UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2019

OR

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

For the transition period from         to         

Commission File Number: 001-37785

 

Reata Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

DELAWARE

 

11-3651945

(State or other jurisdiction of

incorporation or organization)

 

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

 

 

 

2801 Gateway Dr, Suite 150
Irving, Texas

 

75063

(Address of principal executive offices)

 

(Zip Code)

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes       No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, an emerging growth company, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No 

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 May 6, 2019, the registrant had 24,416,773 shares of Class A common stock, $0.001 par value per share, and 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

7

 

Notes to Unaudited Consolidated Financial Statements

8

Item 2.

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

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

30

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

31

Signatures

32

 

 

 

 

i


 

CAUTIONARY NOTE REGARDING F ORWARD-LOOKING STATEMENTS

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

 

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

 

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

 

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

 

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

 

the commercialization of our product candidates, if approved;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

our expectations related to the use of our available cash;

 

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

 

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

1


 

 

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

 

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

 

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

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

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

2


 

DEFINED TERMS

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

 

Abbreviated Term

 

Defined Term

6MWD

 

6-minute walk distance

AbbVie

 

AbbVie Inc.

ADPKD

 

Autosomal dominant polycystic kidney disease

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

 

3


 

PART I - FINANCI AL INFORMATION

 

 

Item 1. Financial Statements.

Reata Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

 

 

 

March 31,

2019

 

 

December 31,

2018

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

313,056

 

 

$

337,790

 

Prepaid expenses and other current assets

 

 

4,416

 

 

 

4,483

 

Total current assets

 

 

317,472

 

 

 

342,273

 

Property and equipment, net

 

 

2,693

 

 

 

1,445

 

Other assets

 

 

11,120

 

 

 

1,490

 

Total assets

 

$

331,285

 

 

$

345,208

 

Liabilities and stockholders’ (deficit) equity

 

 

 

 

 

 

 

 

Accounts payable

 

 

3,500

 

 

 

4,473

 

Accrued direct research liabilities

 

 

16,263

 

 

 

15,416

 

Other current liabilities

 

 

10,107

 

 

 

4,696

 

Current portion of deferred revenue

 

 

31,335

 

 

 

31,335

 

Total current liabilities

 

 

61,205

 

 

 

55,920

 

Other long-term liabilities

 

 

8,472

 

 

 

524

 

Term loan, net of current portion and debt issuance costs

 

 

79,558

 

 

 

79,219

 

Deferred revenue, net of current portion

 

 

186,660

 

 

 

194,386

 

Total noncurrent liabilities

 

 

274,690

 

 

 

274,129

 

Commitments and contingencies

 

 

 

 

 

 

 

 

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

 

 

444,837

 

 

 

435,452

 

Accumulated deficit

 

 

(449,477

)

 

 

(420,323

)

Total stockholders’ (deficit) equity

 

 

(4,610

)

 

 

15,159

 

Total liabilities and stockholders’ (deficit) equity

 

$

331,285

 

 

$

345,208

 

 

 

See accompanying notes.

4


 

Reata Pharmaceuticals, Inc.

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Collaboration revenue

 

 

 

 

 

 

 

 

License and milestone

 

$

7,726

 

 

$

32,168

 

Other revenue

 

 

44

 

 

 

224

 

Total collaboration revenue

 

 

7,770

 

 

 

32,392

 

Expenses

 

 

 

 

 

 

 

 

Research and development

 

 

26,114

 

 

 

21,407

 

General and administrative

 

 

10,038

 

 

 

6,628

 

Depreciation

 

 

170

 

 

 

101

 

Total expenses

 

 

36,322

 

 

 

28,136

 

Other income (expense)

 

 

 

 

 

 

 

 

Investment income

 

 

1,797

 

 

 

335

 

Interest expense

 

 

(2,397

)

 

 

(509

)

Total other income (expense)

 

 

(600

)

 

 

(174

)

(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.

5


 

Reata Pharmaceuticals, Inc.

Unaudited C onsolidated 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

)

 

6


 

Reata Pharmaceuticals, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

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

 

 

4,227

 

 

 

2,485

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Amounts earned or due from collaboration agreements

 

 

573

 

 

 

(25,307

)

Prepaid expenses and other current assets

 

 

(506

)

 

 

(174

)

Other assets

 

 

6

 

 

 

273

 

Accounts payable

 

 

(522

)

 

 

(1,065

)

Accrued direct research and other current and long-term liabilities

 

 

3,861

 

 

 

2,636

 

Deferred revenue

 

 

(7,726

)

 

 

(7,111

)

Net cash used in operating activities

 

 

(28,732

)

 

 

(24,021

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,160

)

 

 

(151

)

Net cash used in investing activities

 

 

(1,160

)

 

 

(151

)

Financing activities

 

 

 

 

 

 

 

 

Payments on deferred issuance costs

 

 

 

 

 

(3

)

Exercise of options

 

 

5,051

 

 

 

332

 

Other shareholder transactions

 

 

107

 

 

 

 

Net cash provided by financing activities

 

 

5,158

 

 

 

329

 

Net decrease in cash and cash equivalents

 

 

(24,734

)

 

 

(23,843

)

Cash and cash equivalents at beginning of year

 

 

337,790

 

 

 

129,780

 

Cash and cash equivalents at end of period

 

$

313,056

 

 

$

105,937

 

Supplemental disclosures

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,052

 

 

$

445

 

Purchases of equipment in accounts payable and other current liabilities

 

$

750

 

 

$

74

 

Non-cash activity:

 

 

 

 

 

 

 

 

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

 

$

9,636

 

 

$

 

 

See accompanying notes.

 

7


 

Reata Pharmaceuticals, Inc.

Notes to Unaudited Consolidated Financial Statements

 

 

1. Description of Business

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

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

2. Summary of Significant Accounting Policies

Basis of Presentation

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

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

Leases

The Company 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 present value of lease payments over the lease term calculated using its incremental borrowing rate

8


 

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

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

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

Recently Adopted Accounting Pronouncements

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

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

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

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

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement: Disclosure Framework (Topic 820) (ASU 2018-13).  This ASU eliminates, modifies, and adds certain disclosure requirements for fair value measurements.  This update is effective in fiscal years, including interim periods, beginning after December 15, 2019, and early adoption is permitted.  The added disclosure requirements and the modified disclosure on the narrative description of 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 Company is currently evaluating the impact on its financial statements of adopting this guidance.

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808) (ASU 2018-18).  This update provides clarification on the interaction between Revenue Recognition (Topic 606) and

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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 eva luating the impact on its financial statements of adopting this guidance.

3. Collaboration Agreements

AbbVie

In December 2011, the Company entered into a collaboration agreement with AbbVie Inc. (AbbVie) (the AbbVie Collaboration Agreement) to jointly research, develop, and commercialize the Company’s portfolio of second and later generation oral Nrf2 activators.  The terms of the agreement include payment to the Company of a 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), which amended and restated the Loan and Security Agreement entered into among Reata and the Lenders on March 31, 2017, as amended on November 3, 2017 (Loan Agreement).

Under the Restated Loan Agreement, the Term A Loan was increased to $80,000,000, and the Term B Loan availability was increased to $45,000,000 upon the achievement of one of two milestones by the earlier of 30 days after the achievement of a milestone or 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 is obligated to pay a non-utilization fee of $450,000.

All outstanding Term Loans will mature on June 1, 2023.  Under the Term A Loan, the Company will make interest-only payments for 24 months through June 1, 2020; however, if the Company draws the Term B Loan, the Company will make interest-only payments for 36 months through June 1, 2021.  The interest-only payment period

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will be followed by 36 equal monthly payments, or 24 equal monthly payments if the Company draws the Term B Loan, of principal and interest pa yments. The Term Loans will bear interest at a floating per annum rate calculated as 7.79% plus the greater of the 30-day U.S. Dollar LIBOR rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or 1.91%, with a minimum rate of 9.7% and maximum rate of 12.29%.

The Company has the option to prepay all, but not less than all, of the borrowed amounts, provided that the Company will be obligated to pay a prepayment fee equal to (a) the aggregate amount of interest that the Company would have paid through the maturity date if prepayment is made on or before the first anniversary of the applicable funding date of the Term Loan, (b) 4.0% of the outstanding principal balance of the applicable Term Loan if prepayment is made after the first anniversary date and on or before the second anniversary of the applicable funding date, (c) 3.0% of the outstanding principal balance of the applicable Term Loan if prepayment is made after the second anniversary date and on or before the third anniversary of the applicable funding date, or (d) 1.5% of the outstanding principal balance of the applicable Term Loan if prepayment is made after the third anniversary date and on or before the fourth anniversary of the applicable funding date.  The Company will also be required to make a final exit fee payment of 6.5% of the principal balance of the Term A Loan and 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 substantially all of its current and future assets, including its owned intellectual property.

As of March 31, 2019, the Company had $80,000,000 outstanding under the Term A Loan, which was recorded at its initial carrying value of $80,000,000, less unamortized discount and debt issuance costs of approximately $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 $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 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 March 31, 2019.

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

 

2019

 

$

 

2020

 

 

15,555

 

2021

 

 

26,667

 

2022

 

 

26,667

 

2023

 

 

11,111

 

 

 

$

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

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of the right-of-use assets and the reduction of the lease liabilities principal in a ccrued 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 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.

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 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

March 31,

 

 

 

2019

 

 

2018

 

Research and development

 

$

1,691

 

 

$

961

 

General and administrative

 

 

2,536

 

 

 

1,524

 

 

 

$

4,227

 

 

$

2,485

 

 

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

 

 

 

Number of

Options

 

 

Weighted-

Average

Exercise

Price

 

Outstanding at January 1, 2019

 

 

3,320,571

 

 

 

21.20

 

Granted

 

 

1,032,375

 

 

 

57.33

 

Exercised

 

 

(314,285

)

 

 

16.07

 

Forfeited

 

 

(257,897

)

 

 

33.07

 

Expired

 

 

 

 

 

 

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 March 31, 2019 was $206,899,000 and $92,094,000, respectively.

 

 

8. Net (Loss) Income per Share

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

 

 

 

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 3,780,764 and 2,131,219 shares for the three months ended March 31, 2019 and 2018, respectively.

 

 

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Item 2. Management’s Discussion and Analysis 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 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 .  We are currently conducting registrational trials with our lead product candidates, Bard and Omav, which activate the transcription factor Nrf2 to normalize mitochondrial function, 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.

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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:  

 

o

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 m 2 (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.

 

o

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 m 2 (p<0.001) and 5.6 mL/min/1.73 m 2 (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:

 

o

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 m 2 , or end-stage kidney disease (ESKD) events (HR=0.48, p<0.0001).  

 

o

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

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Statistically significant improvement in retained eGFR, whi ch 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 .  

 

o

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.

 

o

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 m 2 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 m 2 (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 m 2 (p<0.0001) in 30 patients.  

 

o

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 m 2 per year in the three-year period prior to enrolling in the trial.

 

o

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 m 2 (p<0.05) in 25 patients was observed.  

 

o

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.

 

o

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

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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 the Phase 3 portion of CARDINAL. The protocol allows for enrollment of approximately 150 patients randomized evenly to either Bard or placebo, and the trial 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 CKD caused by Alport syndrome, and data 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 2 patients at 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 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 treatment on study drug for 48 weeks and a four-week withdrawal of 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 Patients with Rare Forms of CKD

PHOENIX was an open-label, multi-center Phase 2 trial 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 related to Bard.

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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 trial s 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 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 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 reviews all safety data.

We are currently conducting the registrational part 2 of MOXIe.  The protocol allows for enrollment of approximately 100 patients 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 is the change from baseline in mFARS score, a neurological and functional assessment tool, in patients treated with Omav compared to 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 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 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 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.  

18


 

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 approxima tely 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 tria ls 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 met ers, 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 do es 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 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 CTD-PAH.  No safety concerns have been reported by the DSMB that oversees the trial and reviews all data.

Other Programs

RTA 901 is 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 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 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 adult volunteers.  No safety or tolerability 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 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 first half of 2019.  We retain all rights to our RORγt inhibitors, which are not subject to any existing commercial collaborations.

