IPO closed on June 1, 2016, for 6,325,000 shares of its Class A common stock, which included 825,000 shares of its Class A common stock issued pursuant to the over-allotment option granted to the underwriters. The Company received total proceeds from the offering of $60.9 million, net of underwriting discounts and commissions and offering expenses.

On August 1, 2017, the Company closed a follow-on underwritten public offering of 3,737,500 shares of its Class A common stock, which included 487,500 shares of its Class A common stock issued pursuant to an option granted to the underwriters, for gross proceeds of $115.9 million. The Company received total proceeds from the offering of $108.5 million, after deducting underwriting discounts and commissions and offering expenses.

~~Reata Pharmaceuticals, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)~~

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 ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2019. The consolidated balance sheet at December 31, ~~2016,~~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.

~~Revenue Recognition~~

The Company’s ~~revenue~~significant accounting policies are described in Note 2 of Notes to ~~date has been generated primarily through collaborative licensing agreements with AbbVie Ltd. (AbbVie) and Kyowa Hakko Kirin Co., Ltd. (KHK)~~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). ~~Revenues for periods shown consist~~During the first quarter of 2019, the Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). As a result of the ~~recognition~~adoption of ~~deferred revenue~~Topic 842, the Company has updated its Leases accounting policies. There were no other changes to its significant accounting policies from ~~upfront payments and milestone payments received~~those disclosed in ~~2012 and prior years.~~ its 2018 Annual Report on Form 10-K.

Leases

The Company ~~has not generated any revenue~~determines if an arrangement is a lease at inception. 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 the ~~sale~~present value of ~~products.~~

~~In June 2013,~~lease payments over the Company entered into a research collaboration with a disease advocacy organization. Under the agreement, the Company may be provided milestone payments to fund research and development activities. The Company recorded collaboration revenue totaling $500,000 related to milestone payments during the nine months ended September 30, 2017.

~~Research and Development Costs~~

AbbVie is not currently participating in the development of bardoxolone methyl for the treatment of CKD caused by Alport syndrome, PAH, PH-ILD, or other rare kidney diseases, and we are therefore incurring all costs for this program. With respect tolease term calculated using its omaveloxolone programs and its collaboration agreement with AbbVie, the Company was responsible for a certain initial amount in early development costs before AbbVie began sharing development costs equally. As of April 2016, the Company had incurred all of these initial costs, after which payments from AbbVie with respect to research and development costs incurred by the Company were recorded as a reduction in research and development expenses.

In September 2016, the Company and AbbVie mutually agreed that the Company would continue unilateral development of omaveloxolone. Therefore, AbbVie no longer co-funds the exploratory development costs of this program, but retains the right to opt back in at certain points in development. For the three and nine months ended September 30, 2017, no payments related to shared research and developments costs were received.

The Company bases its expense accruals related to clinical trials on its estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical trials on its behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing costs, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the Company does not identify costs that it has begun to incur or if the Company underestimates or overestimates the level of services performed or the costs of these services, its actual expenses could differ from its estimates.

To date, the Company has not experienced significant changes in its estimates of accrued research and development expenses after a reporting period. However, due to the nature of estimates, the Company cannot assure that it will not make changes to its estimates in the future as the Company becomes aware of additional information about the status or conduct of its clinical trials and other research activities.incremental borrowing rate

~~Reata Pharmaceuticals, Inc.~~

~~Notes~~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 ~~Unaudited Consolidated Financial Statements (continued)~~

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. ~~Stock-Based Compensation~~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 ~~accounts~~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 ~~equity-based compensation awards in accordance~~exercise.

Leases with ~~Accounting Standard Codification ASC 718~~ ~~Compensation—Stock Compensation~~ (ASC 718). ASC 718 requires companies to recognize compensation expense using a fair value based method for costs related to stock-based payments, including stock options. The expense is measured basedan initial term of 12 months or less are not recorded on the ~~grant date fair value of the awards that are expected to vest,~~balance sheet, and the expense for these short-term leases and operating leases is ~~recorded~~recognized on a straight-line basis over the ~~applicable requisite service period.~~lease term.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock option awards, which takes into consideration various factors, including the exercise price of the award, the expected term of the award, the current price of the underlying shares, the expected volatility of the underlying share price based on peer companies, and the risk-free interest rate. The Company accounts for forfeitures of share-based awards when they occur.

Prior to the Company’s IPO of its common stock, the fair values of the shares of common stock underlying the Company’s share-based awards were estimated on each grant date using a probability-weighted expected return method. Following the close of its IPO in June 2016, the fair values of its common stock underlying its share-based awards were estimated using observable market prices.

~~Risks and Uncertainties~~

The Company has experienced losses and negative operating cash flows for many years since inception and has no marketed drug or other products. The Company’s ability to generate future revenue depends upon the results of its development programs, the success of which cannot be guaranteed. The Company will need to raise additional equity or debt capital in the future in order to fund its operations.

~~Use of Estimates~~

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

~~Fair Value of Financial Instruments~~

The fair values of the Company’s stockholder notes receivable were approximately $34,000 and $28,000 at September 30, 2017 and December 31, 2016, respectively. The fair value was calculated using an income approach to estimate the present value of expected future cash flows to be received under the notes. The measurement is considered to be based primarily on Level 3 inputs used in the calculation, including the discount rate applied and the estimate of future cash flows.

~~Net Loss per Share~~

Basic and diluted net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents. The Company’s potentially dilutive shares, which include unvested restricted stock and options to purchase common stock, are considered to be common stock equivalents and are only included in the calculation of diluted net income (loss) per share when their effect is dilutive. For periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

The Company uses the two-class method to compute net loss per common share attributable to common stockholders because the Company has issued securities, other than Class A and Class B common stock, that contractually entitle the holders to participate in dividends and earnings of the Company. The two-class method requires earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive distributed and undistributed earnings. Holders of restricted common stock are entitled to the dividend amount paid to common stockholders on an as-if-converted-to-common stock basis when declared by the Company’s Board of Directors. As a result, all restricted common stock are considered to be participating securities.

~~Reata Pharmaceuticals, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)~~

~~Deferred Offering Costs~~

Deferred offering costs, which primarily consist of direct incremental accounting, legal, and printing fees relating to the IPO and a follow-on underwritten public offering, were initially capitalized. The deferred offering costs totaling $3,489,000 and $386,000 were subsequently offset against total proceeds from the IPO and the follow-on offering upon the completion of the offerings on June 1, 2016 and August 1, 2017, respectively.

~~Debt Issuance Costs~~

The Company defers costs related to debt issuance and amortizes these costs to interest expense over the term of the debt, using the effective interest method. Debt issuance costs are presented in the balance sheet as a deduction from the carrying amount of the debt liability.

~~Recent~~Recently Adopted Accounting Pronouncements

The Company is an “emerging growth company,” as defined in the ~~Jumpstart Our Business Startups Act of 2012 (the~~ JOBS ~~Act).~~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 ~~May 2014,~~February 2016, the Financial Accounting Standards Board (FASB) issued ~~Accounting Standards Update (ASU) No. 2014-09,~~Topic 842, amended by ASU 2018-11, ~~Revenue from Contracts with Customers~~Leases (Topic ~~606) (ASU 2014-09), which supersedes the revenue recognition requirements in ASC 605,~~ ~~Revenue Recognition~~842): Targeted Improvements. The ~~FASB has subsequently issued~~new guidance requires a ~~number~~lessee to recognize assets and liabilities for all leases with lease terms of ~~amendments~~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 ~~ASU 2014-09. The new standard, as amended, provides a single comprehensive model based on~~retained earnings at the ~~principle that revenue is recognized to depict~~beginning of the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, ASU 2014-09 defines a five-step process, which may include more judgment and estimates than are required under existing GAAP, including identifying performance obligations in a contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each performance obligation.

The new standard is effective for interim and annual periods beginning after December 15, 2017, with early application for interim and annual periods beginning after December 15, 2016, permitted, and allows two methods of adoption: the full retrospective method, which requires the standard to be applied to each priorearliest period presented or 2) a cumulative-effect adjustment recognized to the ~~modified retrospective method, which requires the cumulative effect~~opening balance of ~~adoption to be recognized as an adjustment to opening~~ 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 ~~period~~Company recognized an operating lease right-of-use asset of ~~adoption.~~

~~The Company has completed~~$1,544,000 and an ~~initial~~operating lease liability of $1,659,000 on January 1, 2019, with no impact ~~assessment of the potential changes from adopting ASU No. 2014-09. The impact assessment consisted of a review of contracts, discussions with key stakeholders, and a cataloging of potential impacts~~ on its ~~financial~~beginning retained earnings, consolidated statements ~~accounting policies, financial control, and operations. The Company anticipates that the adoption~~ of ~~ASU No. 2014-09 will have an impact on contract revenues generated by collaboration agreements.~~

The Company has not yet completed its final review of the impact of this guidance; however, the Company anticipates applying the modified retrospective method when implementing this guidance. The Company plans to adopt the new standard effective January 1, 2018. The Company continues to monitor additional changes, modifications, clarificationsincome (loss), or ~~interpretations being undertaken by the FASB, which may impact its current conclusions.~~cash flows. See Note 5, Leases, for further details.

In ~~April 2015,~~July 2018, the FASB issued ASU No. ~~2015-03,~~2018-09, ~~Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs~~Codification Improvements ~~(ASU 2015-03), which requires that debt issuance costs related~~(ASU 2018-09). This ASU provided various minor codification updates and improvements to ~~a recognized debt liability be presented in the balance sheets as a direct deduction from the carrying amount of~~address comments that debt liability, consistent with debt discounts. The Company adopted ASU 2015-03 as of January 1, 2017. The recognition and measurement guidance for debt issuance costs were not affected by the amendments in ASU No. 2015-03. In March 2017, upon entering into a loan and security agreement, $91,000 of debt issuance costs was netted against the principal balance of our outstanding term loan of $20,000,000.

~~In February 2016,~~ the FASB ~~issued ASU No. 2016-02,~~ ~~Leases~~ ~~(Topic 842) (ASU 2016-02), which supersedes ASC 840,~~ ~~Leases. ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases previously classified as operating leases.~~had received regarding unclear or vague accounting guidance. The ~~standard~~guidance is effective for ~~public companies for fiscal years, and for interim periods within those~~ fiscal years beginning after December 15, ~~2018. Early adoption is permitted. The Company will apply the guidance and disclosure provisions of the new~~

~~Reata Pharmaceuticals, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)~~

standard upon adoption. The Company is currently evaluating this standard and has not yet determined what, if any, effect ASU 2016-02 will have on its consolidated operations or financial position but anticipates the recognition of additional assets and corresponding liabilities related to leases on its balance sheet.

~~In March 2016, the FASB issued ASU No. 2016-09,~~ ~~Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting~~ (Topic 718) (ASU 2016-09) which modifies U.S. GAAP by requiring the following, among others: (1) all excess tax benefits and tax deficiencies are to be recognized as income tax expense or benefit on the income statement (excess tax benefits are recognized regardless of whether the benefit reduces taxes payable in the current period); (2) excess tax benefits are to be classified along with other income tax cash flows as an operating activity in the statement of cash flows; (3) in the area of forfeitures, an entity can still follow the current U.S. GAAP practice of making an entity-wide accounting policy election to estimate the number of awards that are expected to vest or may instead account for forfeitures when they occur; and (4) classification as a financing activity in the statement of cash flows of cash paid by an employer to the taxing authorities when directly withholding shares for tax withholding purposes. ASU 2016-09 is effective for annual periods beginning after December 15, 2016. The Company adopted ASU 2016-09 as of January 1, 2017, which resulted in an adjustment to retained earnings of $110,000 related to the cumulative effect of the accounting policy election to account for forfeitures of share-based awards when they occur, and an adjustment of $115,000 to recognize excess tax benefits as a component of the provision for income taxes on a prospective basis. For the nine months ended September 30, 2017, the effect on the provision for income taxes included in the consolidated statement of operations was not significant.

~~In August 2016, the FASB issued ASU No. 2016-15,~~ ~~Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments~~ (Topic 230) (ASU 2016-15). This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The ASU is effective for public companies for fiscal years, and2018, including interim reporting periods within ~~those~~that fiscal ~~years, beginning after December 15, 2017.~~year. The ~~Company is currently evaluating this standard and has not yet determined what, if any, effect ASU 2016-15 will have on its consolidated results of operations or financial position.~~

~~In January 2017, the FASB issued ASU No. 2017-03,~~ ~~Accounting Changes and Error Corrections~~ ~~(Topic 250)~~ ~~and Investments—Equity Method and Joint Ventures~~ ~~(Topic 323) (ASU 2017-03). This ASU amends the disclosure requirements for ASU No. 2014-09,~~ ~~Revenue from Contracts with Customers~~ ~~(Topic 606), ASU No. 2016-02,~~ ~~Leases~~ ~~(Topic 842) and ASU No. 2016-13,~~ ~~Financial Instruments—Credit Losses~~ ~~(Topic 326):~~ ~~Measurement of Credit Losses on Financial Instruments. This ASU states that if a registrant does not know or cannot reasonably estimate the impact that the~~ adoption of the above ASUs is expected to have on the financial statements, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. ASU 2017-03 was effective upon issuance. The adoptionthis guidance did not have a material impact on ~~the Company’s~~our financial ~~statements.~~position, results of operations or disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

In ~~May 2017,~~August 2018, the FASB issued ASU No. ~~2017-09,~~2018-13, ~~Compensation—Stock Compensation~~Fair Value Measurement: Disclosure Framework (Topic ~~718)~~820) (ASU ~~2017-09)~~2018-13). This ASU ~~provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09~~eliminates, modifies, and adds certain disclosure requirements for fair value measurements. This update is effective ~~for~~in fiscal years, including interim ~~and annual~~ periods, beginning after December 15, ~~2017. Early~~2019, and early adoption is permitted. ~~We have adopted~~The added disclosure requirements and the ~~standard as~~modified disclosure on the narrative description of ~~June 30, 2017.~~measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented. All other changes to disclosure requirements in this update should be applied retrospectively to all periods presented upon their effective date. The ~~adoption did not have a material~~Company is currently evaluating the impact on its financial statements of adopting this guidance.

In November 2018, the ~~Company’s financial statements.~~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. ~~Term Loan~~Collaboration Agreements

~~On March 31, 2017,~~AbbVie

In December 2011, the Company entered into a ~~loan~~collaboration agreement with AbbVie Inc. (AbbVie) (the AbbVie Collaboration Agreement) to jointly research, develop, and ~~security~~commercialize the Company’s portfolio of second and later generation oral Nrf2 activators. The terms of the agreement ~~(Loan~~include payment to the Company of a 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 deliverables under the terms of the AbbVie Collaboration Agreement. The Company began recognizing revenue related to the up-front payment upon execution of the agreement and, accordingly, recognized approximately $6,570,000 as collaboration revenue during the three months ended March 31, 2019 and 2018. As of March 31, 2019, the Company recorded deferred revenue totaling approximately $205,074,000 of which approximately $26,720,000 is reflected as the current portion of deferred revenue.

KHK

In December 2009, the Company entered a license agreement with Kyowa Hakko Kirin Co., Ltd. (KHK) (the KHK agreement), which granted KHK 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 KHK 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 KHK agreement. The Company began recognizing revenue related to the up-front payment upon execution of the agreement and, accordingly, recognized approximately $1,156,000 and $25,598,000 as collaboration revenue during the three months ended March 31, 2019, and 2018, respectively. As of March 31, 2019, the Company recorded deferred revenue totaling approximately $12,922,000 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), ~~under~~ which amended and restated the Loan and Security Agreement entered into among Reata and the Lenders ~~agreed to lend the Company up to $35,000,000, issuable in two separate term loans of $20,000,000 (Term A Loan) and $15,000,000 (Term B Loan). On~~on March 31, 2017, as amended on November 3, 2017 (Loan Agreement).

Under the ~~Company borrowed $20,000,000 from~~Restated Loan Agreement, the Term A ~~Loan.~~

~~On November 3, 2017, the Company amended the~~ Loan ~~Agreement (Amended Loan Agreement)~~was increased to ~~increase~~$80,000,000, and the Term B Loan ~~amount~~availability was increased to either $20,000,000 or $25,000,000 and to extend the interest only period by six months if the Term B Loan is drawn. The Company may, at its sole discretion, borrow $20,000,000 under Term B Loan. An additional $5,000,000 will be available under the Term B Loan for a total of $25,000,000$45,000,000 upon the achievement of one of two ~~milestones. The Company may borrow the Term B Loan~~milestones by the earlier of 9030 days after the achievement of a milestone or ~~June 29, 2018.~~

~~Reata Pharmaceuticals, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)~~

~~The Company paid an amendment fee of $250,000 on November 8, 2017, upon the execution of the Amended Loan Agreement.~~December 31, 2019. 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 ~~would~~is obligated to pay ~~an unused line~~a non-utilization fee of ~~$1,000,000.~~$450,000.

All outstanding Term Loans will mature on ~~March~~June 1, ~~2022.~~2023. Under the Term A Loan, the Company will make interest-only payments for 1824 months through ~~October~~June 1, ~~2018;~~2020; however, if the Company draws the Term B Loan, the Company will make interest-only payments for 3036 months through ~~October~~June 1, ~~2019.~~2021. The interest-only payment period

will be followed by 4136 equal monthly payments, or 2924 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 ~~7.40%~~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 ~~0.75%~~1.91%, with a minimum rate of ~~8.15%~~9.7% and maximum rate of ~~10.15%~~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) ~~3.0%~~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 ~~prior to~~after the first anniversary ~~of the applicable funding~~ date ~~of the Term Loan, (b) 2.0% of the outstanding principal balance of the applicable Term Loan if prepayment is made by~~and on or before the second anniversary of the applicable funding date, ~~of the Term Loan, or~~ (c) ~~1.0%~~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.~~Loan if prepayment is made after the third anniversary date and on or before the fourth anniversary of the applicable funding date. The Company will also be required to make a final exit fee payment of ~~2.95%~~6.5% of the principal balance of ~~all~~the Term ~~Loans outstanding,~~A Loan and 4.0% of the Term B Loan, payable on the earliest of the prepayment of the Term Loans, acceleration of any Term Loan, or at maturity of the Term Loans.

The Company may use the proceeds from the Term Loans for working capital and to fund its general business requirements. The Company’s obligations under the Restated Loan Agreement are secured by ~~a first priority security interest in~~ substantially all of its current and future assets, ~~other than~~including its owned intellectual property. ~~The Company has also agreed not to encumber its intellectual property assets, except as permitted by the Loan Agreement.~~

As of ~~September 30, 2017,~~March 31, 2019, the Company had ~~$20,000,000~~$80,000,000 outstanding under the Term A Loan, which was recorded at its initial carrying value of ~~$20,000,000,~~$80,000,000, less unamortized discount and debt issuance costs ~~totaling~~of approximately ~~$251,000.~~$5,642,000. In connection with the Term A Loan, the discount and debt issuance costs were recorded as a reduction to debt on its balance sheet and are being accreted to interest expense over the life of the Term A Loan. Additionally, the final exit fee of approximately ~~$590,000~~$5,200,000 is being accrued over the life of the Term A Loan through interest expense. The Term A Loan has a current effective interest rate of ~~10.4%.~~11.05% before debt issuance costs and final exit fee and 13.60% including debt issuance costs and final exit fee. The Company is in compliance with all covenants under the Restated Loan Agreement as of ~~September 30, 2017.~~March 31, 2019.

The future principal payments for the Company’s Term A Loan as of ~~September 30, 2017~~March 31, 2019 are as follows (in thousands):

2017	$	—
2018		975
2019		5,854	$	—
2020		5,854		15,555
2021		5,854		26,667
2022		1,463		26,667
2023				11,111
	$	20,000	$	80,000

5. Leases

The Company’s corporate headquarters are located in Irving, Texas, where it leases approximately 34,890 square feet of office and laboratory space. In February 2019, the Company commenced a lease for approximately 122,000 square feet of additional office space in Plano, Texas.

The Company’s leases have remaining contractual terms of up to approximately 39 months, which includes the options to extend the leases for up to one year. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

At March 31, 2019, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases held by the Company were 8.3% and 3.0 years, respectively. During the three months ended March 31, 2019, cash paid for amounts included for the measurement of lease liabilities was $237,000 and the Company recorded operating lease expense of $663,000. The Company has elected to net the amortization

of the right-of-use assets and the reduction of the lease liabilities principal in accrued direct research and other current and long-term liabilities in the consolidated statements of cash flows.

Supplemental balance sheet information related to our operating leases is as follows:

	Balance Sheet Classification	As of March 31, 2019
	(in thousands)
Non-current right-of-use assets	Other assets	$	9,636
Current lease liabilities	Other current liabilities		2,149
Non-current lease liabilities	Other long-term liabilities		7,972

Maturities of lease liabilities by fiscal year for our operating leases:

	As of March 31, 2019
	(in thousands)
2019	$	2,149
2020		3,999
2021		4,090
2022		1,178
Total lease payments		11,416
Less: Imputed interest		(1,295	)
Present value of lease liabilities	$	10,121

6. Income Taxes

The Company’s effective tax rate varies with the statutory rate due primarily to the impact of nondeductible stock-based compensation and the changes in valuation allowance related to certain deferred tax assets generated or utilized in the applicable period. The Company’s deferred tax assets have been fully offset by a valuation allowance at ~~September 30, 2017,~~March 31, 2019, and the Company expects to maintain this valuation allowance until there is sufficient evidence that future earnings can be achieved, which is uncertain at this time.

~~Reata Pharmaceuticals, Inc.~~

~~Notes~~The IRS examination team has completed its examination of the Company’s 2013, 2014, and 2015 U.S. tax returns and proposed adjustments with respect to ~~Unaudited Consolidated Financial Statements (continued)~~certain items that were reported by the Company for the 2013 tax year. In June 2018, the Company received the Revenue Agent Report from the IRS. The Company believes that it has accurately reported all amounts in its tax returns and has submitted an administrative protest with the IRS contesting the examination team’s proposed adjustments. The Company intends to vigorously defend its reported positions and believes the ultimate resolution of the adjustments proposed by the IRS examination team will not have a material adverse effect on its consolidated financial statements.

7. Stock-Based Compensation

Stock Options

The following table summarizes stock-based compensation expense reflected in the consolidated statements of operations (in thousands):

	Three Months ended				Nine Months ended
	September 30,				September 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2019		2018
Research and development	$	587	$	375	$	1,729	$	725	$	1,691	$	961
General and administrative		958		341		3,001		726		2,536		1,524
	$	1,545	$	716	$	4,730	$	1,451	$	4,227	$	2,485

The following table summarizes stock option activity as of ~~September 30, 2017,~~March 31, 2019, and changes during the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, under the 2007 Long Term Incentive Plan (the 2007 LTIP) and standalone option agreements:

	Number of Options			Weighted- Average Exercise Price		Number of Options			Weighted- Average Exercise Price
Outstanding at January 1, 2017		2,311,146			17.18
Outstanding at January 1, 2019							3,320,571			21.20
Granted		121,698			26.47		1,032,375			57.33
Exercised		(32,075	)		11.54		(314,285	)		16.07
Forfeited		(3,805	)		16.08		(257,897	)		33.07
Expired		(66	)		25.21		—			—
Outstanding at September 30, 2017		2,396,898			17.72
Exercisable at September 30, 2017		831,620			16.90
Outstanding at March 31, 2019							3,780,764			30.78
Exercisable at March 31, 2019							1,405,785			19.96

The total intrinsic value of all outstanding options and exercisable options at ~~September 30, 2017~~March 31, 2019 was ~~$32,803,000~~$206,899,000 and ~~$12,541,000,~~$92,094,000, respectively.

~~6. Related-Party Transactions~~

During the nine months ended September 30, 2017, the Company did not have any related party transactions. During the nine months ended September 30, 2016, the Company paid approximately $306,000 to AbbVie, a greater than 10% shareholder of the Company at that time, for manufacturing services. The payments were recorded in research and development expense in the accompanying consolidated statements of operations.

~~Reata Pharmaceuticals, Inc.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)~~

7.8. Net ~~Loss~~(Loss) Income per Share

The following table sets forth the computation of basic and diluted net ~~loss~~(loss) income per share attributable to common stockholders:

Three Months ended

Nine Months ended

September 30,

September 30,

2017

2016

2017

2016

Numerator

Net loss (in thousands)

$
(12,308
)

$
(897
)

$
(30,993
)

$
(2,091
)
Denominator

Weighted-average number of common shares used in
net loss per share – basic

24,845,364

22,324,374

23,196,293

18,970,128

Dilutive potential common shares

—

—

—

—

Weighted-average number of common shares used in
net loss per share – diluted

24,845,364

22,324,374

23,196,293

18,970,128

Net loss per share – basic

$
(0.50
)

$
(0.04
)

$
(1.34
)

$
(0.11
)
Net loss per share – diluted

$
(0.50
)

$
(0.04
)

$
(1.34
)

$
(0.11
)

	Three Months Ended March 31,
	2019			2018
	(in thousands, except share and per share data)
Numerator
Net (loss) income (in thousands)	$	(29,154	)	$	4,082
Denominator
Weighted-average number of common shares used in net (loss) income per share – basic		29,830,114			26,155,141
Dilutive potential common shares		—			478,380
Weighted-average number of common shares used in net (loss) income per share – diluted		29,830,114			26,633,521
Net (loss) income per share – basic	$	(0.98	)	$	0.16
Net (loss) income per share – diluted	$	(0.98	)	$	0.15

The number of weighted average options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive represented ~~2,396,898~~3,780,764 and ~~1,474,893~~2,131,219 shares for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, respectively.

~~8. Subsequent events~~

~~On November 3, 2017, the Company amended the Loan Agreement with the Lenders, which is further discussed in Note 3.~~

~~On November 9, 2017, the Company amended the lease agreement for its principal executive offices in Irving, Texas to extend its lease term by 24 months for an expiration date of October 2020.~~

On November 9, 2017, the Company entered into an at-the-market equity offering sales agreement with Stifel, Nicolaus & Company, Incorporated, that established a program pursuant to which it may offer and sell up to $50,000,000 of its Class A common stock from time to time in at-the-market transactions. As of the filing date of this Form 10-Q, there have been no shares sold under this program.

1413

Item 2. ~~MANAGEMENT’S D~~Management’s Discussion and Analysis of~~ISCUSSION AND ANALYSIS~~ Financial Condition and Results of Operations

~~OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information appearing in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, operations, and product candidates, includes forward-looking statements that involve risks and uncertainties. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under the heading “Risk Factors” and discussed elsewhere in this Quarterly Report on Form 10-Q.

Overview

We are a clinical stage biopharmaceutical company focused on identifying, developing, and commercializing ~~product candidates to address serious and~~innovative therapies that change patients’ lives for the better. We concentrate on small-molecule therapeutics with novel mechanisms of action for the treatment of severe, life-threatening diseases with few or no approved ~~therapies by targeting molecular pathways that regulate cellular metabolism and inflammation. Our~~therapies. We are currently conducting registrational trials with our lead product candidates, ~~bardoxolone methyl~~Bard and ~~omaveloxolone,~~Omav, which activate the ~~important~~ transcription factor Nrf2 to ~~restore~~normalize mitochondrial function, ~~reduce oxidative stress,~~restore redox balance, and resolve inflammation.

Our lead registrational programs are evaluating our product candidates for the treatment of four rare diseases: CKD caused by Alport syndrome in our CARDINAL study, FA in our MOXIe study, CTD-PAH in our CATALYST study, and ADPKD in our FALCON study. We have fully enrolled CARDINAL and MOXIe and expect to have top-line data from both of these clinical trials in the second half of 2019. We expect to complete enrollment of CATALYST this year and have top-line data during the first half of 2020. We expect to begin enrollment of FALCON in May 2019. If we receive FDA approval for any of these indications, it may provide expansion opportunities into other related indications. We have received orphan drug designation from the FDA and the European Commission for Bard for the treatment of Alport syndrome and for Omav for the treatment of FA and from the FDA for Bard for the treatment of PAH.

The chart below is a summary of our current registrational programs:

Registrational Programs
Program	Next Expected Milestone	Timing of Milestone
CKD caused by Alport syndrome	Phase 3 Data	2H 2019
Bard
Friedreich’s ataxia	Phase 2 Part 2 Data	2H 2019
Omav
CTD-PAH	Phase 3 Data	1H 2020
Bard
ADPKD	First Patient Enrolled	May 2019
Bard

Bard in CKD Caused by Alport Syndrome and Additional Rare Forms of CKD

Bard has been evaluated in multiple clinical trials enrolling over 2,000 patients exposed to active drug and has demonstrated consistent, clinically meaningful improvement in kidney function across several disease states as measured by estimated glomerular filtration rate (eGFR) and other markers of kidney function. Specifically, we have observed statistically significant increases in eGFR in all Phase 2 and Phase 3 clinical trials in seven distinct patient populations treated with Bard, including patients with CKD caused by type 2 diabetes (T2D CKD), PAH, CKD caused by Alport syndrome, ADPKD, IgA nephropathy (IgAN), type 1 diabetic CKD (T1D CKD), and focal segmental glomerulosclerosis (FSGS). We believe these data support the potential for Bard to delay or prevent dialysis, kidney transplant, and death in patients with Alport syndrome and other rare forms of CKD. Additional observations from the clinical trials of Bard include the following:

Statistically significant increases in directly-measured GFR using the “gold standard” inulin clearance method, improvements in creatinine clearance, and reduction in the levels of blood waste products filtered by the kidney.

Statistically significant improvements in eGFR versus baseline or placebo in six different types of CKD, including Alport syndrome, ADPKD, IgAN, T1D CKD, T2D CKD, and FSGS.

Sustained improvement in kidney function in long-term trials:

In the Phase 2 portion of CARDINAL, Bard treatment produced a statistically significant increase from baseline in mean eGFR of 10.4 mL/min/1.73 m² (p<0.0001) after 48 weeks of treatment, which, based on historical data available for 22 of the patients prior to enrolling in the trial, represents a recovery of over two years of average decline in kidney function.

In two large, placebo-controlled clinical studies (BEAM and BEACON) in patients with T2D CKD, statistically significant increases in mean eGFR of 14.9 mL/min/1.73 m² (p<0.001) and 5.6 mL/min/1.73 m² (p<0.001), respectively, were sustained for at least one year.

Reduction in risk of adverse kidney outcomes, suggesting that Bard treatment preserves kidney function and may delay the onset of kidney failure in patients with T2D and stage 4 CKD:

In BEACON, patients randomized to Bard were significantly less likely to experience adverse kidney outcomes as defined by a composite endpoint consisting of ≥30% decline from baseline in eGFR, eGFR <15 mL/min/1.73 m², or end-stage kidney disease (ESKD) events (HR=0.48, p<0.0001).

In BEACON, Bard treatment resulted in a decreased number of kidney-related serious adverse events (SAEs) and ESKD events.

•

Statistically significant improvement in retained eGFR, which is the eGFR change after a four-week withdrawal of drug, above baseline in BEAM, BEACON, and the Phase 2 portion of CARDINAL. To our knowledge, Bard is the first therapy to produce a retained eGFR benefit that is above baseline in a long-term CKD trial.

The FDA has provided guidance to us and other sponsors that clinical trials with a retained eGFR benefit versus placebo may support approval in certain rare forms of CKD. The FDA has provided guidance to us that, in patients with CKD caused by Alport syndrome or ADPKD, a retained eGFR benefit versus placebo after one year of Bard treatment may support accelerated approval and after two years of Bard treatment may support full approval.

We believe the retained eGFR benefit observed in these clinical trials demonstrates that Bard treatment improved the structure of the kidney, modified the course of the disease, and may prevent or delay kidney failure and the need for dialysis or a kidney transplant.