 

19


 

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 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 March 31, 2019, we had $313.1 million of cash and cash equivalents and an accumulated deficit of $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 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.

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 license agreement with KHK, our license agreement with AbbVie, and 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.  The AbbVie Collaboration Agreement and the KHK agreement extend through 2021, and 2026, respectively.  

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 March 31, 2019, we have incurred a total of $672.9 million in research and development expense, the majority of which relates to the development of Bard and 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.

20


 

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 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 Bard for the treatment of CKD caused by Alport syndrome, ADPKD, CTD-PAH, or other rare kidney diseases, and we are therefore incurring all costs for this program.  AbbVie has the right to opt-in to these programs at any time during development.  Upon opting-in, 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.  All development costs incurred after AbbVie’s opt-in would be split equally.

In September 2016, we and AbbVie mutually agreed that we would continue unilateral development of 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, 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 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 months ended March 31, 2019.  

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The following table summarizes our research and development expenses incurred:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

(in thousands)

 

Bardoxolone methyl

 

$

8,679

 

 

$

9,790

 

Omaveloxolone

 

 

5,803

 

 

 

2,581

 

RTA 901

 

 

337

 

 

 

384

 

RTA 1701

 

 

328

 

 

 

961

 

Other research and development expenses

 

 

10,967

 

 

 

7,691

 

Total research and development expenses

 

$

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 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.

Other Income

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

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 our net deferred tax assets.  Changes in this valuation allowance also affect the tax provision.

 

22


 

Results of Operations

Comparison of the Three Months Ended March 31, 2019 and 2018 (unaudited)

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

 

 

 

2019

 

 

2018

 

 

Change $

 

 

Change %

 

 

 

(unaudited)

 

 

 

(in thousands)

 

Collaboration revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License and milestone

 

$

7,726

 

 

$

32,168

 

 

$

(24,442

)

 

 

(76

)

Other revenue

 

 

44

 

 

 

224

 

 

 

(180

)

 

 

(80

)

Total collaboration revenue

 

 

7,770

 

 

 

32,392

 

 

 

(24,622

)

 

 

(76

)

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

26,114

 

 

 

21,407

 

 

 

4,707

 

 

 

22

 

General and administrative

 

 

10,038

 

 

 

6,628

 

 

 

3,410

 

 

 

51

 

Depreciation and amortization

 

 

170

 

 

 

101

 

 

 

69

 

 

 

68

 

Total expenses

 

 

36,322

 

 

 

28,136

 

 

 

8,186

 

 

 

29

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

 

1,797

 

 

 

335

 

 

 

1,462

 

 

 

436

 

Interest expense

 

 

(2,397

)

 

 

(509

)

 

 

(1,888

)

 

 

(371

)

Total other income (expense)

 

 

(600

)

 

 

(174

)

 

 

(426

)

 

 

(245

)

(Loss) income before taxes on income

 

 

(29,152

)

 

 

4,082

 

 

 

(33,234

)

 

 

(814

)

Provision for taxes on income

 

 

2

 

 

 

 

 

 

2

 

 

 

100

 

Net (loss) income

 

$

(29,154

)

 

$

4,082

 

 

$

(33,236

)

 

 

(814

)

 

Revenue

License and milestone revenue represented approximately 99% of total revenue for the three months ended March 31, 2019 and 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 March 31:

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

(in thousands)

 

License and milestone

 

 

 

 

 

 

 

 

AbbVie collaboration agreement

 

$

6,570

 

 

$

6,570

 

KHK agreement

 

 

1,156

 

 

 

25,598

 

Total license and milestone

 

 

7,726

 

 

 

32,168

 

Other revenue

 

 

44

 

 

 

224

 

Total collaboration revenue

 

$

7,770

 

 

$

32,392

 

 

23


 

Research and Development Expenses

Research and development expenses increased by $4.7 million, or 22%, for the three months ended March 31, 2019, compared to the three months ended March 31, 2018.  The increase was primarily due to $1.3 million in increased scale up and process validation activities to support product registration and startup activities for FALCON and the extension trial for CARDINAL, offset by decreases in clinical expenses, as well as increases of $2.4 million in personnel and 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 ratio of 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%, 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 personnel and equity compensation expenses and $0.6 million in office rent expense to support growth in our development activities and $0.2 million in commercial research activities.

General and administrative expenses, as a percentage of total expenses, was 28% and 24%, for the three months ended 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 March 31, 2018, due to investment and interest income earned on higher balances of cash and cash equivalents.

Interest Expense

Interest expense increased by $1.9 million, or 371%, for the three months ended March 31, 2019 compared to the three months ended March 31, 2018, due to increased interest charges associated with additional borrowings under our Restated Loan Agreement entered in June 2018.

Provision for Taxes on Income

Provision for taxes on income was immaterial for the three months ended March 31, 2019 and 2018.

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

Total expenses (GAAP) for the three months ended March 31, 2019 and 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 three months ended March 31, 2019 and 2018, respectively.

Total expenses (GAAP) were $36.3 million and $33.4 million for the 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 December 31, 2018 included the additional sublicense fees and other expenses from the achievement of 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 and development and administrative personnel, and plan for commercialization of our product candidates.  

24


 

We believe cash-based operating expenses, in addition to GAAP financial measures, provides a meaningful measure of our ongoing business and operating performance, by allowing investors to analyze our financial results similarly to how management analyzes o ur 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 C onsolidated Statements of Operations for the three months ended :

 

 

 

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

%

 

For additional information about our 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.  Through March 31, 2019, we have raised gross cash proceeds of $476.6 million through the sale of convertible preferred stock and $780.0 million from payments under license and collaboration agreements. We also obtained $402.3 million in net proceeds from our IPO and follow-on offerings of our Class A common stock, and $77.2 million in net proceeds from our Restated Loan Agreement.  We have not generated any revenue from the sale of any products.  As of March 31, 2019, we had available cash and cash equivalents of approximately $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.

Cash Flows

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

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

(in thousands)

 

Net cash (used in) provided by:

 

 

 

 

 

 

 

 

Operating activities

 

$

(28,732

)

 

$

(24,021

)

Investing activities

 

 

(1,160

)

 

 

(151

)

Financing activities

 

 

5,158

 

 

 

329

 

Net change in cash and cash equivalents

 

$

(24,734

)

 

$

(23,843

)

 

 

Operating Activities

Net cash used in operating activities was $28.7 million for the three months ended March 31, 2019, consisting primarily of a net loss of $29.2 million adjusted for non-cash items including stock-based compensation expense of $4.2 million, depreciation and amortization expense of $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.

25


 

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 adjust ed 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 $ 30 . 7 million.  The significant items in the change in operat ing assets and liabilities include an increase of prepaid expenses, other current assets, and other assets of $25.2 million primarily due to a contract asset related to a milestone payment we partially recognized in accordance with Topic 606 that we receiv ed later in 2018 , a decrease in accounts payable of $1.1 million due to timing of vendor payments, an increase in accrued direct research and other current liabilities of $2.6 million due to clinical trial activities, and a decrease in deferred revenue of $7.1 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 $7.1 million of lice nse 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 three months ended March 31, 2019 and 2018 were not significant.

Financing Activities

Net cash provided by financing activities was $5.2 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively, and were primarily due to 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 June 14, 2018, we 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 June 14, 2018, which 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 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, the Company entered into an at-the-market equity offering sales agreement with Stifel, Nicolaus & Company, Incorporated, that established a program pursuant to which they may offer and sell up to $50 million of our Class A common stock from time to time in at-the-market transactions as stated in the prospectus supplement filed with the SEC pursuant to Rule 424(b)(5), dated as of November 9, 2017.  To date, no sales have been made under the Company’s at-the-market offering program.

26


 

On July 27, 2018, the Company closed a follow-on underwritten public offering of 3,450,000 shar es 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 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, 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 indebtedness, we could become subject to covenants that 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 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 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;

27


 

 

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 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 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 Discussion and Analysis of Financial Condition and Results of Operations”, as contained in our Annual Report on Form 10-K for year ended December 31, 2018.

Below are our contractual obligations as of March 31, 2019:

 

 

 

Payments due by period

 

 

 

Less than

1 year

 

 

1 to 3

years

 

 

4 to 5

years

 

 

Total

 

 

 

(unaudited)

 

 

 

(in thousands)

 

Operating lease obligations

 

$

2,707

 

 

$

4,484

 

 

$

 

 

$

7,191

 

Outstanding secured term loan

 

 

 

 

 

48,889

 

 

 

31,111

 

 

 

80,000

 

Total contractual obligations

 

$

2,707

 

 

$

53,373

 

 

$

31,111

 

 

$

87,191

 

 

Clinical Trials

As of March 31, 2019, we have several on-going clinical trials in various stages.  Under agreements with various CROs and clinical trial sites, we incur expenses related to clinical 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 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.

28


 

Our significant accounting policies are described in Note 2 of Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part I, Item 7, “Critical Accounting Policies a nd Significant Judgments and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 201 8 .  During the quarter ended March 31, 201 9 we adopted Topic 842 .  As a result of this adoption, we updated our Lease s policies.  There have been n o other changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended December 31, 201 8 .

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 $313.1 million at 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 March 31, 2019, the outstanding principal amount of our Term A Loan was $80.0 million.  Our Term A Loan bears interest at a floating per annum rate calculated as 7.79% plus the greater of the 30-day U.S. Dollar LIBOR rate reported in The Wall Street Journal or 1.91%, with a minimum rate of 9.7% and a maximum rate of 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 $0.8 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 United States dollars.  However, we may be subject to fluctuations in foreign currency rates in connection with agreements not denominated in United States dollars.  We do not hedge our foreign currency exchange rate risk.

29


 

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 March 31, 2019.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the 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 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 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 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 Financial Reporting

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

PART II — OTHER 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, 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 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, 2018.

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

Unregistered Sales of Equity Securities

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

30


 

Item 6. E xhibits.

 

Exhibit

Number

 

Description

 

 

 

  10.1*

 

Reata Pharmaceuticals, Inc. Second Amended and Restated Long Term Incentive Plan.

 

 

 

  10.2*

 

Stock Option Agreement.

 

 

 

  10.3*

 

Notice of stock option grant forms for employees and director/consultant.

 

 

 

  10.4+

 

Notice of Stock Option Grant for employees and directors/consultants (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2018 (File No. 1-37785), filed with the SEC on 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.

**

Furnished herewith.

+

Indicates management contract or compensatory plan.

31


 

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: 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

 

 

32

Exhibit 10.1

REATA PHARMACEUTICALS, INC.

SECOND AMENDED AND RESTATED

LONG TERM INCENTIVE PLAN

1. Purpose .  The purpose of the Reata Pharmaceuticals, Inc. Second Amended and Restated Long Term Incentive Plan (the “ Plan ”) is to provide a means through which Reata Pharmaceuticals, Inc., a Delaware corporation (the “ Company ”), and its Subsidiaries may attract and retain able persons as employees, directors and consultants and to provide a means whereby those persons upon whom the responsibilities of the successful administration and management of the Company, and its Subsidiaries, rest, and whose present and potential contributions to the welfare of the Company, and its Subsidiaries, are of importance, can acquire and maintain stock ownership, or awards the value of which is tied to the performance of the Company, thereby strengthening their concern for the welfare of the Company, and its Subsidiaries, and their desire to remain employed.  A further purpose of this Plan is to provide such employees, directors and consultants with additional incentive and reward opportunities designed to enhance the profitable growth of the Company.  Accordingly, this Plan primarily provides for the granting of Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock Awards, Restricted Stock Units, Stock Appreciation Rights, Stock Awards, Dividend Equivalents, Other Stock-Based Awards, Cash Awards, Performance Awards, Substitute Awards or any combination of the foregoing, as is best suited to the circumstances of the particular individual as provided herein.

2. Definitions .  For purposes of this Plan, the following terms shall be defined as set forth below:

(a) Affiliate ” means any corporation, partnership, limited liability company, limited liability partnership, association, trust or other organization which, directly or indirectly, controls, is controlled by, or is under common control with, the Company.  For purposes of the preceding sentence, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any entity or organization, shall mean the possession, directly or indirectly, of the power (i) to vote more than 50% of the securities having ordinary voting power for the election of directors of the controlled entity or organization, or (ii) to direct or cause the direction of the management and policies of the controlled entity or organization, whether through the ownership of voting securities, by contract, or otherwise.