We are developing Bard for the treatment of patients with CKD caused by Alport syndrome in our registrational CARDINAL study, for the treatment of patients with ADPKD in our registrational FALCON study, and for the treatment of patients with four rare forms of CKD, which were studied in our Phase 2 PHOENIX study. In addition, KHK, one of our strategic collaborators, is currently conducting its registrational trial of Bard in diabetic (type 1 and 2) kidney disease in Japan, with data expected in the first half of 2022.

CARDINAL, a Study in Patients with CKD Caused by Alport Syndrome

Alport syndrome is a rare and serious hereditary disease that manifests as early as the first decade of life and causes average annual declines in eGFR of approximately 3 to 4 mL/min/1.73 m² and affects approximately 30,000 to 60,000 patients in the United States. In patients with the most severe forms of the disease, approximately 50% progress to dialysis by age 25, 90% by age 40, and nearly 100% by age 60. There are no approved therapies for Alport syndrome anywhere in the world.

In 2018, we announced positive interim safety and efficacy data for the ongoing open-label Phase 2 portion of CARDINAL. The Phase 2 portion of the trial enrolled 30 patients, and 25 patients were available for analysis through one year. No patients discontinued due to drug-related adverse events. Data demonstrate that Bard significantly improved kidney function in patients with Alport syndrome as measured by eGFR. In the Phase 2 portion of CARDINAL, we noted the following:

•

A statistically significant increase from baseline in mean eGFR at Week 48 of 10.4 mL/min/1.73 m² (p<0.0001) in 25 patients was observed, which positively correlates with the previously-announced Week 12 eGFR increase from baseline of 13.4 mL/min/1.73 m² (p<0.0001) in 30 patients.

Historical data were available for 22 of the 25 CARDINAL Phase 2 patients. These patients’ eGFR declined an average of 4.2 mL/min/1.73 m² per year in the three-year period prior to enrolling in the trial.

This magnitude of improvement in eGFR represents the recovery of over two years of average decline in kidney function in patients with Alport syndrome in this trial.

•

A statistically significant increase from baseline in mean retained eGFR at Week 52 of 4.1 mL/min/1.73 m² (p<0.05) in 25 patients was observed.

Bard and any active metabolites are eliminated from the body within approximately 10 days after withdrawal, so we believe this retained eGFR benefit is a measure of the effect of long-term treatment on the structure of the kidney and its disease-modifying potential.

We believe this retained eGFR benefit provides evidence that increases in eGFR observed with Bard therapy may prevent or delay kidney failure.

•

We utilized the Patient Global Impression of Change (PGIC) instrument, in which the patients provide self-assessments, and the Clinician Global Impression of Change (CGIC), in which clinicians provide their assessments of their patients, to assess patient quality-of-life factors after one year of treatment. Per the PGIC, 78% of patients reported that they were clinically improved while, per the CGIC, 83% of clinicians reported that their patients were clinically improved.

Urinary albumin-to-creatinine ratio (UACR) is a primary method used to detect elevated urinary protein. Persistent, increased protein in the urine may be a significant risk factor for kidney damage and renal disease. Mean changes in UACR during the 48 weeks on Bard were not clinically significant. At Week 52, the mean UACR was not clinically significant and was not statistically significantly different from baseline. We believe these findings further demonstrate that Bard does not increase eGFR through a damaging mechanism.

No safety concerns were reported by the data monitoring committee (DMC) that oversees the trial and reviews all safety data.

The Phase 3 portion of CARDINAL is an international, multi-center, randomized, double-blind, placebo-controlled trial that is studying the safety and efficacy of Bard in patients with CKD caused by Alport syndrome. We are currently conducting ~~three~~the Phase 3 portion of CARDINAL. The protocol allows for enrollment of approximately 150 patients randomized evenly to either Bard or ~~other potentially registrational trials. Bardoxolone methyl is being studied in a single, pivotal Phase 2/3~~placebo, and the trial ~~known as CARDINAL,~~has been fully enrolled with 157 patients. The FDA has provided us with guidance that an analysis of retained eGFR, demonstrating an improvement versus placebo after one year of Bard treatment, may support an NDA submission for accelerated approval of Bard for the treatment of ~~chronic kidney disease (CKD)~~CKD caused by Alport syndrome, and adata demonstrating an improvement versus placebo in retained eGFR after two years of treatment may support full approval. We expect to have one year top-line results available in the second half of 2019. Based on retained eGFR benefit observed in CARDINAL Phase ~~3 trial, known as CATALYST, for the treatment of pulmonary arterial hypertension associated with connective tissue disease (CTD-PAH). We began enrolling~~2 patients inat Week 52, we believe the Phase 3 portion of CARDINAL is conservatively powered. No safety concerns have been reported by the DMC.

FALCON, a Study in ~~August 2017,~~Patients with ADPKD

ADPKD is an inherited, rare form of CKD caused by a genetic defect in PKD1 or PKD2 and is characterized by formation of fluid-filled cysts in the kidneys. Inflammation appears to play a role in cyst growth and is associated with disease progression in ADPKD. PKD1 is the most common mutation, causing about 85% of ADPKD cases, and patients generally progress to ESKD, on average, by age 54. ADPKD is the most common single-gene disorder of the kidneys, and there are an estimated 400,000 patients in the United States, with approximately 140,000 diagnosed. The only therapy currently approved for ADPKD is tolvaptan, which was approved in the United States in 2018.

We are initiating a registrational Phase 3 trial called FALCON in patients with ADPKD. FALCON is an international, multi-center, randomized, double-blind, placebo-controlled trial studying the safety and efficacy of Bard in approximately 300 patients with ADPKD randomized one-to-one to active drug or placebo. We plan to enroll the first ADPKD patient in FALCON in May 2019. We will measure the retained eGFR benefit versus placebo at 52 weeks after ~~having announced preliminary results from the trial. On November 3, 2017, we announced primary endpoint~~treatment on study drug for 48 weeks and ~~other 12 week data from the ongoing Phase 2 portion~~a four-week withdrawal of ~~CARDINAL. Omaveloxolone is being studied~~drug. After 52 weeks, patients will resume study drug and will continue on study drug for a second year. The second-year retained eGFR benefit will be measured at Week 104.

PHOENIX, a Study in ~~a two-part~~Patients with Rare Forms of CKD

PHOENIX was an open-label, multi-center Phase 2 trial ~~known~~evaluating the safety and efficacy of Bard in patients with ADPKD, IgAN, T1D CKD, or FSGS. In aggregate, the prevalence of these diseases exceeds 700,000 patients in the United States, representing a meaningful market for Bard in rare forms of CKD. A total of 103 patients were enrolled in the study in four separate cohorts, including 31 patients with ADPKD, 26 with IgAN, 28 with T1D CKD, and 18 with FSGS. Patients were treated with Bard for 12 weeks in all four cohorts, and each cohort showed statistically significant increases in mean eGFR., with the mean change in eGFR from baseline across all four cohorts of 7.8 mL/min/1.73 m2 (n=103; p<0.0001). Of the patients that reached Week 12, 88% experienced increases in eGFR at Week 12. Bard significantly reduced mean systolic blood pressure by 3.8 mmHg (n=103; p=0.002) and mean diastolic blood pressure by 2.8mmHg (n=103; p=0.0009). Urinary albumin excretion was low upon study entry and remained unchanged by Bard treatment (n=103; p=0.6). The most commonly reported adverse event across all cohorts was muscle spasms, which were not associated with clinical signs or symptoms of muscle injury. No SAEs were reported as ~~MOXIe,~~related to Bard.

Based on the eGFR improvements observed in PHOENIX patients, we plan to pursue IgAN, T1D CKD, and FSGS as commercial indications. We believe that registrational clinical trials similar to the design of the Phase 3 CARDINAL and FALCON trials with a two-year duration and a retained eGFR benefit endpoint after one and two years of treatment would be sufficient to form the basis of an NDA submission to the FDA seeking approval of Bard for the treatment of these forms of CKD.

Omav in FA

We are developing Omav for the treatment of patients with FA, an inherited, debilitating, and degenerative neuromuscular disorder, which is normally diagnosed during adolescence and is caused by a mutation in the frataxin gene. Patients with FA typically become dependent on wheelchairs 10 to 15 years after disease onset, with a median age of death in the mid-30s. Patients with FA experience an average annual worsening, or increase, in modified Friedreich’s ~~ataxia (FA). We announced data from~~Ataxia Rating Scale (mFARS) scores of one to two points. FA is an ultra-orphan disease that, based on literature and proprietary research, we believe affects approximately 22,000 people globally, including 6,000 in the United States. Approximately 2,700 worldwide patients are identified in patient registries, including approximately 1,500 in the United States. There are no currently approved therapies for the treatment of FA anywhere in the world.

MOXIe, a Study in Patients with FA

Our Phase 2 trial, called MOXIe, is a two-part, international, multi-center, randomized, double-blind, placebo-controlled registrational trial that studies the safety and efficacy of Omav in patients with FA. In part 1 of MOXIe, at the optimal dose level of Omav, we noted the following at Week 12:

A statistically significant improvement, or decrease, in ~~June 2017~~mFARS scores of 3.8 points (p=0.0001) versus baseline was observed. This improvement represents approximately two years of average decline in MOXIe patient mFARS scores.

A placebo-corrected decrease in mFARS scores of 2.3 points (p=0.06) was observed. This improvement represents at least one year of average decline in MOXIe patient mFARS scores.

No safety concerns were noted by the data safety monitoring board (DSMB) that oversees the trial and ~~began enrolling~~reviews all safety data.

We are currently conducting the registrational part 2 of MOXIe. The protocol allows for enrollment of approximately 100 patients ~~in October 2017 in~~randomized evenly to either 150 mg of Omav or placebo, and the trial has been fully enrolled with 103 patients. The primary endpoint of part 2 of the trial ~~which~~ is ~~potentially registrational.~~

~~We are also currently conducting trials~~the change from baseline in ~~four other areas. In October 2017, we began activating sites~~mFARS score, a neurological and functional assessment tool, in ~~a Phase 2 trial, known as PHOENIX,~~patients treated with Omav compared to ~~test bardoxolone methyl~~placebo at 48 weeks. The FDA has provided us with guidance that an analysis of mFARS scores demonstrating an improvement versus placebo after 48 weeks of Omav treatment may support an NDA submission for accelerated or full approval of Omav for the treatment of ~~other rare kidney diseases,~~FA. We expect to have top-line data from MOXIe available in the second half of 2019. No safety concerns have been reported by the DSMB.

Bard in Connective Tissue Disease Associated Pulmonary Arterial Hypertension

CATALYST, a Study in Patients with CTD-PAH

We are studying Bard in CTD-PAH, which is a late and ~~bardoxolone methyl~~often fatal manifestation of many types of autoimmune disease, including systemic sclerosis (scleroderma), systemic lupus erythematosus, mixed connective tissue disease, and others. CTD-PAH is ~~currently being studied~~a subset of PAH, which results in a progressive increase in pulmonary vascular resistance, ultimately leading to right ventricular heart failure and death. Based on literature and proprietary research, we believe there are approximately 12,000 patients with CTD-PAH in the United States and 50,000 worldwide.

In comparison to patients with the idiopathic form of PAH (I-PAH), patients with CTD-PAH generally have a worse prognosis and experience a higher occurrence of small vessel fibrosis and pulmonary veno-obstructive diseases. CTD-PAH represents approximately 30% of the overall PAH population and approximately 10 to 15% of patients with scleroderma or lupus erythematosus. Patients with CTD-PAH are less responsive to existing vasodilator therapies than patients with I-PAH and have a five-year survival rate of approximately 44%, in contrast with a five-year survival rate of approximately 68% for patients with I-PAH. Currently approved therapies, all systemic vasodilators, are used to treat all etiologies of PAH. By a meta-analysis of 11 registrational trials comprised of more than 2,700 patients, the currently approved therapies were shown to be less beneficial for patients with CTD-PAH compared to patients with I-PAH as measured by 6-minute walk distance (6MWD) responses in patients with CTD-PAH of 9.6 meters, or approximately one-third, compared to the responses in patients with I-PAH of 30 meters. Bard is an Nrf2 activator, not a systemic vasodilator, and directly targets the bioenergetic and inflammatory components of PAH. Additionally, because Bard does not have systemic hemodynamic effects or cause drug-drug interactions in patients with PAH, it may be used in combination with other therapies to a greater incremental effect than an additional vasodilator.

Initial results from our Phase 2 LARIAT trial ~~known as LARIAT,~~in patients with PAH showed that Bard provided the greatest improvement in 6MWD to patients with CTD-PAH. Patients with CTD-PAH treated with Bard demonstrated a statistically significant increase of 38.2 meters (p<0.001) in mean 6MWD compared to baseline and a placebo-corrected change in 6MWD of 28.4 meters (p=0.07). Further analysis of data from patients with CTD-PAH who would be eligible for inclusion in our Phase 3 trial, CATALYST, demonstrated a statistically significant increase of 42.7 meters (p<0.001) in mean 6MWD compared to baseline and a placebo-corrected change in 6MWD of 48.5 meters (p=0.005).

We are currently conducting CATALYST, an international, multi-center, randomized, double-blind, placebo-controlled Phase 3 trial that studies the safety and efficacy of Bard in patients with CTD-PAH when added to standard-of-care therapy. The protocol includes 200 patients with CTD-PAH, and we expect to have top-line data from the CATALYST trial in the first half of 2020. Data from CATALYST demonstrating an improvement in 6MWD versus placebo may support an NDA submission for approval of Bard for the treatment of ~~PAH~~CTD-PAH. No safety concerns have been reported by the DSMB that oversees the trial and ~~pulmonary hypertension due to interstitial lung disease (PH-ILD). Omaveloxolone~~reviews all data.

Other Programs

RTA 901 is ~~being studied~~the lead product candidate from our Hsp90 modulator program, which includes highly potent and selective C-terminal modulators of Hsp90. We have observed favorable activity of RTA 901 in a ~~two-part Phase 2 trial for the treatment~~range of preclinical models of neurodegeneration and neuroprotection, including models of diabetic neuropathy, neural inflammation, and neuropathic pain. RTA 901, administered orally once-daily, has been observed to rescue existing nerve function, restore thermal and mechanical sensitivity, and improve nerve conductance velocity and mitochondrial ~~myopathies (MM), known as MOTOR, and a Phase 1b/2 trial for the treatment of metastatic melanoma, known as REVEAL.~~

~~In addition to these ongoing trials with our Nrf2 activators, we conducted~~function in rodent disease models. We have completed a Phase 1 trial to evaluate the safety, tolerability, and pharmacokinetic profile of RTA 901 in healthy ~~volunteers, with no~~adult volunteers. No safety or tolerability ~~issues,~~concerns were reported. We are the exclusive licensee of RTA 901 and have worldwide commercial rights.

RTA 1701 is the lead product candidate from our proprietary series of RORγt inhibitors for the potential treatment of a broad range of autoimmune, inflammatory, and fibrotic diseases. RTA 1701 is an orally-bioavailable, RORγt-selective allosteric inhibitor that suppresses Th17 differentiation in vitro and demonstrates strong efficacy in rodent disease models of autoimmune disease. RTA 1701 also potently suppresses production of IL-17A, a clinically important cytokine, in human immune cells and when dosed orally to non-human primates. We are ~~evaluating various options~~currently conducting a Phase 1 trial to evaluate the safety, tolerability, and pharmacokinetic profile of RTA 1701 in healthy adult volunteers, with initial results expected in the ~~design and timing~~first half of ~~a Phase 2 trial.~~2019. We retain all rights to our RORγt inhibitors, which are not subject to any existing commercial collaborations.

Beyond our clinical programs, we have additional promising preclinical development programs. We believe that our product candidates and preclinical programs have the potential to improve clinical outcomes in numerous underserved patient populations.

Financial Operations Overview

To date, we have focused most of our efforts and resources on developing our product candidates and conducting preclinical studies and clinical trials. We have historically financed our operations primarily through revenue generated from our collaborations with AbbVie and KHK, from sales of our securities, and ~~from~~ secured loans. We have not received any payments or revenue from collaborations other than nonrefundable upfront, milestone, and cost sharing payments from our collaborations with AbbVie and KHK and reimbursements of expenses under the terms of our agreement with KHK. We have incurred losses in each year since our inception, other than in 2014. As of ~~September 30, 2017,~~March 31, 2019, we had ~~approximately $154.6~~$313.1 million of cash and cash equivalents and an accumulated deficit of ~~$320.5~~$449.5 million. We continue to incur significant research and development and other expenses related to our ongoing operations. Despite contractual product development commitments and the potential to receive future payments from our collaborators, we anticipate that ~~without taking into account deferred revenue,~~ we will continue to incur losses for the foreseeable future, and we anticipate that our losses will increase as we continue our development of, and seek regulatory approval for, our product candidates. If we do not successfully develop and obtain regulatory approval of our existing product candidates or any future product candidates and effectively manufacture, market, and sell any products that are approved, we may never generate revenue from product sales. Furthermore, even if we do generate revenue from product sales, we may never again achieve or sustain profitability on a quarterly or annual basis. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. Our failure to become and remain profitable could depress the market price of our Class A common stock and could impair our ability to raise capital, expand our business, diversify our product offerings, or continue our operations.

On August 1, 2017, we closed a follow-on underwritten public offering of 3,737,500 shares of our Class A common stock, which included 487,500 shares of Class A common stock issued pursuant to an option granted to the underwriters, for gross proceeds of $115.9 million. The Company received total proceeds from the offering of $108.5 million, after deducting underwriting discounts and commissions and offering expenses. We intend to use the net proceeds for working capital and general corporate purposes, which include, but are not limited to, advancing the development of bardoxolone methyl through a Phase 2/3 program in CKD caused by Alport syndrome, Phase 2 programs in additional kidney indications, and Phase 2 programs in PH-ILD and the development of omaveloxolone in Friedreich’s ataxia and mitochondrial myopathies.

The probability of success for each of our product candidates and clinical programs and our ability to generate product revenue and become profitable depend upon a variety of factors, including the quality of the product candidate, clinical results, investment in the program, competition, manufacturing capability, commercial viability, and our collaborators’ ability to successfully execute our development and commercialization plans. We will also require additional capital through equity or debt financings in order to fund our operations and execute on our business plans, and there is no assurance that such financing will be available to us on commercially reasonable terms or at all. For a description of the numerous risks and uncertainties associated with product development and raising additional capital, see “Risk Factors” included in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.

~~Lead Product Candidates~~

~~Bardoxolone Methyl~~

Bardoxolone methyl activates molecular pathways that promote the resolution of inflammation by restoring mitochondrial function, reducing oxidative stress, and inhibiting pro-inflammatory signaling. Bardoxolone methyl binds to Keap1 and consequently activates Nrf2, a transcription factor that promotes normal mitochondrial function by making reducing equivalents available for ATP production, and increases cellular antioxidant content. This reduces mitochondrial reactive oxygen species (ROS) production and ROS-mediated activation of inflammatory signaling complexes. Binding to Keap1 and activation of Nrf2 also inhibit NF-κB, the primary transcription factor producing proteins that promote inflammation and the production of ROS. Bardoxolone methyl is currently being tested in a single, pivotal Phase 2/3 trial in CKD caused by Alport syndrome, a Phase 3 trial in CTD-PAH, and a Phase 2 trial in several forms of PH-ILD and PAH and will be tested in a Phase 2 trial being initiated in other rare kidney diseases.

CKD caused by Alport syndrome and CTD-PAH are our most advanced indications with bardoxolone methyl. Although Alport syndrome and CTD-PAH have different causes and inflammatory stimuli at a molecular level, mitochondrial dysfunction, inflammation, proliferative signaling, fibrosis, and tissue remodeling are common to the pathophysiology of both diseases. The anti-inflammatory and anti-fibrotic properties of bardoxolone methyl may therefore have the potential to affect structural alterations and fibrosis of the glomerulus in the kidney in Alport syndrome as well as pathologic remodeling of the pulmonary vasculature in CTD-PAH.

~~Omaveloxolone~~

Omaveloxolone is a close structural analog of bardoxolone methyl that was developed to improve tissue distribution, including blood-brain barrier penetration. Omaveloxolone is being studied in part 2 of a two-part potentially registrational Phase 2 trial in FA, in part 1 of a two-part Phase 2 trial in MM, and in the Phase 1b portion of a Phase 1b/2 trial in metastatic melanoma. Omaveloxolone was also administered topically to patients receiving cataract surgery and to breast cancer patients receiving radiation therapy and suffering from radiation dermatitis. We believe that an omaveloxolone-induced increase in mitochondrial energy production could have beneficial effects on multiple organ systems, with the most profound effects being in skeletal muscle, the brain, and other tissues with a high energy demand.

~~Phase 3 or Other Potentially Registrational Programs~~

~~The chart below is a summary of our current Phase 3 or other potentially registrational programs:~~


~~Phase 3 or Other Potentially Registrational Programs~~
~~Program~~	~~Next Expected Milestone~~	~~Timing of Milestone~~
~~CKD caused by Alport Syndrome~~	~~Phase 3 Data~~	~~2H 2019~~
~~Bardoxolone methyl~~
~~Friedreich’s Ataxia~~	~~Pivotal Phase 2 Part 2 Data~~	~~2H 2019~~
~~Omaveloxolone~~
~~CTD-PAH~~	~~Phase 3 Data~~	~~2H 2018~~
~~Bardoxolone methyl~~

~~Bardoxolone Methyl in Chronic Kidney Disease Caused by Alport Syndrome~~

Alport syndrome is a rare and serious hereditary disease that is caused by mutations in the genes encoding type IV collagen, a major structural component of the glomerular basement membrane (GBM) in the kidney. The expression of abnormal type IV collagen causes loss of GBM integrity, abnormal leakage of proteins through the GBM, and excessive reabsorption of protein in the proximal tubules of the kidney. As in other forms of CKD, excessive reabsorption of protein in the tubules induces oxidative stress, renal interstitial inflammation, and fibrosis.

~~Patients with Alport syndrome are normally diagnosed with the disease in childhood to early adulthood and have average glomerular filtration rate (GFR) declines of 4.0 mL/min/1.73 m~~² per year. The progressive decline of GFR in Alport syndrome leads to kidney failure and end-stage renal disease (ESRD), with a median survival of approximately 55 years. Fifty percent of males with the most prevalent subtype of Alport syndrome require dialysis or kidney transplant by age 25. The incidence of kidney failure in these patients increases to 90% by age 40 and nearly 100% by age 60. Similar to patients with other forms of CKD, Alport syndrome patients receiving dialysis are at increased risk for cardiovascular disease and infections, which are the most common causes of death in these patients.

Bardoxolone methyl has the potential to address the causes of GFR loss in Alport syndrome patients because it activates molecular pathways that promote the resolution of inflammation by restoring mitochondrial function, reducing oxidative stress, and inhibiting ROS-mediated pro-inflammatory signaling. Bardoxolone methyl binds to Keap1 and consequently activates Nrf2, a transcription factor that increases cellular antioxidant content and promotes normal mitochondrial function by making reducing equivalents available for ATP production. This reduces mitochondrial ROS production and ROS-mediated activation of inflammatory signaling complexes. Through these effects, bardoxolone methyl restores mitochondrial production of ATP, increases production of antioxidants, reduces oxidative stress, and reduces pro-inflammatory signaling and fibrotic processes.

There are no currently approved therapies for the treatment of CKD caused by Alport syndrome. The goal of current disease management is to slow the progression of CKD, beginning with anti-hypertensives, such as angiotensin converting enzyme inhibitors or angiotensin receptor blockers, aldosterone, and diuretics, all of which are intended to reduce the levels of protein found in patient urine. Once patients reach ESRD, they require dialysis or kidney transplantation.

~~Phase 2/3 CARDINAL Trial~~

On November 3, 2017, we announced primary endpoint and other 12 week data from the ongoing open-label Phase 2 portion of CARDINAL. The Phase 2 portion of the trial enrolled 30 patients, and available data demonstrate that bardoxolone methyl significantly increased kidney function in Alport syndrome patients as measured by estimated glomerular filtration rate (eGFR).

~~From a mean baseline eGFR of 54 mL/min/1.73 m~~²~~, data from patients showed a mean increase of 13.4 mL/min/1.73 m~~² ~~at Week 12 (p<0.000000001). All patients demonstrated increases in eGFR at Week 12, with 87% of patients demonstrating a clinically meaningful increase in eGFR of at least 4.0 mL/min/1.73 m~~² ~~and 63% of patients demonstrating an increase in eGFR of at least 10.0 mL/min/1.73 m~~²~~. Additionally, 73% of patients had an improvement in CKD stage, and none worsened.~~

Change from Baseline in eGFR

Week 1
Week 4
Week 8
Week 12
N
30
30
30
30
Mean ± SE
3.0 ± 0.7
6.7 ± 1.3
8.9 ± 1.3
13.4 ± 1.4
95% CI
(1.6, 4.4)
(4.1, 9.3)
(6.2, 11.6)
(10.5, 16.3)
p-value
0.0001
<0.0001
<0.000001
<0.000000001
LS mean eGFR change from baseline at each visit is compared to zero using a mixed-model repeated measures analysis using baseline eGFR and log-transformed ACR as continuous covariates.

A result is considered to be statistically significant when the probability of the result occurring by random chance, rather than from the efficacy of the treatment, is sufficiently low. The conventional method for measuring the statistical significance of a result is known as the “p-value,” which represents the probability that random chance caused the result. For example, a p-value of 0.001 means that there is a 0.1% or less probability that the difference between the control group and the treatment group is purely due to random chance. A p-value of 0.05 is a commonly used criterion for statistical significance, and may be supportive of a finding of efficacy by regulatory authorities. However, regulatory authorities, including the United States Food and Drug Administration (FDA), do not rely on strict statistical significance thresholds as criteria for marketing approval and maintain the flexibility to evaluate the overall risks and benefits of a treatment. Accordingly, treatments may receive marketing approval from the FDA even if the p-value of the primary endpoint is greater than 0.05, or may fail to receive marketing approval from the FDA even if the p-value of the primary endpoint is less than 0.05.

~~The table below shows clinically meaningful increases in eGFR were demonstrated across multiple subgroups, with activity in both earlier and later stages of disease.~~

Week 12 Mean ΔeGFR
  Baseline
  Characteristic
  Subgroup
N
Baseline
Change ± SD
% Change
  eGFR
≥ 60
12
81.3 ± 7.5
18.4 ± 7.7
23%
< 60
18
36.1 ± 9.3
10.0 ± 6.6
30%
  UACR
Non-macro
18
62.5 ± 22.2
16.0 ± 8.6
29%
Macro
12
41.7 ± 22.0
9.4 ± 5.5
24%
  Gender
Male
12
50.5 ± 25.1
14.0 ± 8.3
30%
Female
18
56.6 ± 23.8
12.9 ± 8.1
25%
  Age
< 18
2
86.1 ± 9.1
26.1 ± 10.8
31%
≤ 45
11
48.4 ± 24.8
10.1 ± 9.5
20%
> 45
19
57.5 ± 23.7
15.3 ± 6.7
31%

As of the 12-week primary endpoint visit for the Phase 2 portion, no discontinuations or serious adverse events (SAEs) were reported, and reported adverse events (AEs) were generally mild to moderate in intensity. Consistent with prior studies, the most common AEs that were reported in more than two patients were muscle spasms (15/30; 50%), headache (4/30; 13%), nausea (4/30; 13%), fatigue (4/30; 13%), and hyperkalemia (3/30; 10%). Muscle spasms were generally transient and were associated with reductions of creatine kinase, which is evidence of improved energy metabolism.

On November 4, 2017, our partner, KHK, presented results of its trial, TSUBAKI, a double-blind, randomized, placebo-controlled Phase 2 trial in Japan. In TSUBAKI, bardoxolone methyl demonstrated statistically significant and clinically meaningful increases in directly-measured glomerular filtration rate (GFR) in patients with type 2 diabetes and CKD using the “gold standard” inulin clearance method. The observed increase in GFR demonstrates that historical increases in eGFR produced by bardoxolone methyl in various forms of CKD, including Alport syndrome, reflect a true increase in kidney function. Bardoxolone methyl demonstrated a favorable safety profile with no effect on blood pressure, urinary volume or sodium retention, and no evidence of overt fluid overload or cardiac toxicity.

In August 2017, after having announced preliminary results from the CARDINAL Phase 2 trial, we began enrolling patients in the Phase 3 portion of CARDINAL, a double-blind, randomized, placebo-controlled, multi-center, international trial designed to evaluate the safety and efficacy of bardoxolone methyl in patients with CKD caused by Alport syndrome. The trial will enroll approximately 150 patients randomized evenly to either bardoxolone methyl or placebo. The eGFR change will be measured after 48 weeks while the patient is on treatment, or on-treatment eGFR, and again after 52 weeks after the patient has stopped taking study drug for a four-week withdrawal period, or retained eGFR. Based on guidance from the FDA, the year one retained eGFR benefit data may support accelerated approval under subpart H. Data from year one of CARDINAL are expected to be available in the second half of 2019. After withdrawal, patients will be restarted on study drug with their original treatment assignments and will continue on study for a second year. The second year on-treatment eGFR change will be measured after 100 weeks and the retained eGFR benefit will be measured after withdrawal of drug for four weeks at week 104. Based upon guidance from the FDA, the year two retained eGFR benefit data may support full approval. In July 2017, we received orphan drug designation for bardoxolone methyl for the treatment of Alport syndrome.

We have observed no significant tolerability issues in CARDINAL to date. The trial is being overseen by a data monitoring committee (DMC) that reviews all data, including SAE and AE data, on an unblinded basis, to assess safety. The DMC has not reported any safety concerns to date.

~~Omaveloxolone in Friedreich’s Ataxia~~

Friedreich’s ataxia is an inherited, debilitating, and degenerative neuromuscular disorder, caused by a mutation in the frataxin gene, which is typically diagnosed during adolescence and can ultimately lead to early death. Deficiency of frataxin in cells leads to a mitochondrial iron overload and poor cellular iron regulation, increased sensitivity to oxidative stress, and impaired mitochondrial ATP production. Patients with FA experience progressive loss of coordination, muscle weakness, and fatigue, which commonly progresses to motor incapacitation and wheelchair reliance. FA patients may also experience visual impairment, hearing loss, diabetes, and cardiomyopathy. Childhood-onset FA can occur as early as age five, is more common than later-onset FA, and typically involves more rapid disease progression. The majority of FA patients have disease onset by approximately 13 to 15 years of age, and thereafter have a mean duration until wheelchair use of 10 to 15 years. The median age of death is in the mid-30s.

There are no currently approved therapies for the treatment of FA. Patients are usually given guidelines around certain lifestyle habits. They are recommended to follow a diet that is low in iron and encouraged to take vitamins and supplements. Idebenone was previously approved as a treatment for FA in Canada, but it was withdrawn five years after it was launched primarily because no evidence could be provided for its efficacy.

Because impaired ATP production in FA patients likely accounts for the decreased coordination, progressive muscle weakness, exercise intolerance, and fatigue observed in these patients, as well as other disease manifestations, we believe that omaveloxolone may be effective in treating this indication. In FA patients, mitochondrial function is correlated with measures of neurologic function. Further, data demonstrate that Nrf2 signaling is significantly impaired in FA patients, resulting in impairment of antioxidant defense mechanisms, while silencing of frataxin gene expression has been linked to decreases in expression of Nrf2. Additionally, omaveloxolone has been shown in vitro to restore mitochondrial activity in fibroblasts isolated from FA patients. Accordingly, we believe that Nrf2 activation through omaveloxolone may result in a clinical benefit to FA patients.