(b) Award ” means any Option, SAR, Restricted Stock Award, Restricted Stock Unit, Stock Awards, Dividend Equivalent, Other Stock-Based Award, Cash Award, Performance Award or Substitute Award, granted in isolation or combination, together with any other right or interest granted to a Participant under this Plan.

(c) Award Agreement ” means any written instrument (including any employment, severance, or change of control agreement) that establishes the terms, conditions, restrictions and/or limitations applicable to an Award in addition to those established by this Plan and by the Committee’s exercise of its administrative powers.

(d) Board ” means the Board of Directors of the Company.

 

 


 

(e) Cash Award ” means an Award denominated in cash granted under Section 6(i) hereof.

(f) Change in Control ” means the occurrence of any of the following events:

(i) A “change in the ownership of the Company” which shall occur on the date that any one person, or more than one person acting as a group, acquires ownership of stock in the Company that, together with stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of the Company; however, if any one person or more than one person acting as a group is considered to own more than 50% of the total fair market value or total voting power of the stock of the Company, the acquisition of additional stock by the same person or persons will not be considered a “change in the ownership of the Company” (or to cause a “change in the effective control of the Company” within the meaning of Section 2(f)(ii) below) and an increase of the effective percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which the Company acquires its stock in exchange for property will be treated as an acquisition of stock for purposes of this paragraph; provided, further, however, that for purposes of this Section 2(f)(i), any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company shall not constitute a Change in Control.  This Section 2(f)(i) applies only when there is a transfer of the stock of the Company (or issuance of stock) and stock in the Company remains outstanding after the transaction.

(ii) A “change in the effective control of the Company” which shall occur on the date that either (A) any one person, or more than one person acting as a group, acquires (or has acquired during the twelve month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Company possessing 30% or more of the total voting power of the stock of the Company, except for any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company; or (B) a majority of the members of the Board are replaced during any twelve-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election.  For purposes of a “change in the effective control of the Company,” if any one person, or more than one person acting as a group, is considered to effectively control the Company within the meaning of this Section 2(f)(ii), the acquisition of additional control of the Company by the same person or persons is not considered a “change in the effective control of the Company,” or to cause a “change in the ownership of the Company” within the meaning of Section 2(f)(i) above.

(iii) A “change in the ownership of a substantial portion of the Company’s assets” which shall occur on the date that any one person, or more than one person acting as a group, acquires (or has acquired during the twelve month period ending on the date of the most recent acquisition by such person or persons) assets of the Company that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all the assets of the Company immediately prior to such acquisition or acquisitions.  For this purpose, gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.  Any transfer of assets to an entity that is controlled by the stockholders of the Company immediately

2

 


 

after the transfer, as provided in guidance issued pursuant to the Nonqualified Deferred Compensation Rules, shall not constitute a Change in Control.

For purposes of this Section 2(f), the provisions of section 318(a) of the Code regarding the constructive ownership of stock will apply to determine stock ownership; provided, that, stock underlying unvested options (including options exercisable for stock that is not substantially vested) will not be treated as owned by the individual who holds the option.  In addition, for purposes of this Section 2(f) and except as otherwise provided in an Award Agreement, “Company” includes (x) the Company, (y) the entity for whom a Participant performs the services for which an Award is granted, and (z) an entity that is a stockholder owning more than 50% of the total fair market value and total voting power (a “Majority Stockholder”) of the Company or the entity identified in (y) above, or any entity in a chain of entities in which each entity is a Majority Stockholder of another entity in the chain, ending in the Company or the entity identified in (y) above.

(g) Code ” means the United States Internal Revenue Code of 1986, as amended from time to time, including regulations thereunder and successor provisions and regulations thereto.

(h) Committee ” means a committee of two or more directors designated by the Board to administer this Plan; provided , however , that, unless otherwise determined by the Board,  the Committee shall consist solely of two or more directors, each of whom shall be a Qualified Member.

(i) Dividend Equivalent ” means a right, granted to an Eligible Person under Section 6(g), to receive cash, Stock, other Awards or other property equal in value to dividends paid with respect to a specified number of shares of Stock, or other periodic payments.

(j) Effective Date ” of the Plan as amended and restated is June 12, 2019, immediately after the receipt of stockholder approval of the Plan.

(k) Eligible Person ” means all officers and employees of the Company or of any of its Subsidiaries, and other persons who provide services to the Company or any of its Subsidiaries, including directors of the Company; provided, that, any such individual must be an “employee” of the Company or any of its parents or subsidiaries within the meaning of General Instruction A.1(a) to Form S-8 if such individual will be granted an award that shall, or may, be settled in Stock.  An employee on leave of absence may be considered as still in the employ of the Company or its Subsidiaries for purposes of eligibility for participation in this Plan.

(l) Exchange Act ” means the Securities Exchange Act of 1934, as amended from time to time, including rules thereunder and successor provisions and rules thereto.

(m) Fair Market Value ” means, as of any specified date, (i) if the Stock is listed on a national securities exchange, the closing sales price of the Stock, as reported on the stock exchange composite tape on that date (or if no sales occur on that date, on the last preceding date on which such sales of the Stock are so reported); (ii) if the Stock is not traded on a national

3

 


 

securities exchange but is traded over the counter at the time a determination of its fair market value is required to be made under the Plan, the average between the reported high and low bid and asked prices of Stock on the most recent date on which Stock was publicly traded; or (iii) in the event Stock is not publicly traded at the time a determination of its value is required to be made under the Plan, the amount determined by the Committee in its discretion in such manner as it deems appropriate, taking into account all factors the Committee deems appropriate including, without limitation, the Nonqualified Deferred Compensation Rules.

(n) Incentive Stock Option ” or “ ISO ” means any Option intended to be and designated as an incentive stock option within the meaning of section 422 of the Code or any successor provision thereto.

(o) Nonqualified Deferred Compensation Rules ” means the limitations or requirements of section 409A of the Code, as amended from time to time, including the guidance and regulations promulgated thereunder and successor provisions, guidance and regulations thereto.

(p) Nonstatutory Stock Option ” means any Option that is not intended to be an “incentive stock option” within the meaning of section 422 of the Code.

(q) Option ” means a right, granted to an Eligible Person under Section 6(b) hereof, to purchase Stock or other Awards at a specified price during specified time periods.

(r) Other Stock-Based Awards ” means Awards granted to an Eligible Person under Section 6(h) hereof.

(s) Outstanding Prior Awards ” means Options and shares of Restricted Stock granted under the Plan that are outstanding immediately prior to the Effective Date.

(t) Participant ” means a person who has been granted an Award under this Plan that remains outstanding, including a person who is no longer an Eligible Person.

(u) Performance Award ” means a right, granted to an Eligible Person under Section 6(k) hereof, to receive Awards based upon performance criteria specified by the Committee.

(v) Person ” means any person or entity of any nature whatsoever, specifically including an individual, a firm, a company, a corporation, a partnership, a limited liability company, a trust or other entity; a Person, together with that Person’s Affiliates and Associates (as those terms are defined in Rule 12b-2 under the Exchange Act, provided that “registrant” as used in Rule 12b-2 shall mean the Company), and any Persons acting as a partnership, limited partnership, joint venture, association, syndicate or other group (whether or not formally organized), or otherwise acting jointly or in concert or in a coordinated or consciously parallel manner (whether or not pursuant to any express agreement), for the purpose of acquiring, holding, voting or disposing of securities of the Company with such Person, shall be deemed a single “Person.”

4

 


 

(w) Qualified Member ” means a member of the Committee who is (i) a “Non-Employee Director” within the meaning of Rule 16b-3(b)(3) and (ii) “independent” under the listing standards or rules of the securities exchange upon which the Stock is traded, but only to the extent such independence is required in order to take the action at issue pursuant to such standards or rules.

(x) Restricted Stock ” means Stock granted to an Eligible Person under Section 6(d) hereof, that is subject to certain restrictions and to a risk of forfeiture.

(y) Restricted Stock Unit ” means a right, granted to an Eligible Person under Section 6(e) hereof, to receive Stock, cash or a combination thereof at the end of a specified deferral period.

(z) Rule 16b-3 ” means Rule 16b-3, promulgated by the Securities and Exchange Commission under section 16 of the Exchange Act, as amended from time to time and applicable to this Plan and Participants.

(aa) Securities Act ” means the Securities Act of 1933 and the rules and regulations promulgated thereunder, or any successor law, as it may be amended from time to time.

(bb) Stock ” means the Company’s Class A Common Stock, par value $0.001 per share, Class B Common Stock, par value $0.001 per share, such other securities as may be substituted (or re-substituted) for Stock pursuant to Section 8, and, if the Company has more than one class of Common Stock, then shares of any such class of Common Stock as the Committee may designate with respect to any Award.

(cc) Stock Award ” means unrestricted shares of Stock granted to an Eligible Person under Section 6(f) hereof.

(dd) Stock Appreciation Rights ” or “ SAR ” means a right granted to an Eligible Person under Section 6(c) hereof.

(ee) Subsidiary ” means with respect to the Company, any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by the Company.

(ff) Substitute Award ” means an Award granted under Section 6(j) hereof in substitution for a similar award as a result of certain business transactions.

3. Administration .  

(a) Authority of the Committee .  The Plan shall be administered by the Committee except to the extent the Board elects to administer the Plan, in which case references herein to the “Committee” shall be deemed to include references to the “Board.”  Subject to the express provisions of the Plan, Rule 16b-3, if applicable, and other applicable laws, the Committee shall have the authority, in its sole and absolute discretion, to: (i) designate Eligible Persons as Participants; (ii) determine the type or types of Awards to be granted to an Eligible Person; (iii)

5

 


 

determine the number of shares of Stock or amount of cash to be covered by Awards; (iv) determine the terms and conditions of any Award, consistent with the terms of the Plan, as well as the modification of such terms, which may include the acceleration of vesting, waiver of forfeiture restrictions, modification of the form of settlement of the Award (for example, from cash to Stock or vice versa), or modification of any other condition or limitation regarding an Award, based on such factors as the Committee shall determine, in its sole discretion; (v) determine whether, to what extent, and under what circumstances Awards may be vested, settled, exercised, canceled, or forfeited; (vi) interpret and administer the Plan and any instrument or agreement relating to an Award made under the Plan; (vii) establish, amend, suspend, or waive rules and regulations used to administer the Plan; and (viii) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan.  Subject to Rule 16b-3  and the Nonqualified Deferred Compensation Rules, in each case, as applicable, the Committee may correct any defect, supply any omission, or reconcile any inconsistency in the Plan, in any Award, or in any Award Agreement in the manner and to the extent it deems necessary or desirable to carry the Plan into effect, and the Committee shall be the sole and final judge of that necessity or desirability. Notwithstanding the foregoing, the Committee shall not have any discretion to (A) accelerate the payment of any Award that provides for a deferral of compensation under the Nonqualified Deferred Compensation Rules if such acceleration would subject a Participant to additional taxes under the Nonqualified Deferred Compensation Rules or (B) take any action that would violate any applicable law.  The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The determinations of the Committee on the matters referred to in this Section 3(a) shall be final and conclusive.

(b) Manner of Exercise of Committee Authority .  It is the intent of the Company that, to the fullest extent possible, the grant of any Awards to, or other transaction by, a Participant who is subject to section 16 of the Exchange Act shall be exempt from such section pursuant to an applicable exemption (except for transactions acknowledged in writing to be non-exempt by such Participant).  At any time that a member of the Committee is not a Qualified Member, any action of the Committee relating to an Award granted or to be granted to an Eligible Person who is then subject to section 16 of the Exchange Act in respect of the Company where such action is not taken by the full Board may be taken either (i) by a subcommittee, designated by the Committee, composed solely of two or more Qualified Members, or (ii) by the Committee but with each such member who is not a Qualified Member abstaining or recusing himself or herself from such action; provided , however , that, upon such abstention or recusal, the Committee remains composed solely of two or more Qualified Members.  Such action, authorized by such a subcommittee or by the Committee upon the abstention or recusal of such non-Qualified Member(s), shall be the action of the Committee for purposes of this Plan.  Any action of the Committee shall be final, conclusive and binding on all Persons, including the Company, its Subsidiaries, stockholders, Participants, beneficiaries, and transferees under Section 7(a)(iii) and (iv) hereof or other Persons claiming rights from or through a Participant.  For the avoidance of doubt, the full Board may take any action relating to an Award granted or to be granted to an Eligible Person who is then subject to section 16 of the Exchange Act in respect of the Company.

(c) Delegation of Authority .  The Committee may delegate (A) to any officer of the Company, irrespective of whether or not the officer is also a member of the Board, the power

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to perform administrative functions and grant all types of Awards under the Plan so long as the resolutions of the Board or Committee delegating such authority specifies (1) the total number of Awards that the officer may grant, and (2) with respect to Awards of Restricted Stock or Stock Awards, the time period during which such Awards may be granted and a minimum amount of consideration for which the Awards may be issued and (B) to any individual member of the Board (including an officer of the Company that serves as a member of the Board), any or all of the Committee’s powers and duties under the Plan, including the power to perform administrative functions and grant all types of Awards under the Plan, in the case of both (A) and (B), subject to such additional terms or limitations as the Committee shall provide and only to the extent that such delegation will not (i) violate state or corporate law or (ii) result in the loss of an exemption under Rule 16b-3(d)(1) for Awards granted to Participants subject to section 16 of the Exchange Act in respect of the Company.  Upon any such delegation, all references in the Plan to the “Committee,” other than in Section 8, shall be deemed to include any officer of the Company or member of the Board to whom such powers have been delegated by the Committee.  Any such delegation shall not limit such officer or director’s right to receive Awards under the Plan; provided , however , the officer or director may not grant Awards to himself or herself, a member of the Board, or any executive officer of the Company or an Affiliate, or take any action with respect to any Award previously granted to himself or herself, a member of the Board, or an individual who is an executive officer of the Company or an Affiliate. The Committee may also appoint agents to assist it in administering the Plan that are not executive officers of the Company or members of the Board, provided that such individuals may not be delegated the authority to grant or modify any Awards that will, or may, be settled in Stock.

(d) Limitation of Liability .  The Committee and each member thereof shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any officer or employee of the Company or any of its Subsidiaries, the Company’s legal counsel, independent auditors, consultants or any other agents assisting in the administration of this Plan.  Members of the Committee and any officer or employee of the Company or any of its Subsidiaries acting at the direction or on behalf of the Committee shall not be personally liable for any action or determination taken or made in good faith with respect to this Plan, and shall, to the fullest extent permitted by law, be indemnified and held harmless by the Company with respect to any such action or determination.

(e) Participants in Non-U.S. Jurisdictions . Notwithstanding any provision of the Plan to the contrary, to comply with applicable laws in countries other than the United States in which the Company or any of its Affiliates operates or has employees, directors or other service providers from time to time, or to ensure that the Company complies with any applicable requirements of foreign securities exchanges, the Committee, in its sole discretion, shall have the power and authority to: (i) determine which of its Affiliates shall be covered by the Plan; (ii) determine which Eligible Persons outside the United States are eligible to participate in the Plan; (iii) modify the terms and conditions of any Award granted to Eligible Persons outside the United States to comply with applicable foreign laws or listing requirements of any foreign exchange; (iv) establish sub-plans and modify exercise procedures and other terms and procedures, to the extent such actions may be necessary or advisable (any such sub-plans and/or modifications shall be attached to the Plan as appendices), provided , however , that no such sub-plans and/or modifications shall increase the share limitations contained in Section 4(a); and (v) take any action,

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before or after an Award is granted, that it deems advisable to comply with any applicable governmental regulatory exemptions or approval or listing requirements of any such foreign securities exchange.  For purposes of the Plan, all references to foreign laws, rules, regulations or taxes shall be references to the laws, rules, regulations and taxes of any applicable jurisdiction other than the United States or a political subdivision thereof.  

4. Stock Subject to Plan .  

(a) Overall Number of Shares Available for Delivery .  Subject to adjustment in a manner consistent with any adjustment made pursuant to Section 8, the total number of shares of Stock reserved and available for issuance in connection with Awards under this Plan as of the Effective Date shall be 6,804,443 shares (“the Share Pool”) ; provided, however, that the shares of Stock reserved and available for issuance in connection with Awards under this Plan shall be available for issuance only in connection with shares of Stock issued in connection with Outstanding Prior Awards and shares of Stock issued in connection with Awards granted on or after the Effective Date .   On January 1, 2020 and January 1 of each calendar year occurring thereafter and prior to the expiration of the Plan, the Share Pool will automatically be increased by an amount equal to four percent (4%) of the number of shares of Stock outstanding on a fully diluted basis as of the close of business on the immediately preceding December 31 (calculated by adding to the number of shares of Stock outstanding (of all classes of Common Stock), all outstanding securities convertible into Stock (of all classes of Common Stock) on such date on an as converted basis). Notwithstanding the foregoing, the Committee may act prior to January 1 of a given year to provide that there will be no such automatic increase in the Share Pool for such year or that the increase in the Share Pool for such year will be lesser number of shares of Stock than would otherwise occur pursuant to the preceding sentence.   For purposes of clarity, the only shares of Stock that will count against the share limit calculated pursuant to this Section 4(a) are shares of Stock issued in connection with Awards granted after the Effective Date and shares of Stock issued in connection with Outstanding Prior Awards. Notwithstanding the number of shares of Stock available in the Share Pool, no more than 6,804,443 shares of Stock will be available for issuance in connection with Incentive Stock Options under the Plan.

(b) Application of Limitation to Grants of Awards .  Subject to Section 4(c), no Award may be granted if the number of shares of Stock to be delivered in connection with such Award exceeds the number of shares of Stock remaining available under this Plan and not subject to Awards.  The Committee may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or Substitute Awards) and make adjustments if the number of shares of Stock actually delivered differs from the number of shares previously counted in connection with an Award.

(c) Availability of Shares Not Issued under Awards .  Shares of Stock subject to an Award under this Plan (including any Outstanding Prior Award) that expires or is canceled, forfeited, exchanged, settled in cash or otherwise terminated, including (i) shares forfeited with respect to Restricted Stock, and (ii) the number of shares withheld or surrendered to the Company in payment of any exercise or purchase price of an Award or taxes relating to Awards, will again be deemed reserved and available for issuance under this Plan.

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(d) Stock Offered .  The shares to be delivered under the Plan shall be made available from (i) authorized but unissued shares of Stock, (ii) Stock held in the treasury of the Company, or (iii) previously issued shares of Stock reacquired by the Company, including shares purchased on the open market.

5. Eligibility; Per Person Award Limitations.   Awards may be granted under this Plan only to Persons who are Eligible Persons at the time of grant thereof. In each calendar year during any part of which this Plan is in effect, an Eligible Person who is serving as a member of the Board and who is not an employee of the Company may not be granted Awards having a value, determined, if applicable, pursuant to Financial Accounting Standards Board Accounting Standards Codification 718, on the date of grant in excess of $1,000,000 multiplied by the number of full or partial calendar years in any performance period established with respect to an Award, if applicable.  

6. Specific Terms of Awards .  

(a) General .  Awards may be granted on the terms and conditions set forth in this Section 6.  Awards granted under this Plan may, in the discretion of the Committee, be granted either alone, in addition to, or in tandem with any other Award.  In addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or thereafter (subject to Section 8(a)), such additional terms and conditions, not inconsistent with the provisions of this Plan, as the Committee shall determine. The Committee may provide in an Award Agreement terms and conditions that are more beneficial to a Participant than are otherwise provided by the Plan if the Committee determines that such terms and conditions (i) are not expressly prohibited by the Plan, (ii) will not invalidate an exemption from section 16 of the Exchange Act with respect to the grant, settlement or exercise of an Award, (iii) will not subject a Participant to additional taxes under the Nonqualified Deferred Compensation Rules, (iv) will not prevent the qualification of an Incentive Stock Option as such within the meaning of section 422 of the Code, and (v) will neither violate nor require stockholder approval under any applicable law or the standards or rules of the securities exchange upon which the Stock is traded.  Further, notwithstanding any provision of the Plan or an Award Agreement, a Participant can consent to terms under or with respect to an Award or the Stock issuable pursuant to an Award that are less beneficial to the Participant than the terms of the Plan or an Award Agreement.

(b) Options .  The Committee is authorized to grant Options, which may be designated as either ISOs or Nonstatutory Stock Options, to Eligible Persons on the following terms and conditions:

(i) Exercise Price .  Each Award Agreement evidencing an Option shall state the exercise price per share of Stock (the “ Exercise Price ”); provided , however , that, except as provided in Section 6(j), the Exercise Price per share of Stock subject to an Option shall not be less than the greater of (A) the par value per share of the Stock or (B) 100% of the Fair Market Value per share of the Stock as of the date of grant of the Option (or in the case of an ISO granted to an individual who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or its parent or any Subsidiary, 110% of the Fair Market Value per share of the Stock on the date of grant).

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(ii) Time and Method of Exercise .  The Committee shall determine the time or times at which or the circumstances under which an Option may be exercised in whole or in part (including based on achievement of performance goals pursuant to Section 6(k) hereof and/or future service requirements), the methods by which such Exercise Price may be paid or deemed to be paid, the form of such payment, including without limitation, cash or cash equivalents, Stock (including previously owned shares or through a cashless or broker-assisted exercise or other reduction of the amount of shares otherwise issuable pursuant to the Option), other Awards or awards granted under other plans of the Company or any Subsidiary, other property, or any other legal consideration the Committee deems appropriate (including notes or other contractual obligations of Participants to make payment on a deferred basis), and the methods by or forms in which Stock will be delivered or deemed to be delivered to Participants, including, but not limited to, the delivery of Restricted Stock subject to Section 6(d).  In the case of an exercise whereby the Exercise Price is paid with Stock, such Stock shall be valued as of the date of exercise.  No Option may be exercisable for a period of more than ten (10) years following the date of grant of the Option (or in the case of an ISO granted to an individual who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or its parent or any Subsidiary, for a period of no more than five (5) years following the date of grant of the ISO).

(iii) ISOs .  The terms of any ISO granted under this Plan shall comply in all respects with the provisions of section 422 of the Code.  ISOs may only be granted to Eligible Persons who are employees of the Company or employees of a parent or Subsidiary corporation of the Company.  Except as otherwise provided in Section 8, no term of this Plan relating to ISOs (including any SAR in tandem therewith) shall be interpreted, amended or altered, nor shall any discretion or authority granted under this Plan be exercised, so as to disqualify either this Plan or any ISO under section 422 of the Code, unless the Participant has first requested the change that will result in such disqualification.  ISOs shall not be granted more than ten years after the earlier of the adoption of this Plan or the approval of this Plan by the Company’s stockholders. Notwithstanding the foregoing, the Fair Market Value of shares of Stock subject to an ISO and the aggregate Fair Market Value of shares of stock of any parent or subsidiary corporation (within the meaning of sections 424(e) and (f) of the Code) subject to any other ISO (within the meaning of section 422 of the Code) of the Company or a parent or subsidiary corporation (within the meaning of sections 424(e) and (f) of the Code) that first becomes purchasable by a Participant in any calendar year may not (with respect to that Participant) exceed $100,000, or such other amount as may be prescribed under section 422 of the Code or applicable regulations or rulings from time to time.  As used in the previous sentence, Fair Market Value shall be determined as of the date the ISOs are granted.  Failure to comply with this provision shall not impair the enforceability or exercisability of any Option, but shall cause the excess amount of shares to be reclassified in accordance with the Code.  

(c) Stock Appreciation Rights .  The Committee is authorized to grant SARs to Eligible Persons on the following terms and conditions:

(i) Right to Payment .  An SAR shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of

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one share of Stock on the date of exercise over (B) the grant price of the SAR as determined by the Committee.