In June 2017, we announced data from part 1 of MOXIe, a double-blind, randomized, placebo-controlled, multi-center, international Phase 2 trial designed to evaluate the safety, tolerability, and efficacy of omaveloxolone in patients with FA. Data from the trial showed that in 52 FA patients, and across all doses, omaveloxolone improved modified Friedreich’s Ataxia Rating Scale (mFARS) by 2.5 points from baseline (p<0.0001) and by 1.1 points relative to placebo (not statistically significant). The maximum effect on mFARS was observed at the 160 mg dose level, which was administered to a total of 12 patients, with an improvement in mFARS of 3.8 points versus baseline (p=0.0001) and of 2.3 points relative to placebo (approached statistical significance, p=0.06).

We observed that omaveloxolone produced greater improvements in mFARS in patients that did not have a preexisting musculoskeletal foot deformity that causes high arched feet, called pes cavus. As seen in the graph below, in patients without pes cavus, maximum effect on mFARS was also observed at the 160 mg dose level, with an improvement in mFARS at Week 12 of 6.0 points versus baseline (p<0.0001) and of 4.4 points relative to placebo (p=0.01). Observed improvement in mFARS at Week 12 for the 7 placebo patients without pes cavus of 1.6 points was similar to that observed in all 17 placebo patients of 1.4 points.

The trial is being overseen by a data safety monitoring board (DSMB) that reviews all data, including SAE and AE data, on an unblinded basis to assess safety. No safety concerns were identified by the DSMB in part 1 of MOXIe. Only two SAEs were reported, and both events occurred in placebo-treated patients. The most common AEs in excess to placebo in the omaveloxolone group were upper respiratory tract infections and nasopharyngitis, which were generally mild in severity. Omaveloxolone was reported to be well-tolerated with only a single discontinuation in a 40 mg patient who developed a skin rash. One placebo patient discontinued prematurely due to withdrawal of consent.

We began enrolling patients in part 2 of MOXIe in October 2017. During August 2017, the FDA confirmed that mFARS was acceptable as the primary endpoint for part 2 of MOXIe. The FDA communication was made in response to the Company’s request that the FDA confirm its prior guidance that, depending on MOXIe results, mFARS could be appropriate to support approval of omaveloxolone for FA under Subpart H. In the recent communication, FDA indicated that it may consider either accelerated or full approval based on the overall results of the trial and strength of the data. FDA recommended that the Company extend the treatment duration of the study and add a straightforward patient-reported or performance-based outcome endpoint to the study.

The trial will enroll approximately 100 FA patients randomized evenly to either 150 mg of omaveloxolone or placebo. The primary endpoint of the trial will be the change from baseline in mFARS in patients treated with omaveloxolone compared to placebo at 48 weeks. Additional endpoints will include the change from baseline in peak work during maximal exercise testing, Patient Global Impression of Change, and Clinical Global Impression of Change. In June 2017, we received orphan drug designation for omaveloxolone for the treatment of FA.

~~We have observed no significant tolerability issues in MOXIe to date. The DSMB has not reported any safety concerns to date.~~

~~Bardoxolone Methyl in CTD-PAH~~

CTD-PAH, which represents approximately 30% of the overall PAH population, is a late and often fatal manifestation of many types of autoimmune disease, including systemic sclerosis (scleroderma), systemic lupus erythematosus, mixed connective tissue disease, and others. Patients with CTD-PAH are generally less responsive to existing therapies and have a worse prognosis than patients with other forms of PAH. In comparison to patients with idiopathic PAH (I-PAH), patients with CTD-PAH have a higher occurrence of small vessel fibrosis and greater incidence of pulmonary veno-obstructive diseases. In the United States, the five-year survival rate for CTD-PAH patients is approximately 44% while I-PAH patients have a 68% five-year survival rate.

Currently approved therapies to treat PAH include endothelin receptor antagonists, nitric oxide pathway modulators, and prostacyclin pathway agonists, all of which are systemic vasodilators that directly modulate vasoconstrictive and vasodilatory pathways. The effects of these existing therapies are not specific to the pulmonary vasculature, so they also have systemic hemodynamic effects. These systemic hemodynamic effects can result in hypotension and syncope (fainting), which generally limits their clinical effectiveness. These hemodynamic effects can be exacerbated when a patient is prescribed multiple vasodilators. In addition, clinically significant drug-drug interactions have been observed that can further limit the ability to deliver effective drug combinations.

~~A meta-analysis of the response of CTD-PAH patients to vasodilator therapy in 11 registrational trials comprised of more than 2,700 PAH patients published in the November 2015 issue of~~ ~~American Journal of Respiratory and Critical Care Medicine~~ demonstrated that CTD-PAH patients respond less well than I-PAH patients to approved vasodilator therapies in both clinical worsening and improvements in 6-minute walk distance (6MWD) from baseline, with a response in CTD-PAH patients (9.6 meters) of approximately one-third of the response in I-PAH patients (30 meters). The meta-analysis also demonstrated that I-PAH patients were more hemodynamically impaired than CTD-PAH patients, which likely explains why vasodilator therapy is more effective in I-PAH patients. This difference also explains why CTD-PAH patients respond less well to vasodilator therapy, as their disease process is less hemodynamic and involves systemic fibrotic processes caused by the patients’ underlying autoimmune diseases, such as scleroderma, lupus, or mixed connective tissue disease.

Bardoxolone methyl directly targets the bioenergetic and inflammatory components of PAH. PAH patients experience mitochondrial dysfunction, increased activation of NF-κB and related inflammatory pathways involved in ROS-mediated signaling, cellular proliferation, and fibrosis. Bardoxolone methyl, through the combined effect of Nrf2 activation and NF-κB suppression, has the potential to inhibit inflammatory and proliferative signaling, suppress ROS production and signaling, reduce the production of proteins related to fibrosis and tissue remodeling, and increase cellular respiration and ATP production. Bardoxolone methyl targets multiple cell types relevant to PAH, including endothelial cells, smooth muscle cells, and macrophages. Additionally, unlike current therapies, bardoxolone methyl does not have systemic hemodynamic effects or drug-drug interactions in PAH patients. Therefore, by addressing a novel pathway in PAH, we believe that bardoxolone methyl may provide additional benefits beyond current PAH therapies, including increased functional capacity, potential effects beyond functional improvements and potential as a combination therapy with other current therapies.

~~Phase 3 CATALYST Trial~~

In October 2016, we began enrolling patients in CATALYST, an international, randomized, double-blind, placebo-controlled Phase 3 trial examining the safety and efficacy of bardoxolone methyl in patients with CTD-PAH when added to standard-of-care vasodilator therapy. Patients will be on up to two background therapies and will be randomized evenly to either bardoxolone methyl or placebo, and the study drug will be administered once daily for 24 weeks. Patients randomized to bardoxolone methyl will start at 5 mg and will dose-escalate to 10 mg at Week 4 unless contraindicated clinically. The primary endpoint of the study is the change from baseline in 6MWD relative to placebo at Week 24. Secondary endpoints include time to first clinical improvement as measured by improvement in World Health Organization/New York Heart Association, functional class, increase from baseline in 6MWD by at least 10%, or decrease from baseline in creatine kinase, which is a surrogate biomarker for muscle injury and inflammation, by at least 10%. The trial will enroll between 130 and 200 patients, with the final sample size determined by a pre-specified, blinded sample size re-calculation based on 6MWD variability and baseline characteristics of the first 100 patients enrolled in the trial. All patients who complete the treatment period are eligible to continue into an extension trial to evaluate the intermediate and long-term safety of bardoxolone methyl. Those patients who had been receiving placebo will be converted to bardoxolone methyl in the extension trial. Data from CATALYST are expected to be available during the second half of 2018. In 2015, the FDA granted our request for orphan drug designation for the treatment of PAH.

CATALYST was designed based on previous data from the LARIAT Phase 2 trial which enrolled a total of 22 patients with CTD-PAH. Based on findings in LARIAT, patients with moderate to severe anemia, which represent a small percentage of the patient population, are being excluded from CATALYST because data demonstrated that treatment with iron supplementation or erythropoietin can affect 6MWD values independent of study drug effect. The primary endpoint in CATALYST, which will be analyzed using the mixed-model repeated measures (MMRM) statistical analysis method, is the placebo-corrected change in 6MWD from baseline to the end-of-treatment at 24 weeks. As part of the planning to determine sample size for CATALYST, we performed an analysis applying the MMRM statistical analysis method for CATALYST to the available end-of-treatment change in 6MWD data from CTD-PAH patients in LARIAT. The summary of our analysis using the change at the end of treatment period on all patients and patients without anemia is shown in the table below.

~~Summary of End-of-Treatment 6MWD Changes for CTD-PAH Patients in LARIAT~~

All Patients

Patients Without Anemia
  Treatment
N
Change from Baseline (m)
Placebo-corrected (m)
N
Change from
Baseline
Placebo-corrected
  Placebo
7
9.8
p=0.44
—
5
-5.8
p=0.68
—
  Bardoxolone Methyl
15
38.2
p <0.001
28.4
p=0.07
14
42.7
p < 0.001
48.5
p=0.005

CATALYST is designed to detect a minimum treatment effect of 12.5 meters versus placebo assuming a standard deviation of 50 meters. The observed treatment effect in the LARIAT CTD-PAH subgroup analyses, both with and without the anemic patients included, is meaningfully larger than the minimally detectable treatment effect in CATALYST. The standard deviation observed in LARIAT of 37 meters is lower than the estimated standard deviation of 50 meters in CATALYST.

CTD-PAH is a serious progressive disease that ultimately leads to right ventricular heart failure and death. Patients with CTD-PAH can develop serious comorbidities, such as syncope, chest pain, palpitations, fluid retention, and hypoxemia. CATALYST is overseen by a DSMB that reviews all data, including SAE and AE data, on an unblinded basis to assess safety. The DSMB has not reported any safety concerns to date.

~~Other Programs~~

~~The chart below is a summary of our current other clinical programs:~~


~~Other Programs~~
~~Program~~	~~Next Expected Milestone~~	~~Timing of Milestone~~
~~Rare Kidney Diseases~~	~~Phase 2 Data~~	~~2H 2018~~
~~Bardoxolone methyl~~
~~Pulmonary Hypertension (ILD)~~	~~Phase 2 Data~~	~~1Q 2018~~
~~Bardoxolone methyl~~
~~Mitochondrial Myopathies~~	~~Phase 2 Part 1 Data~~	~~1Q 2018~~
~~Omaveloxolone~~
~~Melanoma~~	~~Phase 1b Data~~	~~2H 2017~~
~~Omaveloxolone~~
~~Neurological Indications~~	~~Initiation of Phase 2~~	~~TBD~~
~~RTA 901~~

~~Bardoxolone Methyl in Other Rare Kidney Diseases~~

We began activating sites in October 2017 for PHOENIX, a Phase 2 trial of bardoxolone methyl in various rare forms of CKD, including autosomal dominant polycystic kidney disease, IgA nephropathy, type 1 diabetic CKD, and focal segmental glomerulosclerosis. Bardoxolone methyl has demonstrated clinically significant increased kidney function in clinical trials in patients with CKD caused by Alport syndrome and type 2 diabetic CKD. We believe bardoxolone methyl suppresses the fibrosis, remodeling, and inflammation that drive losses in kidney function in these diseases. The CKD that arises in the four indications being studied in PHOENIX is caused by different initial insults, but the processes of fibrosis, remodeling, and inflammation are central to the loss of kidney function in each. PHOENIX will be an open-label trial of bardoxolone methyl orally-administered once-daily for 12 weeks, with a primary efficacy endpoint of change from baseline in eGFR.

~~Bardoxolone Methyl in PAH and PH-ILD~~

ILD patients experience extensive pulmonary vascular remodeling, which ultimately leads to PH-ILD. Recent studies have demonstrated that mitochondrial abnormalities are contributors to PH-ILD. Because bardoxolone methyl was active in patients with CTD-PAH, a fibrotic disease, we believe that bardoxolone methyl may be effective in PH-ILD patients. We are studying bardoxolone methyl in LARIAT, an international, randomized, placebo-controlled, double-blind, dose-escalation Phase 2 trial evaluating the safety and efficacy of once daily, orally administered bardoxolone methyl in patients with PAH or PH-ILD, including PH-ILD caused by sarcoidosis and idiopathic pulmonary fibrosis. The primary endpoint of LARIAT is change in 6MWD during a 16 week treatment period. All patients who complete the treatment period are eligible to continue into an extension trial to evaluate the intermediate and long-term safety of bardoxolone methyl. Those patients who had been receiving placebo are converted to bardoxolone methyl in the extension trial. Data have not been presented for any of the PH-ILD groups. We completed enrollment of PH-ILD patients in the third quarter of 2017 and anticipate that data will be available in the first quarter of 2018.

We have observed no significant tolerability issues in LARIAT to date. The trial utilizes a protocol safety review committee (PSRC) that reviews all data, including SAE and AE data, on an unblinded basis to assess safety. The PSRC has not reported any safety concerns to date.

~~Omaveloxolone in Mitochondrial Myopathies~~

MM are a multi-systemic group of myopathies associated with mitochondrial dysfunction that are caused by over 200 different genetic mutations. Patients with MM present a complex array of symptoms that can vary widely in severity, with main symptoms including muscle weakness, exercise intolerance, and fatigue. We are studying omaveloxolone in MOTOR, a two-part randomized, placebo-controlled, double-blind, dose-escalation Phase 2 trial to evaluate the safety and efficacy of omaveloxolone in patients with MM. The protocol for the trial allows up to 100 patients with MM under the Investigational New Drug application (IND) that we sponsored and filed in July 2014. In 2014, we met with the FDA to discuss our MM program. Based on discussions with the FDA, we designed a two-part trial with evaluation of a broad dose range in part 1 and confirmatory evaluation of safety and efficacy in part 2. Part 1 focuses on the evaluation of safety and efficacy of omaveloxolone doses ranging from 2.5 mg to 160 mg. Data for multiple endpoints are being collected, with the primary efficacy endpoint being the change in peak work, as measured by exercise testing on a recumbent bicycle. The key secondary endpoint is the change from baseline in patients’ 6MWD. Part 2 is designed to provide additional efficacy and safety data and it has the potential to be used for registration. We completed patient enrollment in part 1 in the third quarter of 2017, and data are expected in the first quarter of 2018. We expect to evaluate the data and, if successful, make any changes needed to the protocol and then initiate part 2 of MOTOR.

We have observed no significant tolerability issues in MOTOR to date. The trial is being overseen by a DSMB that reviews all data, including SAE and AE data, on an unblinded basis to assess safety. The DSMB has not reported any safety concerns to date. We intend to submit a request to the FDA for orphan drug designation for omaveloxolone for the treatment of MM once we have in vivo or human clinical data to support this application.

~~Omaveloxolone in Melanoma~~

We are studying omaveloxolone in REVEAL, an open-label, multi-center, dose-escalation Phase 1b/2 trial evaluating the safety, pharmacodynamics, and efficacy of omaveloxolone, in combination with existing immunotherapies, in up to 102 patients with metastatic melanoma. In REVEAL, patients receive omaveloxolone monotherapy for one week, followed by omaveloxolone in combination with the labeled treatment course of either Yervoy® or Opdivo®. We have observed no significant tolerability issues in REVEAL to date. The trial is being overseen by a PSRC that reviews all data, including SAE and AE data, to assess safety. The PSRC has not reported any safety concerns to date. Data from the 1b dose escalation portion of REVEAL are expected during the second half of 2017. In September 2017, we received orphan drug designation for omaveloxolone for the treatment of Stage IIb through IV malignant melanoma.

~~RTA 901 for the Treatment of Neurological Indications~~

Our Hsp90 modulators, including RTA 901, are highly potent and selective C-terminal modulators of Hsp90. Modulation of Hsp90 may induce expression of Hsp70, a molecular chaperone that plays a critical role in the process through which a protein assumes its functional shape and that serves as a central gatekeeper for mitochondrial protein import. Mitochondria rely on Hsp70-dependent protein import mechanisms for almost all of their activity, including the production of ATP. There are also indications that Hsp70 may play a profound role in neuroprotection since nerve cells are high consumers of ATP and rely on Hsp70-dependent protein import for proper mitochondrial function.

We have conducted a Phase 1 clinical trial to evaluate the safety, tolerability, and pharmacokinetic profile of RTA 901 in healthy adult volunteers. The trial was designed in two parts, part 1 with single ascending doses, and part 2 with multiple ascending doses. In part 1, 48 healthy subjects in 6 groups of 8 subjects each were randomized in a 3:1 ratio to receive a single dose of RTA 901 or placebo, respectively. In part 2, 30 healthy subjects in 3 groups of 10 subjects each were randomized in a 4:1 ratio to receive 14 daily doses of RTA 901 or placebo, respectively. We encountered no safety or tolerability issues, observed an acceptable pharmacokinetic profile in the trial, and are currently evaluating various options in the design and timing of a Phase 2 trial.

~~Preclinical Programs~~

~~ROR~~γ~~T Inhibitors~~

We are pursuing preclinical development of novel, small-molecule, orally bioavailable RORγT inhibitors. RORγT is the master regulator of human T Helper 17 (Th17) cellular differentiation, function, and cytokine production, and represents a compelling target for a variety of autoimmune and inflammatory conditions. Th17 cells produce cytokines, including IL-17, that play a critical role in driving immune-mediated inflammation and are implicated in the pathogenesis of certain autoimmune diseases. The efficacy of suppressing IL-17 as a means of treating these conditions has been demonstrated both in animal models and in humans. We have selected and are advancing a single RORγT development candidate into Good Laboratory Practices toxicology studies.

~~Additional Nrf2 Activator Indications~~

If beneficial effects are demonstrated in our ongoing CKD caused by Alport syndrome, CTD-PAH, FA, MM, and PH-ILD trials, this could indicate that our Nrf2 activator pharmacology may also provide therapeutic benefit for patients suffering from other diseases where mitochondrial dysfunction or chronic inflammation is implicated. In addition, if therapeutic benefits are demonstrated in CKD caused by Alport syndrome, the Nrf2 activator pharmacology may also provide therapeutic benefit in other kidney diseases. Some of these diseases may be treated by our current lead product candidates, bardoxolone methyl and omaveloxolone.

~~Additional Hsp90 Modulator Indications~~

If beneficial neuroprotective and bioenergetic effects are demonstrated in our future Phase 2 trials, this could indicate that our Hsp90 modulator pharmacology may also provide therapeutic benefit for patients suffering from other diseases where neurodegeneration and mitochondrial dysfunction are implicated.

~~Financial Operations Overview~~

Revenue

Our revenue to date has been generated primarily from licensing fees received under our collaborative license agreements and reimbursements for expenses. We currently have no approved products and have not generated any revenue from the sale of products to date. In the future, we may generate revenue from product sales, royalties on product sales, reimbursements for collaboration services under our current collaboration agreements, or license fees, milestones, or other upfront payments if we enter into any new collaborations or license agreements. We expect that our future revenue will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such payments and sales.

Our license and milestone revenue has been generated primarily from our ~~collaborative licensing agreements~~license agreement with KHK, our license agreement with AbbVie, and ~~KHK~~our collaboration agreement with AbbVie and consists of upfront payments and milestone payments. License revenue recorded with respect to the KHK agreement, the AbbVie License Agreement, and the AbbVie Collaboration Agreement consists solely of the recognition of deferred revenue. Under our revenue recognition policy, license revenue associated with upfront, non-refundable license payments received under the license and collaboration agreements with AbbVie and KHK are deferred and recognized ratably over the expected term of the performance obligations under the ~~agreements, which~~agreements. The AbbVie Collaboration Agreement and the KHK agreement extend through ~~various periods beginning in 2017~~2021, and ending in 2026. License revenue recorded with respect to the collaboration agreements with AbbVie consists solely of the recognition of deferred revenue. License revenue recorded with respect to the collaboration agreements with KHK consists of the recognition of deferred revenue and reimbursement of KHK clinical drug supply costs.2026, respectively.

We also have other license revenue, which consists of milestone payments from a disease advocacy organization in 2017, and other revenue, which consists of reimbursements from KHK for expenses incurred to obtain KHK clinical drug supplies.

Research and Development Expenses

The largest component of our total operating expenses has historically been our investment in research and development activities, including the clinical development of our product candidates. From our inception through ~~September 30, 2017,~~March 31, 2019, we have incurred a total of ~~$529.0~~$672.9 million in research and development expense, athe majority of which relates to the development of ~~bardoxolone methyl~~Bard and ~~omaveloxolone.~~Omav. We expect our research and development expense to continue to increase in the future as we advance our product candidates through clinical trials and expand our product candidate portfolio. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and we consider the active management and development of our clinical pipeline to be crucial to our long-term success. The actual probability of success for each product candidate and preclinical program may be affected by a variety of factors, including the safety and efficacy data for product candidates, investment in the program, competition, manufacturing capability, and commercial viability.

Research and development expenses include:

expenses incurred under agreements with clinical trial sites that conduct research and development activities on our behalf;

expenses incurred under contract research agreements and other agreements with third parties;

employee and consultant-related expenses, which include salaries, benefits, travel, and stock-based compensation;

laboratory and vendor expenses related to the execution of preclinical and non-clinical studies and clinical trials;

the cost of acquiring, developing, manufacturing, and distributing clinical trial materials;

the cost of development, scale up and process validation activities to support product registration; and

facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other supply costs.

Research and development costs are expensed as incurred. Costs for certain development activities such as clinical trials are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.

We base our expense accruals related to clinical trials on our estimates of the services received and efforts expended ~~under~~pursuant to contracts with multiple research institutions and contract research organizations (CROs) that conduct and manage clinical trials on our behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing costs, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.

To date, we have not experienced significant changes in our estimates of accrued research and development expenses after a reporting period. However, due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical trials and other research activities.

Currently, AbbVie is not participating in the development of ~~bardoxolone methyl~~Bard for the treatment of CKD caused by Alport syndrome, ~~PAH,~~ADPKD, CTD-PAH, or ~~PH-ILD,~~other rare kidney diseases, and we are therefore incurring all costs for this program. ~~With respect~~AbbVie has the right to ~~our omaveloxolone~~opt-in to these programs ~~and our collaboration agreement with~~at any time during development. Upon opting-in, AbbVie ~~we were responsible for a certain initial~~would be required to pay an agreed upon amount ~~in early~~of all development costs ~~before AbbVie began sharing development costs equally. In April 2016, we had incurred all~~accumulated up to the point of ~~these initial costs, after which payments from AbbVie with respect to research and~~exercising their opt-in right. All development costs incurred ~~by us were recorded as a reduction in research and development expenses.~~after AbbVie’s opt-in would be split equally.

In September 2016, we and AbbVie mutually agreed that we would continue unilateral development of ~~omaveloxolone.~~Omav. Therefore, AbbVie no longer co-funds the exploratory development costs of this program, but retains the right to opt back in. Depending upon what point, if any, AbbVie opts back into development, AbbVie may retain its right to commercialize a product outside the United States, or we may be responsible for commercializing the product on a worldwide basis. Upon opting back in, ~~at certain points~~AbbVie would be required to pay an agreed upon amount of all development costs accumulated up to the point of exercising their opt-in right, after which development costs incurred and product revenue worldwide would be split equally.

Currently, KHK is not participating in ~~development. For~~the development of Bard in CTD-PAH, ADPKD, or other rare kidney diseases but is reimbursing us the majority of the costs for our registrational trial in CKD caused by Alport syndrome in Japan. The Company’s expenses were reduced by $0.3 million for KHK’s share of the study costs for the three ~~and nine~~ months ended ~~September 30, 2017, no payments related to shared research and development costs were received.~~March 31, 2019.

2521

The following table summarizes our research and development expenses incurred:

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2019		2018
	(unaudited)								(unaudited)
	(in thousands)								(in thousands)
Bardoxolone methyl	$	8,857	$	4,508	$	25,312	$	11,725	$	8,679	$	9,790
Omaveloxolone	$	3,289		725	$	7,015		3,539		5,803		2,581
RTA 901	$	398		303	$	1,772		1,880		337		384
RTA 1701										328		961
Other research and development expenses	$	5,782		3,764	$	16,731		10,537		10,967		7,691
Total research and development expenses	$	18,326	$	9,300	$	50,830	$	27,681	$	26,114	$	21,407

The program-specific expenses summarized in the table above include costs that we directly allocate to our product candidates. Our other research and development expenses include research and development salaries, benefits, stock-based compensation and preclinical, research, and discovery costs, which we do not allocate on a program-specific basis.

General and Administrative Expenses

General and administrative expenses consist primarily of employee-related expenses for executive, operational, finance, legal, compliance, and human resource functions. Other general and administrative expenses include facility-related costs, professional fees, accounting and legal services, depreciation expense, other external services, and expenses associated with obtaining and maintaining our intellectual property rights.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development and potential commercialization of our product candidates. We have also incurred, and anticipate incurring in the future, increased expenses associated with being a public company, including exchange listing and SEC requirements, director and officer insurance ~~premiums,~~premium, legal, audit and tax fees, compliance with the Sarbanes-Oxley Act, regulatory compliance programs, and investor relations costs. Additionally, if and when we believe the first regulatory approval of one of our product candidates appears likely, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially for the sales and marketing of our product candidates.

~~Investment~~Other Income

~~Investment~~Other income represents interest and gains earned on our cash and cash equivalents, which include money market funds.

~~Interest expense~~

~~Commencing in March 2017, interest expense is primarily attributable to interest charges associated with borrowings under our Loan Agreement.~~

Provision for Taxes on Income

Provision for taxes on income consists of net loss, taxed at federal tax rates and adjusted for certain permanent differences. We maintain a full valuation allowance against ~~the majority of~~ our net deferred tax assets. Changes in this valuation allowance also affect the tax provision.

2622

Results of Operations

Comparison of the ~~three months ended September 30, 2017~~Three Months Ended March 31, 2019 and ~~2016~~2018 (unaudited)

The following table sets forth our results of operations for the three months ended ~~September 30:~~March 31, 2019:

	2017			2016			Change $			Change %			2019			2018			Change $			Change %
	(unaudited)												(unaudited)
	(in thousands, except percentage data)												(in thousands)
Consolidated Statements of Operations Data
Collaboration revenue
License and milestone	$	12,501		$	12,500		$	1			—		$	7,726		$	32,168		$	(24,442	)		(76	)
Other revenue		56			51			5			10			44			224			(180	)		(80	)
Total collaboration revenue		12,557			12,551			6			—			7,770			32,392			(24,622	)		(76	)
Expenses
Research and development		18,326			9,300			9,026			97			26,114			21,407			4,707			22
General and administrative		6,151			4,039			2,112			52			10,038			6,628			3,410			51
Depreciation and amortization		98			170			(72	)		(42	)		170			101			69			68
Total expenses		24,575			13,509			11,066			82			36,322			28,136			8,186			29
Other income (expense)
Investment income		198			62			136			219			1,797			335			1,462			436
Interest expense		(484	)		—			(484	)		(100	)		(2,397	)		(509	)		(1,888	)		(371	)
Other income (expense)		(3	)		—			(3	)		(100	)
Total other income (expense)		(289	)		62			(351	)		(566	)		(600	)		(174	)		(426	)		(245	)
Loss before taxes on income		(12,307	)		(896	)		(11,411	)		(1,274	)
(Loss) income before taxes on income														(29,152	)		4,082			(33,234	)		(814	)
Provision for taxes on income		1			1			—			—			2			—			2			100
Net loss	$	(12,308	)	$	(897	)	$	(11,411	)		(1,272	)
Net (loss) income													$	(29,154	)	$	4,082		$	(33,236	)		(814	)

Revenue

License and milestone revenue ~~totaled $12.5 million for each of the three months ended September 30, 2017 and 2016. License revenue~~ represented ~~100%~~approximately 99% of total revenue for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016.~~2018. License and milestone revenue decreased by $24.4 million, or 76%, for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The decrease was primarily due to revenue recognized related to variable consideration that was no longer constrained and was included in the transaction price under the KHK agreement for the three months ended March 31, 2018.

Other revenue decreased by $0.2 million or 80%, during the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily due to a decrease in reimbursements of expenses from KHK for expenses incurred.

The following table summarizes the sources of our revenue for the three months ended ~~September 30:~~March 31:

	2017		2016		2019		2018
	(unaudited)				(unaudited)
	(in thousands)				(in thousands)
License and milestone
AbbVie license agreement	$	5,397	$	5,396
AbbVie collaboration agreement		6,717		6,717	$	6,570	$	6,570
KHK agreement		387		387		1,156		25,598
Total license and milestone		12,501		12,500		7,726		32,168
Other revenue		56		51		44		224
Total collaboration revenue	$	12,557	$	12,551	$	7,770	$	32,392

Research and Development Expenses

Research and development expenses increased by ~~$9.0~~$4.7 million, or ~~97%~~22%, for the three months ended ~~September 30, 2017,~~March 31, 2019, compared to the three months ended ~~September 30, 2016.~~March 31, 2018. The increase was primarily due to ~~$4.3~~$1.3 million in increased ~~clinical~~scale up and ~~manufacturing~~process validation activities ~~primarily~~to support product registration and startup activities for ~~CARDINAL, CATALYST,~~FALCON and the extension trial for ~~CATALYST~~CARDINAL, offset by decreases in clinical expenses, as well as increases of $2.4 million in personnel and ~~LARIAT patients (trials that were initiated or began enrolling~~equity compensation expense to support growth of our development activities, and $0.6 million in medical affairs activities.

Research and development expenses, as a percentage of total expenses, was 72% and 76% for the three months ended March 31, 2019 and 2018, respectively. The decrease in the ~~fourth quarter~~ratio of ~~2016)~~research and development expenses to total expenses of 4% was primarily due to a proportionately larger increase in general and administrative costs for additional headcount and office space to support the growth of our operations.

General and Administrative Expenses

General and administrative expenses increased by $3.4 million, or 51%, ~~$1.8~~for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The increase was primarily due to $2.2 million in ~~manufacturing activities for part 2 of MOXIe~~personnel and ~~REVEAL, $0.8 million reduction in co-funding from AbbVie as a result of the agreement for Reata to continue development of omaveloxolone unilaterally, $0.8~~equity compensation expenses and $0.6 million in ~~preclinical and manufacturing activities in our RORγT program, $0.7 million in personnel~~office rent expense to support growth in our development activities and $0.2 million in ~~stock compensation expense related to award issuances in December 2016 and additional issuances to new employees.~~

~~General and Administrative Expenses~~commercial research activities.

General and administrative expenses, ~~increased by $2.1 million, or 52%~~as a percentage of total expenses, was 28% and 24%, for the three months ended ~~September 30, 2017,~~March 31, 2019 and 2018, respectively. The increase of 4% was primarily due to additional headcount and office space to support the growth of our operations.

Investment Income

Investment income increased by $1.5 million, or 436%, for the three months ended March 31, 2019, compared to the three months ended ~~September 30, 2016. The increase was primarily~~March 31, 2018, due to ~~$0.8 million in personnel expense to support growth in the organization~~investment and ~~expanded development activities, $0.4 million in license fees, $0.6 million in stock compensation expense related to award issuances in December 2016~~interest income earned on higher balances of cash and ~~additional issuances to new employees, and $0.2 million in increased commercial research activities.~~

~~Investment Income~~

~~Investment income was immaterial for the three months ended September 30, 2017 and 2016.~~cash equivalents.

Interest Expense

Interest expense increased by ~~$0.5~~$1.9 million, or ~~100%~~371%, for the three months ended ~~September 30, 2017,~~March 31, 2019 compared to the three months ended ~~September 30, 2016. The increase was attributable~~March 31, 2018, due to increased interest charges associated with additional borrowings under our Restated Loan Agreement entered in ~~March 2017.~~June 2018.

Provision for Taxes on Income

~~Benefit~~Provision for taxes on income was immaterial for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016.~~2018.