(ii) Grant Price . Each Award Agreement evidencing an SAR shall state the grant price per share of Stock; provided , however , that the grant price per share of Stock subject to an SAR shall not be less than the greater of (A) the par value per share of the Stock or (B) 100% of the Fair Market Value per share of the Stock as of the date of grant of the SAR.  

(iii) Time and Method of Exercise and Settlement . Except as otherwise provided herein, the Committee shall determine, at the date of grant or thereafter, the number of shares of Stock to which the SAR relates, the time or times at which and the circumstances under which an SAR may be vested and/or exercised in whole or in part (including based on achievement of performance goals pursuant to Section 6(k) hereof and/or future service requirements), the method of exercise, method of settlement, form of consideration payable upon settlement, method by or forms in which Stock (if any) will be delivered to Participants, and any other terms and conditions of any SAR.  SARs may be either free-standing or in tandem with other Awards.  No SAR may be exercisable for a period of more than ten (10) years following the date of grant of the SAR.

(iv) Rights Related to Options .  An SAR granted in connection with an Option shall entitle a Participant, upon exercise, to surrender that Option or any portion thereof, to the extent unexercised, and to receive payment of an amount determined by multiplying (A) the difference obtained by subtracting the Exercise Price with respect to a share of Stock specified in the related Option from the Fair Market Value of a share of Stock on the date of exercise of the SAR, by (B) the number of shares as to which that SAR has been exercised.  The Option shall then cease to be exercisable to the extent surrendered.  SARs granted in connection with an Option shall be subject to the terms and conditions of the Award Agreement governing the Option, which shall provide that the SAR is exercisable only at such time or times and only to the extent that the related Option is exercisable and shall not be transferable except to the extent that the related Option is transferrable.

(d) Restricted Stock .  The Committee is authorized to grant Restricted Stock to Eligible Persons on the following terms and conditions:

(i) Grant and Restrictions .  Restricted Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals pursuant to Section 6(k) hereof and/or future service requirements), in such installments or otherwise, as the Committee may determine at the date of grant or thereafter.  During the restricted period applicable to the Restricted Stock, the Restricted Stock may not be sold, transferred, pledged, hypothecated, margined or otherwise encumbered by the Participant.

(ii) Dividends and Splits .  As a condition to the grant of an Award of Restricted Stock, the Committee may allow a Participant to elect, or may require, that any cash dividends paid on a share of Restricted Stock be automatically reinvested in additional shares of

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Restricted Stock, applied to the purchase of additional Awards under this Plan or deferred without interest to the date of vesting of the associated Award of Restricted Stock; provided , that, to the extent applicable, any such election is intended to comply with the Nonqualified Deferred Compensation Rules.  Unless otherwise determined by the Committee and specified in the applicable Award Agreement, Stock distributed in connection with a Stock split or Stock dividend, and other property (other than cash) distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Stock or other property has been distributed.

(e) Restricted Stock Units .  The Committee is authorized to grant Restricted Stock Units to Eligible Persons, subject to the following terms and conditions:

(i) Award and Restrictions .  Restricted Stock Units shall be subject to such restrictions (which may include a risk of forfeiture) as the Committee may impose, if any, which restrictions may lapse at the expiration of the deferral period or at earlier specified times (including based on achievement of performance goals and/or future service requirements), separately or in combination, in installments or otherwise, as the Committee may determine.  

(ii) Settlement .  Settlement of Restricted Stock Units shall occur upon expiration of the deferral period specified for such Restricted Stock Unit by the Committee (or, if permitted by the Committee, as elected by the Participant).  Restricted Stock Units shall be satisfied by the delivery of (A) a number of shares of Stock equal to the number of RSUs vesting on such date, or (B) cash in an amount equal to the Fair Market Value of the specified number of shares of Stock covered by the vesting Restricted Stock Units, or a combination thereof, as determined by the Committee at the date of grant or thereafter.

(f) Stock Awards .  The Committee is authorized to grant a Stock Award under the Plan to any Eligible Person as a bonus, as additional compensation, or in lieu of cash compensation the individual is otherwise entitled to receive, in such amounts and subject to such other terms as the Committee in its discretion determines to be appropriate.

(g) Dividend Equivalents .  The Committee is authorized to grant Dividend Equivalents to an Eligible Person, entitling the Eligible Person to receive cash, Stock, other Awards, or other property equal in value to dividends or other distributions paid with respect to a specified number of shares of Stock, or other periodic payments.  Dividend Equivalents may be awarded on a free-standing basis or in connection with another Award (other than an Award of Restricted Stock or a Stock Award).  The Committee may provide that Dividend Equivalents shall be paid or distributed when accrued or at a later specified date, and if distributed at a later date may be deemed to have been reinvested in additional Stock, Awards, or other investment vehicles or accrued in a bookkeeping account without interest, and subject to such restrictions on transferability and risks of forfeiture, as the Committee may specify.  With respect to Dividend Equivalents granted in connection with another Award, absent a contrary provision in the Award Agreement, such Dividend Equivalents shall be subject to the same restrictions and risk of forfeiture as the Award with respect to which the dividends accrue and shall not be paid unless and until such Award has vested.  Notwithstanding the foregoing, Dividend Equivalents shall only be

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paid in a manner that is either exempt from or in compliance with the Nonqualified Deferred Compensation Rules.

(h) Other Stock-Based Awards .  The Committee is authorized, subject to limitations under applicable law, to grant to Eligible Persons such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock, as deemed by the Committee to be consistent with the purposes of this Plan, including without limitation convertible or exchangeable debt securities, other rights convertible or exchangeable into Stock, purchase rights for Stock, Awards with value and payment contingent upon performance of the Company or any other factors designated by the Committee, and Awards valued by reference to the book value of Stock or the value of securities of or the performance of specified Subsidiaries of the Company.  The Committee shall determine the terms and conditions of such Other Stock-Based Awards.  Stock delivered pursuant to an Other-Stock Based Award in the nature of a purchase right granted under this Section 6(h) shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, cash, Stock, other Awards, or other property, as the Committee shall determine.  

(i) Cash Awards .  The Committee is authorized to grant Cash Awards, on a free-standing basis or as an element of or supplement to, or in lieu of, any other Award under this Plan to Eligible Persons in such amounts and subject to such other terms (including the achievement of performance goals pursuant to Section 6(k) hereof and/or future service requirements) as the Committee in its discretion determines to be appropriate.

(j) Substitute Awards; No Repricing .  Awards may be granted in substitution or exchange for any other Award granted under the Plan or under another plan of the Company or any other right of an Eligible Person to receive payment from the Company.  Awards may be also be granted under the Plan in substitution for similar awards held by individuals who become Eligible Persons as a result of a merger, consolidation or acquisition of another entity or the assets of another entity by or with the Company or an Affiliate of the Company.  Such Substitute Awards referred to in the immediately preceding sentence that are Options or Stock Appreciation Rights may have an exercise price that is less than the Fair Market Value of a share of Stock on the date of the substitution if such substitution complies with the Nonqualified Deferred Compensation Rules and other applicable laws and exchange rules.  Except as provided in this Section 6(j) or in Section 8 hereof, the terms of outstanding Awards may not be amended to reduce the Exercise Price or grant price of outstanding Options or SARs or to cancel outstanding Options and SARs in exchange for cash, other Awards or Options or SARs with an Exercise Price or grant price that is less than the Exercise Price or grant price of the original Options or SARs without the approval of the stockholders of the Company.

(k) Performance Awards . The Committee is authorized to designate any of the Awards granted under the foregoing provisions of this Section 6 as Performance Awards.  The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions applicable to a Performance Award, and may exercise its discretion to reduce or increase the amounts payable under any Performance Award.  Performance conditions may differ for Performance Awards granted to any one

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Participant or to different Participants.  The performance period applicable to any Performance Award shall be set by the Committee in its discretion but shall not exceed ten years.

7. Certain Provisions Applicable to Awards .  

(a) Limit on Transfer of Awards .

(i) Except as provided in Section 7(a)(iii) and (iv) below, each Option and SAR shall be exercisable only by the Participant during the Participant’s lifetime, or by the Person to whom the Participant’s rights shall pass by will or the laws of descent and distribution. Notwithstanding the foregoing, an ISO shall not be transferable other than by will or the laws of descent and distribution.

(ii) Except as provided in Section 7(a)(iii) and (iv) below, no Award other than a Stock Award, and no right under any such Award, may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate.

(iii) To the extent specifically provided by the Committee, an Award may be transferred by a Participant without consideration to immediate family members or related family trusts, limited partnerships or similar entities or on such terms and conditions as the Committee may from time to time establish.

(iv) An Award may be transferred pursuant to a domestic relations order entered or approved by a court of competent jurisdiction upon delivery to the Company of a written request for such transfer and a certified copy of such order.

(b) Form and Timing of Payment under Awards; Deferrals .  Subject to the terms of this Plan and any applicable Award Agreement, payments to be made by the Company or any of its Subsidiaries upon the exercise or settlement of an Award may be made in such forms as the Committee shall determine in its discretion, including without limitation cash, Stock, other Awards or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis (which may be required by the Committee or permitted at the election of the Participant on terms and conditions established by the Committee); provided , however , that any such deferred or installment payments will be set forth in the Award Agreement and/or otherwise made in a manner that will not result in additional taxes under the Nonqualified Deferred Compensation Rules.  Payments may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents or other amounts in respect of installment or deferred payments denominated in Stock.  This Plan shall not constitute an “employee benefit plan” for purposes of section 3(3) of the Employee Retirement Income Security Act of 1974, as amended.

(c) Evidencing Stock . The Stock or other securities of the Company delivered pursuant to an Award may be evidenced in any manner deemed appropriate by the Committee in its sole discretion, including, but not limited to, in the form of a certificate issued in the name of

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the Participant or by book entry, electronic or otherwise and shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Stock or other securities are then listed, and any applicable federal, state or other laws, and the Committee may cause a legend or legends to be inscribed on any such certificates to make appropriate reference to such restrictions.  If certificates representing Restricted Stock are registered in the name of the Participant, the Committee may require that such certificates bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock, that the Company retain physical possession of the certificates, and that the Participant deliver a stock power to the Company, endorsed in blank, related to the Restricted Stock

(d) Consideration for Grants . Awards may be granted for such consideration, including services, as the Committee shall determine, but shall not be granted for less than the minimum lawful consideration.

(e) Additional Agreements .  Each Eligible Person to whom an Award is granted under this Plan may be required to agree in writing, as a condition to the grant of such Award or otherwise, to subject an Award that is exercised or settled following such Eligible Person’s termination of employment or service to a general release of claims and/or a noncompetition or other restricted covenant agreement in favor of the Company and its Affiliates, with the terms and conditions of such agreement(s) to be determined in good faith by the Committee.  

(f) Termination of Service .  Except as provided herein, the treatment of an Award upon a termination of employment or any other service relationship by and between a Participant and the Company or any Affiliate shall be specified in the applicable Award Agreement.

8. Amendment; Subdivision or Consolidation; Recapitalization; Change in Control; Reorganization.  

(a) Amendments to the Plan and Awards .  The Board may amend, alter, suspend, discontinue or terminate this Plan or the Committee’s authority to grant Awards under this Plan without the consent of stockholders or Participants, except that any amendment or alteration to this Plan, including any increase in any share limitation, shall be subject to the approval of the Company’s stockholders not later than the annual meeting next following such Board action if such stockholder approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Stock may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other such changes to this Plan to stockholders for approval; provided , that, without the consent of an affected Participant, no such Board action may materially and adversely affect the rights of such Participant under any previously granted and outstanding Award.  The Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue or terminate any Award theretofore granted and any Award Agreement relating thereto, except as otherwise provided in this Plan; provided , however , that, without the consent of an affected Participant, no such Committee action may materially and adversely affect the rights of such Participant under such Award.  For purposes of

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clarity, any adjustments made to Awards pursuant to Section 8(b) through 8(g) will be deemed not to materially and adversely affect the rights of any Participant under any previously granted and outstanding Award and therefore may be made without the consent of affected Participants.   