~~Comparison of~~Cash-based Operating Expenses (non-GAAP) for the ~~nine~~Three Months ended March 31, 2019

Total expenses (GAAP) for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016 (unaudited)~~

~~The following table sets forth our results of operations~~March 31, 2018 were $36.3 million and $28.1 million, respectively. Our cash-based operating expenses (a non-GAAP measure calculated as total expenses, less stock-based compensation expense and depreciation expense) were $31.9 million and $25.6 million for the ~~nine~~three months ended ~~September 30:~~March 31, 2019 and 2018, respectively.

2017

2016

Change
$

Change
%

(unaudited)

(in thousands, except percentage data)

Consolidated Statements of Operations Data

Collaboration revenue

License and milestone

$
37,594

$
37,230

$
364

1

Other revenue

500

125

375

300

Total collaboration revenue

38,094

37,355

739

2

Expenses

Research and development

50,830

27,681

23,149

84

General and administrative

17,312

11,783

5,529

47

Depreciation and amortization

336

537

(201
)

(37
)
Total expenses

68,478

40,001

28,477

71

Other income (expense)

Investment income

352

113

239

212

Interest expense

(956
)

—

(956
)

(100
)
Other income (expense)

(3
)

—

(3
)

(100
)
Total other income (expense)

(607
)

113

(720
)

(637
)
Loss before taxes on income

(30,991
)

(2,533
)

(28,458
)

(1,123
)
Provision (benefit) for taxes on income

2

(442
)

444

100

Net loss

$
(30,993
)

$
(2,091
)

$
(28,902
)

(1,382
)

~~Revenue~~

~~License~~Total expenses (GAAP) were $36.3 million and ~~milestone revenue increased by $0.4~~$33.4 million ~~or 1%,~~ for the ~~nine~~quarters ended March 31, 2019 and December 31, 2018, respectively. Cash-based operating expenses for the quarters ended March 31, 2019 and December 31, 2018 were $31.9 million and $30.5 million, respectively. Cash-based operating expenses for the three months ended ~~September 30, 2017, compared to~~December 31, 2018 included the ~~nine months ended September 30, 2016. The increase was primarily due to~~additional sublicense fees and other expenses from the achievement of ~~a $0.5 million milestone from a~~the KHK milestone. We expect our cash-based operating expenses to continue to increase in the future as we advance Bard and Omav through ongoing and future clinical trials, scale manufacturing for registrational and validation purposes, advance other product candidates into mid and later stage clinical trials, expand our product candidate portfolio, increase both our research ~~collaboration with a disease advocacy organization in March 2017. License revenue represented 99%~~ and ~~100%~~development and administrative personnel, and plan for commercialization of ~~total revenue for the nine months ended September 30, 2017 and 2016, respectively.~~our product candidates.

2824

~~Other revenue increased~~We believe cash-based operating expenses, in addition to GAAP financial measures, provides a meaningful measure of our ongoing business and operating performance, by ~~$0.4 million, or 300%,~~allowing investors to analyze our financial results similarly to how management analyzes our financial results by viewing period expense totals more indicative of effort directly expended to advance the business and our product candidates. The table below reconciles cash-based operating expenses to total expenses as reported on the Unaudited Consolidated Statements of Operations for the ~~nine~~three months ~~ended September 30, 2017, compared to the nine months ended September 30, 2016. The increase was primarily due to reimbursements of expenses from KHK for KHK clinical drug costs incurred.~~ended:

~~The following table summarizes the sources of our revenue for the nine months ended September 30:~~

2017

2016

(unaudited)

(in thousands)

License and milestone

AbbVie license agreement

$
16,014

$
16,073

AbbVie collaboration agreement

19,931

20,004

KHK agreement

1,149

1,153

Other

500

—

Total license and milestone

37,594

37,230

Other revenue

500

125

Total collaboration revenue

$
38,094

$
37,355

	2019			2018
	March 31			December 31			September 30			June 30			March 31
	(in thousands)
Total expenses - GAAP	$	36,322		$	33,373		$	34,735		$	34,223		$	28,136
Stock-based compensation expense		(4,227	)		(2,768	)		(2,745	)		(2,552	)		(2,485	)
Depreciation		(170	)		(120	)		(105	)		(105	)		(101	)
Cash-based operating expenses - Non-GAAP	$	31,925		$	30,485		$	31,885		$	31,566		$	25,550

Change from previous quarter	$	1,440		$	(1,400	)	$	319		$	6,016		$	961
Percentage change from previous quarter		5	%		-4	%		1	%		24	%		4	%

~~Research and Development Expenses~~

Research and development expenses increased by $23.1 million, or 84%, for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The increase was primarily due to $13.6 million in increased clinical and manufacturing activities, which include start-up costs, for CARDINAL, CATALYST, and the extension trial for CATALYST and LARIAT patients (trials that were initiated or began enrolling in the fourth quarter of 2016), $2.2 million in personnel expense to support growth inFor additional information about our development activities, $2.1 million in clinical and manufacturing activities, which include start-up costs, for part 2 of MOXIe, MOTOR, and REVEAL, $1.9 million in preclinical and manufacturing activities in our RORγT program, $1.4 million reduction in co-funding from AbbVie as a result of the agreement for Reata to continue development of omaveloxolone unilaterally, $1.0 million in stock compensation expense related to award issuances in December 2016 and additional issuances to new employees, and $0.7 million in increased medical affairs activities.

~~General and Administrative Expenses~~

General and administrative expenses increased by $5.5 million, or 47%, for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The increase was primarily due to $1.3 million in personnel expense to support growth in the organization and expanded development activities, $2.3 million in stock compensation expense related to award issuances in December 2016 and additional issuances to new employees, $0.5 million in increased commercial research activities, $0.8 million in intellectual property costs due to additional validation of patents, new applications, national stage filings, and license fees, and $0.4 million increased legal, insurance, and consulting costs in connection with being a public company.

~~Investment Income~~

~~Investment income was immaterial for the nine months ended September 30, 2017 and 2016.~~

~~Interest Expense~~

Interest expense increased by $1.0 million, or 100%, the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The increase was attributable to interest charges associated with borrowings under our Loan Agreement entered in March 2017.

~~Provision for Taxes on Income~~

Benefit for taxes on income decreased by $0.4 million, or 100%, for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, due to differences generated and changes in the valuation allowances.non-GAAP financial measure, see “Non-GAAP Financial Measure” below.

Liquidity and Capital Resources

Since our inception, we have funded our operations primarily through collaboration and license agreements, the sale of preferred and common stock, and secured loans. ~~To date,~~Through March 31, 2019, we have raised gross cash proceeds of $476.6 million through the sale of convertible preferred stock and ~~received $750~~$780.0 million from payments under license and collaboration ~~agreements, $169.8~~agreements. We also obtained $402.3 million in net proceeds from our ~~initial public offering~~IPO and follow-on ~~offering~~offerings of our Class A common stock, and ~~$19.7~~$77.2 million in net proceeds from our Restated Loan ~~Agreement in March 2017.~~Agreement. We have not generated any revenue from the sale of any products. As of ~~September 30, 2017,~~March 31, 2019, we had available cash and cash equivalents of approximately ~~$154.6~~$313.1 million. Our cash and cash equivalents are invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation.

On August 1, 2017, we closed a follow-on underwritten public offering of 3,737,500 shares of our Class A common stock, which included 487,500 shares of our Class A common stock issued pursuant to an option granted to the underwriters, for gross proceeds of $115.9 million. The Company received total proceeds from the offering of $108.5 million, after deducting underwriting discounts and commissions and offering expenses.

On March 31, 2017, we entered into a Loan Agreement, which was amended on November 3, 2017 (Amended Loan Agreement). Under the Amended Loan Agreement, our Lenders agreed to lend us up to $45.0 million, issuable in two separate tranches of $20.0 million (Term A Loan) and either $20.0 million or $25.0 million (Term B Loan). On March 31, 2017, we borrowed $20.0 million from the Term A Loan. We may, at our sole discretion, borrow $20.0 million under the Term B Loan. An additional $5.0 million will be available under the Term B Loan, providing a total of $25.0 million, upon the achievement of one of two milestones. We may borrow the Term B Loan by the earlier of 90 days after the achievement of a milestone or June 29, 2018.

All outstanding Term Loans will mature on March 1, 2022. We will make interest-only payments through October 1, 2018; however, if we draw the Term B Loan, we will make interest-only payments through October 1, 2019. The interest-only payment period will be followed by principal and interest payments thereafter and through maturity. The Term A Loan bears interest at a floating per annum rate between a minimum of 8.15% and a maximum of 10.15%. The interest rate is calculated as 7.40% plus the greater of the 30-day U.S. Dollar LIBOR rate reported in The Wall Street Journal or 0.75%.

~~We paid an amendment fee of $250,000 on November 8, 2017, upon execution of the amendment to the Loan Agreement. If we do not draw the Term B Loan, we will pay an unused line fee of $1 million.~~

Cash Flows

The following table sets forth the primary sources and uses of cash for each of the ~~nine~~three months ended ~~September 30~~March 31 set forth below:

	2017			2016			2019			2018
	(unaudited)						(unaudited)
	(in thousands)						(in thousands)
Net cash (used in) provided by:
Operating activities	$	(58,523	)	$	(8,123	)	$	(28,732	)	$	(24,021	)
Investing activities		(208	)		(281	)		(1,160	)		(151	)
Financing activities		128,599			62,056			5,158			329
Net change in cash and cash equivalents	$	69,868		$	53,652		$	(24,734	)	$	(23,843	)

Operating Activities

Net cash used in operating activities was ~~$58.5~~$28.7 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, consisting primarily of a net loss of ~~$31.0~~$29.2 million adjusted for non-cash items including stock-based compensation expense of ~~$4.7~~$4.2 million, depreciation and amortization expense of ~~$0.4~~$0.5 million, and a net increase in operating assets and liabilities of $4.2 million. The significant items in the change in operating assets that impacted our use of cash in operations include increases in accrued direct research and other current and long-term liabilities of $3.9 million due to manufacturing activities related to clinical trials and personnel-related activities and a decrease in deferred revenue of $7.7 million. The decrease in deferred revenue is due to the ratable recognition of revenue over the expected term of the performance obligations under our collaboration agreements with AbbVie and KHK, which resulted in recognition of $7.7 million of license and milestone revenue.

Net cash used in operating activities was $24.0 million for the three months ended March 31, 2018, consisting primarily of net income of $4.1 million adjusted for non-cash items including stock-based compensation expense of $2.5 million, depreciation and amortization expense of $0.1 million, and a net decrease in operating assets and liabilities of ~~$32.6~~$30.7 million. The significant items in the change in operating assets and liabilities include an increase of prepaid expenses, other current assets, and other assets of ~~$1.5~~$25.2 million primarily due to ~~clinical trial prepayments and reimbursements due from KHK,~~a contract asset related to a milestone payment we partially recognized in accordance with Topic 606 that we received later in 2018, a decrease in ~~account~~accounts payable of ~~$1.4~~$1.1 million due to timing of vendor payments, an increase in accrued direct research and other current liabilities of ~~$7.4~~$2.6 million due to clinical trial activities, and a decrease in deferred revenue of ~~$37.1~~$7.1 million. The decrease in deferred revenue ~~relates~~is due to the ~~timing of upfront payments and~~ ratable recognition of revenue over the expected term of the performance obligations under our collaboration agreements with AbbVie and KHK, ~~resulting~~which resulted in recognition of ~~$37.1 million of license and milestone revenue.~~

Net cash used in operating activities was $8.1 million for the nine months ended September 30, 2016, consisting primarily of net loss of $2.1 million adjusted for non-cash items including stock-based compensation expense of $1.5 million, depreciation expense of $0.5 million, and a net decrease in operating assets and liabilities of $8.0 million. The significant items in the change in operating assets and liabilities include an increase of prepaid expenses and other current assets of $2.9 million due to clinical trial prepayments and reimbursements due from KHK and AbbVie, a decrease in income tax receivable of $31.9 million due to tax refunds received, and a decrease in deferred revenue of $37.2 million. The decrease in deferred revenue relates to the timing of upfront payments and ratable recognition of revenue over the expected term of the performance obligations under our collaboration agreements with AbbVie and KHK, resulting in recognition of $37.2$7.1 million of license and milestone revenue.

Investing Activities

Net cash used in investing activities consisted of purchases and sales of property and equipment. Net cash used in investing activities for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016 was~~2018 were not significant.

Financing Activities

Net cash provided by financing activities was ~~$128.6~~$5.2 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively, and were primarily due to ~~net proceeds of $108.5 million from follow-on public offering and $19.7 million from our Loan Agreement for the nine months ended September 30, 2017.~~

~~Net cash provided by financing activities was $62.1 million, primarily due to net proceeds of $62.2 million from the close of our initial public offering for the nine months ended September 30, 2016.~~option exercises.

Operating Capital Requirements

To date, we have not generated any revenue from product sales. We do not know when or whether we will generate any revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and commercialize one or more of our current or future product candidates. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. We are subject to all the risks related to the development and commercialization of novel therapeutics, and we may encounter unforeseen expenses, difficulties, complications, delays, and other unknown factors that may adversely affect our business. We continue to incur additional costs associated with operating as a public company. We anticipate that we will need substantial additional funding in connection with our continuing operations.

On ~~July 10, 2017,~~June 14, 2018, we ~~filed a universal shelf registration statement~~amended and restated our Loan Agreement. Under our Restated Loan Agreement, the Term A Loan was increased from $20.0 million to $80.0 million, of which Reata borrowed an additional $60.0 million on ~~Form S-3,~~June 14, 2018, which ~~was declared effective~~resulted in an outstanding principal balance of $80.0 million under the Term A Loan at June 14, 2018. We may, at our sole discretion, borrow additional $45.0 million under the Term B Loan, upon the achievement, of one of two milestones by the ~~SEC on July 14,~~earlier of 30 days after the achievement of a milestone or December 31, 2019. If we borrow under the Term B Loan, we expect to incur additional related interest expense.

In November 2017, on which we registered for sale up to $250.0 million of any combination of our common stock, preferred stock, warrants, rights, purchase contracts and/or units from time to time and at prices and on terms that we may determine. After the closing of our follow-on underwritten public offering on August 1, 2017, approximately $134.1 million of securities remains available for issuance under this shelf registration. This shelf registration statement will remain in effect for up to three years from the date it was declared effective. We believe our existing cash and cash equivalents, not including proceeds from the follow-on offering or expected receipts from our collaborations, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months.

~~On November 9, 2017, we~~Company entered into an at-the-market equity offering sales agreement with Stifel, Nicolaus & Company, Incorporated, that established a program pursuant to which wethey may offer and sell up to $50 million of our Class A common stock from time to time in at-the-market transactions ~~under our existing shelf registration statement. As~~as stated in the prospectus supplement filed with the SEC pursuant to Rule 424(b)(5), dated as of ~~the filing~~November 9, 2017. To date, ~~of this Form 10-Q, there~~no sales have been nomade under the Company’s at-the-market offering program.

On July 27, 2018, the Company closed a follow-on underwritten public offering of 3,450,000 shares ~~sold under this program.~~of its Class A common stock for gross proceeds of $248.4 million. Net proceeds to the Company from the offering were approximately $232.9 million, after deducting underwriting discounts and commissions and offering expenses.

Our longer term liquidity requirements will require us to raise additional capital, such as through additional equity or debt financings. Our future capital requirements will depend on many factors, including the receipt of milestones under our current collaboration agreements and the timing of our expenditures related to clinical trials. We believe our existing cash and cash equivalents, combined with available future debt, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements into 2021. However, we anticipate opportunistically raising additional capital before that time through equity offerings, collaboration or license agreements, or additional debt in order to maintain adequate capital reserves. In addition, we may choose to raise additional capital at any time for the further development of our existing product candidates and may also need to raise additional funds sooner to pursue other development activities related to additional product candidates. Decisions about the timing or nature of any financing will ~~rely~~be based on, among other things, our perception of our liquidity and of the market opportunity to raise equity or debt. Additional securities may include common stock, preferred stock, or debt securities.