(b) Existence of Plans and Awards .  The existence of this Plan and the Awards granted hereunder shall not affect in any way the right or power of the Company, the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities ahead of or affecting Stock or the rights thereof, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding.  In no event will any action taken by the Committee pursuant to this Section 8 result in the creation of deferred compensation within the meaning of the Nonqualified Deferred Compensation Rules.

(c) Subdivision or Consolidation of Shares .  The terms of an Award and the share limitations under the Plan shall be subject to adjustment by the Committee from time to time, in accordance with the following provisions:

(i) If at any time, or from time to time, the Company shall subdivide as a whole (by reclassification, by a Stock split, by the issuance of a distribution on Stock payable in Stock, or otherwise) the number of shares of Stock then outstanding into a greater number of shares of Stock or in the event the Company distributes an extraordinary cash dividend, then, as appropriate (A) the maximum number of shares of Stock available for the Plan or in connection with Awards as provided in Section 4 (including the annual increase in such share limit) and Section 5 shall be increased proportionately, and the kind of shares or other securities available for the Plan shall be appropriately adjusted, (B) the number of shares of Stock (or other kind of shares or securities) that may be acquired under any then outstanding Award shall be increased proportionately, and (C) the price (including the Exercise Price or grant price) for each share of Stock (or other kind of shares or securities) subject to then outstanding Awards shall be reduced proportionately, without changing the aggregate purchase price or value as to which outstanding Awards remain exercisable or subject to restrictions.

(ii) If at any time, or from time to time, the Company shall consolidate as a whole (by reclassification, by reverse Stock split, or otherwise) the number of shares of Stock then outstanding into a lesser number of shares of Stock, then, as appropriate (A) the maximum number of shares of Stock available for the Plan or in connection with Awards as provided in Section 4 (including the annual increase in such share limit) and Section 5 shall be decreased proportionately, and the kind of shares or other securities available for the Plan shall be appropriately adjusted, (B) the number of shares of Stock (or other kind of shares or securities) that may be acquired under any then outstanding Award shall be decreased proportionately, and (C) the price (including the exercise price) for each share of Stock (or other kind of shares or securities) subject to then outstanding Awards shall be increased proportionately, without changing the aggregate purchase price or value as to which outstanding Awards remain exercisable or subject to restrictions.

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(iii) Whenever the number of shares of Stock subject to outstanding Awards and the price for each share of Stock subject to outstanding Awards are required to be adjusted as provided in this Section 8(c), the Committee shall promptly prepare a notice setting forth, in reasonable detail, the event requiring adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the change in price and the number of shares of Stock, other securities, cash, or property purchasable subject to each Award after giving effect to the adjustments.  The Committee shall promptly provide each affected Participant with such notice.

(d) Recapitalization .  If the Company recapitalizes, reclassifies its capital stock, or otherwise changes its capital structure (a “ recapitalization ”) without the occurrence of a Change in Control, the number and class of shares of Stock covered by an Award theretofore granted shall be adjusted so that such Award shall thereafter cover the number and class of shares of Stock and securities to which the holder would have been entitled pursuant to the terms of the recapitalization if, immediately prior to the recapitalization, the holder had been the holder of record of the number of shares of Stock then covered by such Award and the share limitations provided in Sections 4 and 5 shall be adjusted in a manner consistent with the recapitalization.

(e) Additional Issuances .  Except as expressly provided herein, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to Awards theretofore granted or the purchase price per share of Stock, if applicable.

(f) Change in Control and Other Events .  Notwithstanding any other provisions of the Plan or an Award Agreement to the contrary, upon a Change in Control or changes in the outstanding Stock by reason of a recapitalization, reorganization, merger, consolidation, combination, exchange or other relevant change in capitalization occurring after the date of the grant of any Award and not otherwise provided for by this Section 8, the Committee, acting in its sole discretion without the consent or approval of any holder, may effect one or more of the following alternatives, which may vary among individual holders and which may vary among Options, SARs or other Awards held by any individual holder: (i) remove any applicable forfeiture restrictions on any Award; (ii) accelerate the time of exercisability of an Award so that such Award may be exercised in full or in part for a limited period of time on or before a date specified by the Committee, before or after such Change in Control, after which specified date all unexercised Awards and all rights of holders thereunder shall terminate; (iii) provide for a cash payment with respect to outstanding Awards by requiring the mandatory surrender to the Company by selected holders of some or all of the outstanding Awards held by such holders (irrespective of whether such Awards are then vested or exercisable pursuant to the Plan) as of a date, before or after such Change in Control, specified by the Committee, in which event the Committee shall thereupon cancel such Awards (with respect to all shares subject to such Awards) and pay to each holder an amount of cash (or other consideration including securities or other property) per Award (other than a Dividend Equivalent or Cash Award) equal to the Change in Control Price (as defined below), less the Exercise Price with respect to an Option and less the grant price with respect to a

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SAR, as applicable to such Awards; provided , however , that to the extent the exercise price of an Option or an SAR exceeds the Change in Control Price, such award may be canceled for no consideration; or (iv) make such other adjustments to Awards then outstanding as the Committee deems appropriate to reflect such Change in Control, provided, that such adjustment may not materially and adversely affect the rights of a Participant, as determined in the sole discretion of the Committee, without the consent of such Participant (including, but not limited to, (x) the substitution, assumption, or continuation of Awards by the successor company or a parent or subsidiary thereof for new awards, and (y) the adjustment as to the number and price of shares of Stock or other consideration subject to such Awards); provided , however , that the Committee may determine in its sole discretion that no adjustment is necessary to Awards then outstanding.

(g) Change in Control Price .  The “ Change in Control Price ” shall equal the amount determined in the following clause (i), (ii), (iii), (iv) or (v), whichever is applicable, as follows:  (i) the price per share offered to holders of Stock in any merger or consolidation, (ii) the per share Fair Market Value of the Stock immediately before the Change in Control without regard to assets sold in the Change in Control and assuming the Company has received the consideration paid for the assets in the case of a sale of the assets, (iii) the amount distributed per share of Stock in a dissolution transaction, (iv) the price per share offered to holders of Stock in any tender offer or exchange offer whereby a Change in Control takes place, or (v) if such Change in Control occurs other than pursuant to a transaction described in clauses (i), (ii), (iii), or (iv) of this Section 8(g), the Fair Market Value per share of the Stock that may otherwise be obtained with respect to such Awards or to which such Awards track, as determined by the Committee as of the date determined by the Committee to be the date of cancellation and surrender of such Awards.  In the event that the consideration offered to stockholders of the Company in any transaction described in this Section 8(g) or in Section 8(f) consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash and such determination shall be binding on all affected Participants to the extent applicable to Awards held by such Participants.

9. General Provisions .   

(a) Tax Withholding .  The Company and any of its Subsidiaries are authorized to withhold from any Award granted, or any payment relating to an Award under this Plan, including from a distribution of Stock, amounts of withholding and other taxes due or potentially payable in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company, its Subsidiaries and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award.  The Committee shall determine, in its sole discretion, the form of payment acceptable for such tax withholding obligations, including, without limitation, the delivery of cash or cash equivalents, Stock (including previously owned shares, net settlement, a broker-assisted sale, or other cashless withholding or reduction of the amount of shares otherwise issuable or delivered pursuant to the Award), other property, or any other legal consideration the Committee deems appropriate.  Any determination made by the Committee to allow a Participant who is subject to Rule 16b-3 to pay taxes with shares of Stock through net settlement or previously owned shares shall be approved by a committee made up of two or more Qualified Members or the full Board. If such tax obligations are satisfied through the withholding of shares of Stock that are otherwise

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issuable to the Participant pursuant to an Award (or through the surrender of shares of Stock by the Participant to the Company), the maximum number of shares of Stock that may be so withheld (or surrendered) shall be the number of shares of Stock that have an aggregate Fair Market Value on the date of withholding or repurchase equal to the aggregate amount of such tax liabilities determined based on the greatest withholding rates for federal, state, foreign and/or local tax purposes, including payroll taxes, that may be utilized without creating adverse accounting treatment with respect to such Award, as determined by the Committee.

(b) Limitation on Rights Conferred under Plan .  Neither this Plan nor any action taken hereunder shall be construed as (i) giving any Eligible Person or Participant the right to continue as an Eligible Person or Participant or in the employ or service of the Company or any of its Subsidiaries, (ii) interfering in any way with the right of the Company or any of its Subsidiaries to terminate any Eligible Person’s or Participant’s employment or service relationship at any time, (iii) giving an Eligible Person or Participant any claim to be granted any Award under this Plan or to be treated uniformly with other Participants and/or employees and/or other service providers, or (iv) conferring on a Participant any of the rights of a stockholder of the Company unless and until the Participant is duly issued or transferred shares of Stock in accordance with the terms of an Award.

(c) Governing Law; Submission to Jurisdiction .  All questions arising with respect to the provisions of the Plan and Awards shall be determined by application of the laws of the State of Delaware, without giving effect to any conflict of law provisions thereof, except to the extent Delaware law is preempted by federal law.  The obligation of the Company to sell and deliver Stock hereunder is subject to applicable federal and state laws and to the approval of any governmental authority required in connection with the authorization, issuance, sale, or delivery of such Stock. With respect to any claim or dispute related to or arising under this Plan, the Company and the Participants consent to the exclusive jurisdiction, forum and venue of the state and federal courts located in Dallas County, Texas.

(d) Severability and Reformation .  If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable law or, if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect. If any of the terms or provisions of this Plan or any Award Agreement conflict with the requirements of Rule 16b-3 (as those terms or provisions are applied to Eligible Persons who are subject to section 16(b) of the Exchange Act) or section 422 of the Code (with respect to Incentive Stock Options), then those conflicting terms or provisions shall be deemed inoperative to the extent they so conflict with the requirements of Rule 16b-3 (unless the Board or the Committee, as appropriate, has expressly determined that the Plan or such Award should not comply with Rule 16b-3) or section 422 of the Code, in each case, only to the extent such sections of the Code are applicable.  With respect to Incentive Stock Options, if this Plan does not contain any provision required to be included herein under section 422 of the Code, that provision shall be deemed to be incorporated herein with the same force and effect as if that

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provision had been set out at length herein; provided , further, that, to the extent any Option that is intended to qualify as an Incentive Stock Option cannot so qualify, that Option (to that extent) shall be deemed a Nonstatutory Stock Option for all purposes of the Plan.

(e) Unfunded Status of Awards; No Trust or Fund Created .  This Plan is intended to constitute an “unfunded” plan for certain incentive awards. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person.  To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any general unsecured creditor of the Company or such Affiliate.

(f) Nonexclusivity of this Plan .  Neither the adoption of this Plan by the Board nor its submission to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board or a committee thereof to adopt such other incentive arrangements as it may deem desirable.  Nothing contained in this Plan shall be construed to prevent the Company or any of its Subsidiaries from taking any corporate action which is deemed by the Company or such Subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on this Plan or any Award made under this Plan. No employee, beneficiary or other Person shall have any claim against the Company or any of its Subsidiaries as a result of any such action.

(g) Fractional Shares .  No fractional shares of Stock shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine in its sole discretion whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional shares of Stock or whether such fractional shares of Stock or any rights thereto shall be canceled, terminated, or otherwise eliminated with or without consideration.

(h) Headings .  Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference.  Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.

(i) Facility of Payment .  Any amounts payable hereunder to any individual under legal disability or who, in the judgment of the Committee, is unable to manage properly his financial affairs, may be paid to the legal representative of such individual, or may be applied for the benefit of such individual in any manner that the Committee may select, and the Company shall be relieved of any further liability for payment of such amounts.

(j) Gender and Number .  Words in the masculine gender shall include the feminine gender, the plural shall include the singular and the singular shall include the plural.

(k) Conditions to Delivery of Stock .  Nothing herein or in any Award Agreement shall require the Company to issue any shares with respect to any Award if that issuance would, in the opinion of counsel for the Company, constitute a violation of the Securities Act or any similar or superseding statute or statutes, any other applicable statute or regulation, or the rules of any applicable securities exchange or securities association, as then in effect.  In

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addition, each Participant who receives an Award under this Plan shall not sell or otherwise dispose of Stock that is acquired upon grant or vesting of an Award in any manner that would constitute a violation of any applicable federal or state securities laws, the Plan or the rules, regulations or other requirements of the Securities and Exchange Commission or any stock exchange upon which the Stock is then listed.  At the time of any exercise of an Option or Stock Appreciation Right, or at the time of any grant of any other Award the Company may, as a condition precedent to the exercise of such Option or Stock Appreciation Right or settlement of any other Award, require from the Participant (or in the event of his or her death, his or her legal representatives, heirs, legatees, or distributees) such written representations, if any, concerning the holder’s intentions with regard to the retention or disposition of the shares of Stock being acquired pursuant to the Award and such written covenants and agreements, if any, as to the manner of disposal of such shares as, in the opinion of counsel to the Company, may be necessary to ensure that any disposition by that holder (or in the event of the holder’s death, his or her legal representatives, heirs, legatees, or distributees) will not involve a violation of the Securities Act or any similar or superseding statute or statutes, any other applicable state or federal statute or regulation, or any rule of any applicable securities exchange or securities association, as then in effect.  Stock or other securities shall not be delivered pursuant to any Award until payment in full of any amount required to be paid pursuant to the Plan or the applicable Award Agreement (including, without limitation, any Exercise Price, grant price, or tax withholding) is received by the Company.

(l) Section 409A of the Code .  It is the general intention, but not the obligation, of the Committee to design Awards to comply with or to be exempt from the Nonqualified Deferred Compensation Rules, and Awards will be operated and construed accordingly. Neither this Section 9(l) nor any other provision of the Plan is or contains a representation to any Participant regarding the tax consequences of the grant, vesting, exercise, settlement, or sale of any Award (or the Stock underlying such Award) granted hereunder, and should not be interpreted as such.  In no event shall the Company be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by the Employee on account of non-compliance with the Nonqualified Deferred Compensation Rules.  Notwithstanding any provision in this Plan or an Award Agreement to the contrary, in the event that a “specified employee” (as defined under the Nonqualified Deferred Compensation Rules) becomes entitled to a payment under an Award that would be subject to additional taxes and interest under the Nonqualified Deferred Compensation Rules if the Participant’s receipt of such payment or benefits is not delayed until the earlier of (i) the date of the Participant’s death, or (ii) the date that is six months after the Participant’s “separation from service,” as defined under the Nonqualified Deferred Compensation Rules (such date, the “ Section 409A Payment Date ”), then such payment or benefit shall not be provided to the Participant until the Section 409A Payment Date.  Any amounts subject to the preceding sentence that would otherwise be payable prior to the Section 409A Payment Date will be aggregated and paid in a lump sum without interest on the Section 409A Payment Date.  The applicable provisions of the Nonqualified Deferred Compensation Rules are hereby incorporated by reference and shall control over any Plan or Award Agreement provision in conflict therewith.  

(m) Clawback .  This Plan is subject to any written clawback policies that the Company, with the approval of the Board, may adopt.  Any such policy may subject a Participant’s Awards and amounts paid or realized with respect to Awards under this Plan to reduction, cancelation, forfeiture or recoupment if certain specified events or wrongful conduct occur,

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including but not limited to an accounting restatement due to the Company’s material noncompliance with financial reporting regulations or other events or wrongful conduct specified in any such clawback policy adopted to conform to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and rules promulgated thereunder by the Securities and Exchange Commission and that the Company determines should apply to this Plan.

(n) Amendment and Restatement .  As of the Effective Date, this amendment and restatement of the Plan supersedes and replaces in all respects the Amended and Restated Reata Pharmaceuticals, Inc. Long Term Incentive Plan, as in effect immediately prior to the Effective Date.

(o) Plan Effective Date and Term .  This Plan, as amended and restated, was adopted by the Board on the Effective Date, to be effective on the Effective Date.  No Awards may be granted under this Plan on and after the tenth anniversary of the Effective Date. However, any Award granted prior to such termination, and the authority of the Board or Committee to amend, alter, adjust, suspend, discontinue, or terminate any such Award or to waive any conditions or rights under such Award in accordance with the terms of this Plan, shall extend beyond such termination date until the final disposition of such Award.

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Exhibit 10.2

STOCK OPTION AGREEMENT

 

This Agreement is made and entered into as of the Date of Grant set forth in the Notice of Grant of Stock Option (“ Notice of Grant ”) by and between Reata Pharmaceuticals, Inc., a Delaware corporation (the “ Company ”), and you:

WHEREAS , the Company, in order to induce you to enter into and continue in dedicated service to the Company and to materially contribute to the success of the Company, agrees to grant you an option to acquire an interest in the Company through the purchase of shares of stock of the Company;

WHEREAS , the Company adopted the Reata Pharmaceuticals, Inc. Second Amended and Restated Long Term Incentive Plan, as it may be amended from time to time (the “ Plan ”), under which the Company is authorized to grant stock options to certain employees and service providers of the Company;  

WHEREAS , a copy of the Plan has been furnished to you and shall be deemed a part of this stock option agreement (the “ Agreement ”) as if fully set forth herein and terms capitalized but not defined herein shall have the meaning set forth in the Plan; and

WHEREAS , you desire to accept the option created pursuant to the Agreement.

NOW, THEREFORE , in consideration of the mutual covenants set forth herein and for other valuable consideration hereinafter set forth, the parties agree as follows:

1. The Grant .  Subject to the conditions set forth below, the Company hereby grants to you, effective as of the Date of Grant set forth in the Notice of Grant, as a matter of separate inducement and not in lieu of any salary or other compensation for your services for the Company, the right and option to purchase (the “ Option ”), in accordance with the terms and conditions set forth herein and in the Plan, an aggregate of the number of shares of Stock set forth in the Notice of Grant (the “ Option Shares ”), at the Exercise Price set forth in the Notice of Grant.

2. Exercise .  

(a) Option Shares shall be deemed “ Nonvested Shares ” unless and until they have become “ Vested Shares ,” as defined in the Notice of Grant.  The Option shall in all events terminate at the close of business on the Expiration Date set forth in the Notice of Grant.  Subject to other terms and conditions set forth herein, including, but not limited to, Section 3(d) of this Agreement, the Option may be exercised in cumulative installments in accordance with the vesting schedule set forth in the Notice of Grant, provided that you remain in the employ of or a service provider to the Company or its Subsidiaries until the applicable dates set forth therein.

(b) Subject to the relevant provisions and limitations contained herein and in the Plan, you may exercise the Option to purchase all or a portion of the applicable number of Vested Shares at any time prior to the termination of the Option pursuant to this Option Agreement.  No less than 100 Vested Shares may be purchased at any one time unless the number purchased is

 

 


 

the total number of Vested Shares at that time purchasable under the Option.  In no event shall you be entitled to exercise the Option for any Nonvested Shares or for a fraction of a Vested Share.

(c) Any exercise by you of the Option shall be in writing addressed to the Secretary of the Company at its principal place of business or shall be effectuated on any electronic platform provided by or at the direction of the Company.  Exercise of the Option shall be made by delivery to the Company by you (or other person entitled to exercise the Option as provided hereunder) of (i) an executed Notice of Stock Option Exercise in the form provided by the Company, and (ii) payment of the aggregate purchase price for shares purchased pursuant to the exercise.

(d) Payment of the Exercise Price may be made, at your election, with the approval of the Committee, (i) in cash, by certified or official bank check or by wire transfer of immediately available funds, (ii) by delivery to the Company of a number of shares of Stock having a Fair Market Value as of the date of exercise equal to the Exercise Price, (iii) by net issue exercise, pursuant to which the Company will issue to you a number of shares of Stock as to which the Option is exercised, less a number of shares with a Fair Market Value as of the date of exercise equal to the Exercise Price, (iv) if the Stock is readily tradable on a national securities market, through a “cashless exercise” in accordance with a Company-established policy or program for the same, or (v) any combination of the foregoing.  No fraction of a share of Stock shall be accepted by the Company in payment of the Exercise Price.

(e) If you are on leave of absence for any reason, the Company may, in its sole discretion, determine that you will be considered to still be in the employ of or providing services for the Company, provided that rights to the Option will be limited to the extent to which those rights were earned or vested when the leave of absence began.  Notwithstanding the preceding sentence, if the Option is intended to be an incentive stock option designed pursuant to section 422 of the Code, then in addition to being approved by the Company, such leave must also meet the requirements of Treasury Regulation Section 1.421-1(h)(2), as applicable.

3. Effect of Termination of Service on Exercisability .  Except as provided in Sections 6 and 7 or an Employment Agreement, this Option may be exercised only while you continue to perform services for the Company or any Subsidiary and will terminate and cease to be exercisable upon termination of your service, except as follows:

(a) Termination on Account of Disability .  

(i) If your service with the Company or any Subsidiary terminates by reason of Disability (as defined below), this Option may be exercised by you (or your estate or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of your death, or by a Permitted Transferee who acquires this Option in compliance with Section 7(a) of the Plan) at any time during the period ending on the earlier to occur of (A) the date that is one year following such termination, or (B) the Expiration Date, but only to the extent this Option was exercisable for Vested Shares as of the date your service so terminates.

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(ii) As used in this Agreement, “ Disability ” shall have the meaning set forth in your Employment Agreement (as defined in Section 2(f) above), or if no such Employment Agreement exists or such Employment Agreement does not define “Disability,” “Disability” means, as determined by the Board or the Committee, in its sole discretion exercised in good faith, a physical or mental impairment of sufficient severity that you are either unable to perform the essential functions of your position, with or without a reasonable accommodation for your disability, or to perform the essential functions of your position without an accommodation that would be an undue hardship for the Company or a Subsidiary to provide.

(b) Termination on Account of Death .  If you cease to perform services for the Company or any Subsidiary due to your death or die within 30 days of your termination of employment (or termination of your service relationship) with the Company or a Subsidiary, your estate, the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of your death, or a Permitted Transferee who acquires this Option in compliance with Section 7(a) of the Plan, may exercise this Option at any time during the period ending on the earlier to occur of (i) the date that is one year following your death, or (ii) the Expiration Date, but only to the extent this Option was exercisable for Vested Shares as of the date of your death.

(c) Termination not for Cause .  

(i) If your service with the Company or any Subsidiary terminates for any reason other than as described in Sections 3(a) or (b) of this Agreement, unless such service is terminated for Cause (as defined below), this Option may be exercised by you (or by a Permitted Transferee who acquires this Option in compliance with Section 7(a) of the Plan) at any time during the period ending on the earlier to occur of (A) the date that is three months following your termination, or (B) the Expiration Date, but only to the extent this Option was exercisable for Vested Shares as of the date of your termination.

(ii) As used in this Agreement, “ Cause ” means your (A) commission of a willful criminal act, such as fraud, embezzlement or theft, provided that it is proven that you committed such willful criminal act, (B) conviction, plea of no contest or nolo contendere, deferred adjudication or unadjudicated probation for any felony or any crime involving moral turpitude, or (C) unlawful use or unlawful possession of alcohol or illegal drugs (however, for purposes of this Agreement, unlawful use and possession of alcohol shall be limited to a conviction of any alcohol-related crime, including driving while intoxicated); and provided that in no event shall the termination of your employment or service relationship as a result of bad judgment or negligence on your part be considered a termination for Cause.

(d) Termination in Connection with a Change in Control .

(i) If (A) your service with the Company or any Subsidiary is terminated for a reason described in Section 3(a) or (b) following a Change in Control or is terminated by the Company for a reason other than Cause in anticipation of or following a Change in Control, or (B) following a Change in Control, you terminate your employment or service relationship with the Company for Good Reason (as defined below), then any Option Shares that

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are Nonvested Shares on the date of the Change in Control shall become Vested Shares immediately prior to the termination of your employment or service relationship.  

(ii) As used in this Agreement, “ Good Reason ” shall mean (A) any reduction in your annual cash base salary or cash bonus compensation from the level of such compensation immediately prior to the Change in Control, (B) any termination or reduction of a material benefit under any benefit plan in which you participate unless there is substituted a comparable benefit that is economically substantially equivalent to the terminated or reduced benefit prior to the Change in Control, (C) any requirement that you relocate away from the Dallas/Fort Worth metropolitan area, or (D) without limiting the generality of the foregoing, any material breach by the Company of this Agreement or any other agreement between you and the Company.