We may explore strategic collaborations or license arrangements for certain of our earlier stage assets, including RTA 901 and RTA 1701. If we do explore any arrangements, there can be no assurance that any agreement will be reached, and we may determine to cease exploring a potential transaction for any or all of the assets at any time. If an agreement is reached, there can be no assurance that any such transaction would provide us with a material amount of additional capital resources.

Until we can generate a sufficient amount of revenue from our product candidates, if ever, we expect to finance future cash needs through public or private equity or debt ~~offerings.~~offerings, commercial loans, and collaboration or license transactions. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back, or discontinue the development or commercialization of one or more of our product candidates. If we raise additional funds through the issuance of additional equity or debt securities, it could result in dilution to our existing stockholders or increased fixed payment obligations, and any such securities may have rights senior to those of our common stock. If we incur ~~additional~~ indebtedness, we could become subject to ~~additional~~ covenants that ~~could further~~would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell, or license intellectual property rights, and other operating restrictions that could adversely affect our ability to conduct our business, and any such debt could be secured by some or all of our ~~owned intellectual property, in addition to assets which currently secure our debt.~~assets. Any of these events could significantly harm our business, financial condition, and prospects. For a description of the numerous risks and uncertainties associated with product development and raising additional capital, see “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2018.

Our forecast of the period through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary ~~due to~~as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements, both near- and long-term, will depend on many factors, including, but not limited to:

the scope, rate of progress, results, and cost of our clinical trials, preclinical testing, and other activities related to the development of our product candidates;

the number and characteristics of product candidates that we pursue;

the costs of development efforts for our product candidates that are not subject to reimbursement from our collaborators;

the costs necessary to obtain regulatory approvals, if any, for our product candidates in the United States and other jurisdictions, and the costs of post-marketing studies that could be required by regulatory authorities in jurisdictions where approval is obtained;

the continuation of our existing collaborations and entry into new collaborations and the receipt of any collaboration payments;

the time and unreimbursed costs necessary to commercialize products in territories in which our product candidates are approved for sale;

~~the revenue from any future sales of our products for which we are entitled to a profit share, royalties, and milestones;~~

•

the revenue from any future sales of our products for which we are entitled to a profit share, royalties, and milestones;

the level of reimbursement or third-party payor pricing available to our products;

the costs of obtaining third-party commercial supplies of our products, if any, manufactured in accordance with regulatory requirements;

the costs associated with being a public company; and

the costs we incur in the filing, prosecution, maintenance, and defense of our ~~extensive~~ patent portfolio and other intellectual property rights.

If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition, and results of operations could be materially adversely affected.

Contractual Obligations and Commitments

As of ~~September 30, 2017,~~March 31, 2019, there have been no material changes, outside of the ordinary course of business, in our outstanding contractual obligations from those disclosed within ~~"Management's~~“Management's Discussion and Analysis of Financial Condition and Results of ~~Operations"~~Operations”, as contained in our Annual Report on Form 10-K for year ended December 31, ~~2016, other than the following:~~

2018.

~~As of September 30, 2017,~~Below are our contractual obligations ~~were~~ as ~~follows:~~of March 31, 2019:

	Payments due by period								Payments due by period
	Less than 1 year		1 to 3 years		4 to 5 years		Total		Less than 1 year		1 to 3 years		4 to 5 years		Total
	(unaudited)								(unaudited)
	(in thousands)								(in thousands)
Operating lease obligations	$	609	$	51	$	—	$	660	$	2,707	$	4,484	$	—	$	7,191
Outstanding secured term loan		—		11,220	$	9,370	$	20,590		—		48,889		31,111		80,000
Total contractual obligations	$	609	$	11,271	$	9,370	$	21,250	$	2,707	$	53,373	$	31,111	$	87,191

~~On November 9, 2017, we amended the lease agreement for our principal executive offices in Irving, TX to extend the lease term by 24 months for an expiration date of October 2020.~~

Clinical Trials

As of ~~September 30, 2017,~~March 31, 2019, we have several ~~ongoing~~on-going clinical trials in various stages. Under agreements with various CROs and clinical trial sites, we incur expenses related to clinical ~~trials.~~trials of our product candidates and potential other clinical candidates. The timing and amounts of these disbursements are contingent upon the achievement of certain milestones, patient enrollment, and services rendered or as expenses are incurred by the CROs or clinical trial sites. Therefore, we cannot estimate the potential timing and amount of these payments and they have been excluded from the table above.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with ~~U.S.~~United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued research and development expenses, income taxes, and stock-based compensation. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. ~~There have been no~~

Our significant ~~and material changes in our critical~~ accounting policies ~~during the nine months ended September 30, 2017, as compared to those disclosed~~are described in ~~“Management’s Discussion~~Note 2 of Part I, Item 1 of this Quarterly Report on Form 10-Q and ~~Analysis of Financial Condition and Results of Operations-Critical~~in Part I, Item 7, “Critical Accounting Policies and Significant Judgments and Estimates” in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2018. During the quarter ended March 31, 2019 we adopted Topic 842. As a result of this adoption, we updated our Leases policies. There have been no other changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended December 31, 2018.

Off-Balance Sheet Arrangements

Since our inception, we have not had any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements, and we have not engaged in any other off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, please see Note 2 of Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

Non-GAAP Financial Measures

In addition to the U.S. GAAP financial measures, this Quarterly Report on Form 10-Q includes cash-based operating expenses, a non-GAAP financial measure, which the Company defines as total expenses excluding stock-based compensation expense and depreciation expense. A reconciliation of this non-GAAP financial measure to its most directly comparable U.S. GAAP financial measure is included in “—Results of Operations—Cash-based Operating Expenses (non-GAAP) for the Three Months ended March 31, 2019” above.

Non-GAAP financial measures should be considered in addition to, not in isolation or as a substitute for, U.S. GAAP financial measures. In addition, our non-GAAP financial measure may differ from similarly named measures used by other companies. You should carefully evaluate our non-GAAP financial measure, the adjustments included in our non-GAAP financial measure and the reasons we consider it appropriate for analysis supplemental to our GAAP information. This non-GAAP financial measure has important limitations as an analytical tool due to the exclusion of some but not all items that affect the most directly comparable GAAP financial measure.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risks in the ordinary course of our business. These market risks are principally limited to interest rate fluctuations. We had cash and cash equivalents of ~~$154.6~~$313.1 million at ~~September 30, 2017,~~March 31, 2019, consisting primarily of funds in operating cash accounts. The primary objective of our investment activities is to preserve principal and liquidity while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of our investment portfolio, we do not believe an immediate increase of 100 basis points in interest rates would have a material effect on the fair market value of our portfolio, and accordingly we do not expect a sudden change in market interest rates to affect materially our operating results or cash flows.

We also have interest rate exposure as a result of our Term A Loan. As of ~~September 30, 2017,~~March 31, 2019, the outstanding principal amount of our Term A Loan was ~~$20.0~~$80.0 million. Our Term A Loan bears interest at a floating per annum rate calculated as ~~7.40%~~7.79% plus the greater of the 30-day U.S. Dollar LIBOR rate reported in The Wall Street Journal or ~~0.75%~~1.91%, with a minimum rate of ~~8.15%~~9.7% and a maximum rate of ~~10.15%~~12.29%. Changes in the U.S. Dollar LIBOR rate may therefore affect our interest expense associated with the Term A Loan. An increase of 100 basis points in interest rates would increase expense by approximately ~~$0.2~~$0.8 million annually based on the amounts currently outstanding and would not materially affect our results of operations.

We contract with research, development, and manufacturing organizations and investigational sites globally. Generally, these contracts are denominated in ~~U.S.~~United States dollars. However, we may be subject to fluctuations in foreign currency rates in connection with agreements not denominated in ~~U.S.~~United States dollars. We do not hedge our foreign currency exchange rate risk.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of ~~September 30, 2017.~~March 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, ~~of 1934 (Exchange Act),~~ means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the ~~Securities and Exchange Commission’s~~SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal ~~financials~~financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of ~~September 30, 2017,~~March 31, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control ~~over~~Over Financial Reporting

There ~~has~~have been no ~~change~~changes in our internal control over financial reporting, ~~(as~~as such term is defined in Rules 13a-15(f) and ~~15d-15(f)~~15(d)-15(f) promulgated under the Exchange ~~Act)~~Act, during the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

PART II — ~~OTHE~~ROTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently subject to any material legal proceedings.

Item 1A. Risk Factors.

In addition to other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors and other cautionary statements described under the heading “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, ~~2016 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017,~~2018, which could materially affect our businesses, financial condition, or future results. Additional risks and uncertainties currently unknown to us, or that we currently deem to be immaterial, also may materially adversely affect our business, financial condition, or future results. There ~~has~~have been no material changes in our risk factors from those described in the Annual Report on Form 10-K for the year ended December 31, ~~2016 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.~~2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

None.

~~Use of Proceeds from Initial Public Offering of Class A Common Stock~~

On May 25, 2016, our registration statement on Form S-1 (File No. 333-208843) relating to our IPO of our Class A common stock was declared effective by the SEC. The shares began trading on The NASDAQ Global Market on May 26, 2016. The public offering price of the shares sold in the offering was $11.00 per share. The IPO closed on June 1, 2016 and included 6,325,000 shares of Class A common stock, which included 825,000 shares of Class A common stock issued pursuant to the overallotment option granted to the underwriters, for gross proceeds of approximately $69.6 million before deducting underwriters’ discounts and commissions and offering-related expenses. Net proceeds, after deducting underwriting discounts and commissions of $4.9 million and offering expenses of approximately $3.8 million, were $60.9 million. Citigroup Global Markets Inc., Cowen and Company, LLC, and Piper Jaffray & Co. acted as joint book-running managers of this offering.

There has been no material change in the planned use of proceeds from our IPO as described in our prospectus dated May 25, 2016, filed with the SEC pursuant to Rule 424(b)(4) of the Securities Act. We invested the funds received in highly liquid money market funds. The net proceeds from the IPO have been used and will be used, together with our cash and cash equivalents, to fund continued advancement of our bardoxolone methyl, omaveloxolone, and clinical trials and preclinical studies, and to provide funds for working capital and other general purposes. None of the offering proceeds were paid directly or indirectly to any of our directors or officers, or their associates, or persons owning 10.0% or more of any class of our equity securities or to any other affiliates.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

On November 9, 2017, we entered into an at-the-market equity offering sales agreement (Sales Agreement) with Stifel, Nicolaus & Company, Incorporated (Stifel) to sell, from time to time, shares of the Company’s Class A common stock, with aggregate proceeds of up to $50 million, through an “at-the-market” equity offering program under which Stifel will act as sales agent and/or principal. As of the filing date of this Form 10-Q, there have been no shares sold under this program.

None.

Pursuant to the Sales Agreement, shares of the Company’s Class A common stock may be offered and sold through Stifel in transactions that are deemed to be "at-the-market" offerings as defined in Rule 415 of the Securities Act, including sales made directly on or through the NASDAQ Global Market, sales made to or through a market maker other than on an exchange or otherwise, in negotiated transactions at market prices prevailing at the time of sale or at prices related to such prevailing market prices, and any other method permitted by law, including in privately negotiated transactions. Stifel will act as sales agent on a best efforts basis and use commercially reasonable efforts to sell on our behalf all of the shares of Class A common stock requested to be sold by us, consistent with its normal trading and sales practices, on mutually agreed terms between Stifel and us. Except as otherwise described in the Sales Agreement, Stifel will be entitled to compensation at a commission rate of up to 3% of the gross sales price per share sold. We have no obligation to sell any shares under the Sales Agreement, and may at any time suspend offers under the Sales Agreement or terminate the Sales Agreement.

The Class A shares will be issued pursuant to the Company’s shelf registration statement on Form S-3 (Registration No. 333-218915). The summary of the Sales Agreement in this Form 10-Q does not purport to be complete and is qualified by reference to such agreement, which is filed as Exhibit 1.1 to this Form 10-Q and incorporated herein by reference.

On November 9, 2017, we amended our lease agreement for our principal executive offices in Irving, TX to extend the lease term by 24 months for an expiration date of October 2020. The amendment to our lease agreement is attached as Exhibit 10.1 and incorporated herein by reference.

3630

Item 6. Exhibits.

Exhibit Number		Description

1.110.1		~~At-the-Market Equity Offering Sales Agreement, dated November 9, 2017, between~~ Reata Pharmaceuticals, Inc., Second Amended and ~~Stifel, Nicolaus & Company, Incorporated.~~Restated Long Term Incentive Plan.

5.110.2		~~Legal Opinion of Vinson & Elkins L.L.P.~~Stock Option Agreement.

10.110.3		~~Lease Amendment No. 11, effective as~~Notice of ~~November 9, 2017, between Reata Pharmaceuticals, Inc.~~stock option grant forms for employees and ~~SDCO Gateway Commerce I & II, Inc.~~director/consultant.

~~10.2~~10.4+		~~First Amendment to Loan~~Notice of Stock Option Grant for employees and Security Agreement, dated as of November 3, 2017, by and among Reata Pharmaceuticals, Inc., as borrower, Oxford Finance LLC, as the collateral agent and a lender, and Silicon Valley Bank, as a lender theretodirectors/consultants (incorporated by reference to ~~exhibit 10.1~~Exhibit 10.30 to the ~~Registrants’ Current~~Company’s Annual Report on Form ~~8-K, file~~10-K for the period ended December 31, 2018 (File No. ~~001-37785,~~1-37785), filed with the ~~Commission~~SEC on ~~November 7, 2017.~~February 28, 2019).

31.1*		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema Document

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB**		XBRL Taxonomy Extension Label Linkbase Document

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith.

**	~~Filed electronically~~Furnished herewith.

+	Indicates management contract or compensatory plan.

3731

~~SIGNATURES~~SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: ~~November 13, 2017~~May 9, 2019	REATA PHARMACEUTICALS, INC.

	By:	/s/ J. Warren Huff
	Name:	J. Warren Huff
	Title:	Chief Executive Officer and President

	By:		/s/ Jason D. Wilson
	Name:		Jason D. Wilson
	Title:		Chief Financial Officer

3832


	Change from Baseline in eGFR
	Week 1	Week 4	Week 8	Week 12
N	30	30	30	30
Mean ± SE	3.0 ± 0.7	6.7 ± 1.3	8.9 ± 1.3	13.4 ± 1.4
95% CI	(1.6, 4.4)	(4.1, 9.3)	(6.2, 11.6)	(10.5, 16.3)
p-value	0.0001	<0.0001	<0.000001	<0.000000001
LS mean eGFR change from baseline at each visit is compared to zero using a mixed-model repeated measures analysis using baseline eGFR and log-transformed ACR as continuous covariates.


				Week 12 Mean ΔeGFR
Baseline Characteristic	Subgroup	N	Baseline	Change ± SD	% Change
eGFR	≥ 60	12	81.3 ± 7.5	18.4 ± 7.7	23%
eGFR	< 60	18	36.1 ± 9.3	10.0 ± 6.6	30%
UACR	Non-macro	18	62.5 ± 22.2	16.0 ± 8.6	29%
UACR	Macro	12	41.7 ± 22.0	9.4 ± 5.5	24%
Gender	Male	12	50.5 ± 25.1	14.0 ± 8.3	30%
Gender	Female	18	56.6 ± 23.8	12.9 ± 8.1	25%
Age	< 18	2	86.1 ± 9.1	26.1 ± 10.8	31%
	≤ 45	11	48.4 ± 24.8	10.1 ± 9.5	20%
	> 45	19	57.5 ± 23.7	15.3 ± 6.7	31%


		All Patients			Patients Without Anemia
Treatment	N	Change from Baseline (m)	Placebo-corrected (m)	N	Change from Baseline	Placebo-corrected
Placebo	7	9.8 p=0.44	—	5	-5.8 p=0.68	—
Bardoxolone Methyl	15	38.2 p <0.001	28.4 p=0.07	14	42.7 p < 0.001	48.5 p=0.005