(e) Miscellaneous Post-Termination Exercise Provisions .  This Option will not be exercisable following your termination of employment, or the termination of your service relationship, with the Company, except as provided in this Section 3.  The purchase price of shares as to which this Option is exercised shall be paid in full at the time of exercise, pursuant to Section 2(c) of this Agreement.  

4. Transferability .  The Option, and any rights or interests therein will be transferable by you only to the extent approved by the Committee in conformance with Section 7(a) of the Plan.  If this Option is intended to be an incentive stock option designed pursuant to section 422 of the Code, then such option shall not be transferable by you other than by will or the laws of descent and distribution and shall be exercisable during your lifetime only by you, in each case, unless otherwise specifically permitted pursuant to section 422 of the Code or the regulations issued thereunder.  If Following the transfer of this Option, as permitted by the Committee in its complete discretion, (a) this Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that the terms “you,” “your,” and “Participant,” as used in this Agreement, the Plan, and the Notice of Grant, shall be deemed to refer to the Permitted Transferee, the recipient under a qualified domestic relations order, your estate or heirs if you are deceased, or other transferee, as applicable, to the extent appropriate to enable the holder to exercise this Option in accordance with the terms of the Plan and applicable law and (b) the provisions of this Option relating to exercisability shall continue to be applied with respect to the original holder and, following the occurrence of any such events described herein, this Option shall be exercisable by the Permitted Transferee, the recipient under a qualified domestic relations order, your estate or heirs if you are deceased, or other transferee, as applicable, only to the extent and for the periods that would have been applicable in the absence of the transfer.

5. Compliance with Securities Law .  Notwithstanding any provision of this Agreement to the contrary, the grant of the Option and the issuance of Stock will be subject to compliance with all applicable requirements of federal, state, and foreign securities laws and with the requirements of any stock exchange or market system upon which the Stock may then be listed.  The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state, or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed.  In addition, the Option may not be exercised unless (a) a registration statement under the Securities

4

 


 

Act is in effect at the time of exercise of the Option with respect to the shares issuable upon exercise of the Option or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act.  YOU ARE CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.  ACCORDINGLY, YOU MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED.  The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option will relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority has not been obtained.  As a condition to the exercise of the Option, the Company may require you to satisfy any qualifications that may be necessary or appropriate to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect to such compliance as may be requested by the Company.

6. Extension if Exercise Prevented by Law .  Notwithstanding Section 3, if the exercise of the Option within the applicable time periods set forth in Section 3 is prevented by the provisions of Section 5, the Option will remain exercisable until 30 days after the date you are notified by the Company that the Option is exercisable, but in any event no later than the Expiration Date.  The Company makes no representation as to the tax consequences of any such delayed exercise.  You should consult with your own tax advisor as to the tax consequences of any such delayed exercise.

7. Extension if You are Subject to Section 16(b) .  Notwithstanding Section 3, if a sale within the applicable time periods set forth in Section 3 of shares acquired upon the exercise of the Option would subject you to suit under Section 16(b) of the Securities Exchange Act of 1934, as amended, the Option will remain exercisable until the earliest to occur of (a) the 10th day following the date on which a sale of such shares by you would no longer be subject to such suit, (b) the 190th day after your termination of service with the Company and any Subsidiary, or (c) the Expiration Date.  The Company makes no representation as to the tax consequences of any such delayed exercise.  You should consult with your own tax advisor as to the tax consequences of any such delayed exercise.

8. Withholding Taxes .  The Committee may, in its discretion, require you to pay to the Company at the time of the exercise of an Option or thereafter, the amount that the Committee deems necessary to satisfy the Company’s current or future obligation to withhold federal, state or local income or other taxes that you incur by exercising an Option.  In connection with such an event requiring tax withholding, you may (a) direct the Company to withhold from the shares of Stock to be issued to you the number of shares necessary to satisfy the Company’s obligation to withhold taxes, that determination to be based on the shares’ Fair Market Value as of the date of exercise; (b) deliver to the Company sufficient shares of Stock (based upon the Fair Market Value as of the date of such delivery) to satisfy the Company’s tax withholding obligation; or (c) deliver sufficient cash to the Company to satisfy its tax withholding obligations.  If you elect to use a Stock withholding feature you must make the election at the time and in the manner that the Committee prescribes and the maximum number of shares of Stock that may be so withheld or surrendered shall be the number of shares of Stock that have an aggregate Fair Market Value on the date of withholding or repurchase equal to the aggregate amount of such tax liabilities

5

 


 

determined based on the greatest withholding rates for federal, state, foreign and/or local tax purposes, including payroll taxes, that may be utilized without creating adverse accounting treat ment with respect to such Award.  The Committee may, at its sole option, deny your request to satisfy withholding obligations through shares of Stock instead of cash.  In the event the Committee subsequently determines that the aggregate Fair Market Value (as determined above) of any shares of Stock withheld or delivered as payment of any tax withholding obligation is insufficient to discharge that tax withholding obligation, then you shall pay to the Company, immediately upon the Committee’s request, the amount of that deficiency in the form of payment requested by the Committee.

9. Status of Stock .  With respect to the status of the Stock, you understand and agree to all of the following:

(a) If the shares of Stock to be issued upon exercise of this Option have not been registered under the Securities Act or any state securities law as of such date, then in the event exemption from registration under the Securities Act is available upon an exercise of this Option, you (or such other person permitted to exercise this Option if applicable), if requested by the Company to do so, will execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to ensure compliance with applicable securities laws.

(b) You agree that the shares of Stock that you may acquire by exercising this Option will be acquired for investment without a view to distribution, within the meaning of the Securities Act, and will not be sold, transferred, assigned, pledged, or hypothecated in the absence of an effective registration statement for the shares under the Securities Act and applicable state securities laws or an applicable exemption from the registration requirements of the Securities Act and any applicable state securities laws.  You also agree that the shares of Stock that you may acquire by exercising this Option will not be sold or otherwise disposed of in any manner that would constitute a violation of any applicable securities laws, whether federal or state.

(c) You agree that (i) the Company may refuse to register the transfer of the shares of Stock purchased under this Option on the stock transfer records of the Company if such proposed transfer would, in the opinion of counsel satisfactory to the Company, constitute a violation of the terms and provisions of any stockholder or investors’ rights agreement, Section 7(a) of the Plan, or any applicable securities law and (ii) the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the shares of Stock purchased under this Option.

10. Adjustments .  The terms of the Option, including the number and type of shares subject to the Option and the option price shall be subject to adjustment in accordance with Section 8 of the Plan.

11. Legends .  The Company may at any time place legends, referencing any restrictions imposed on the shares pursuant to this Agreement, and any applicable federal, state or foreign securities law restrictions, on all certificates representing shares of Stock subject to the provisions of this Agreement.  

6

 


 

12. Notice of Sales Upon Disqualifying Disposition of ISO .  If the Option is designated as an Incentive Stock Option in the Notice of Grant, you must comply with the provisions of this Section 12.  You must promptly notify the Chief Financial Officer of the Company if you dispose of any of the shares acquired pursuant to the Option within one year after the date you exercise all or part of the Option or within two years after the Date of Grant.  Until such time as you dispose of such shares in a manner consistent with the provisions of this Agreement, unless otherwise expressly authorized by the Company, you must hold all shares acquired pursuant to the Option in your name (and not in the name of any nominee) for the one-year period immediately after the exercise of the Option and the two-year period immediately after the Date of Grant.  At any time during the one-year or two-year periods set forth above, the Company may place a legend on any certificate representing shares acquired pursuant to the Option requesting the transfer agent for the Company’s stock to notify the Company of any such transfers.  Your obligation to notify the Company of any such transfer will continue notwithstanding that a legend has been placed on the certificate pursuant to the preceding sentence.

13. Right to Terminate Services .  Nothing contained in this Agreement shall confer upon you the right to continue in the employ of, or performing services for, the Company or any Subsidiary, or interfere in any way with the rights of the Company or any Subsidiary to terminate your employment or service relationship at any time.

14. Furnish Information .  You agree to furnish to the Company all information requested by the Company to enable it to comply with any reporting or other requirement imposed upon the Company by or under any applicable statute or regulation.

15. Remedies .  The Company shall be entitled to recover from you reasonable attorneys’ fees incurred in connection with the enforcement of the terms and provisions of this Agreement whether by an action to enforce specific performance or for damages for its breach or otherwise.

16. No Liability for Good Faith Determinations .  The Company and the members of the Committee and the Board shall not be liable for any act, omission or determination taken or made in good faith with respect to this Agreement or the Option granted hereunder and all members of the Board or the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination, or interpretation.

17. Execution of Receipts and Releases .  Any payment of cash or any issuance or transfer of shares of Stock or other property to you, or to your legal representative, heir, legatee or distributee, in accordance with the provisions hereof, shall, to the extent thereof, be in full satisfaction of all claims of such persons hereunder. The Company may require you or your legal representative, heir, legatee or distributee, as a condition precedent to such payment or issuance, to execute a release and receipt therefore in such form as it shall determine.

18. No Guarantee of Interests .  The Board and the Company do not guarantee the Stock of the Company from loss or depreciation.

7

 


 

19. Company Records .  Records of the Company regarding your service and other matters shall be conclusive for all purposes hereunder, unless determined by the Company to be incorrect.

20. Notice .  Each notice required or permitted under this Agreement must be in writing and personally delivered or sent by mail and shall be deemed to be delivered on the date on which such notice is actually received by the person to whom it is properly addressed or if earlier the date sent via certified mail.  

21. Waiver of Notice .  Any person entitled to notice hereunder may, by written form, waive such notice.

22. Successors .  This Agreement shall be binding upon you, your legal representatives, heirs, legatees and distributees, and upon the Company, its successors and assigns.

23. Severability .  If any provision of this Agreement is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions hereof, but such provision shall be fully severable and this Agreement shall be construed and enforced as if the illegal or invalid provision had never been included herein.

24. Company Action .  Any action required of the Company shall be by resolution of the Board or by a person authorized to act by resolution of the Board.

25. Headings .  The titles and headings of Sections are included for convenience of reference only and are not to be considered in construction of the provisions hereof.

26. Governing Law .  All questions arising with respect to the provisions of this Agreement shall be determined by application of the laws of Delaware, without giving any effect to any conflict of law provisions thereof, except to the extent Delaware state law is preempted by federal law.  The obligation of the Company to sell and deliver Stock hereunder is subject to applicable laws and to the approval of any governmental authority required in connection with the authorization, issuance, sale, or delivery of such Stock.

27. Consent to Texas Jurisdiction and Venue .  You hereby consent and agree that state courts located in Dallas County, Texas and the United States District Court for the Northern District of Texas each shall have personal jurisdiction and proper venue with respect to any dispute between you and the Company arising in connection with the Option or this Agreement. In any dispute with the Company, you will not raise, and you hereby expressly waive, any objection or defense to any such jurisdiction as an inconvenient forum.

28. Word Usage .  Words used in the masculine shall apply to the feminine where applicable, and wherever the context of this Agreement dictates, the plural shall be read as the singular and the singular as the plural.

29. No Assignment .  You may not assign this Agreement or any of your rights under this Agreement without the Company’s prior written consent, and any purported or attempted assignment without such prior written consent shall be void.

8

 


 

30. Clawback . This Agreement and your Award is subject to any written clawback policies of the Company, whether in effect on the Date of Grant or adopted, with the approval of the Board, following the Date of Grant. Any such policy may subject your Option and amounts paid or realized with respect to your Option to reduction, cancelation, forfeiture or recoupment if certain specified events or wrongful conduct occur, including but not limited to an accounting restatement due to the Company’s material noncompliance with financial reporting regulations or other events or wrongful conduct specified in any such clawback policy adopted to conform to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and rules promulgated thereunder by the Securities and Exchange Commission and that the Company determines should apply to this Option .

31. Miscellaneous .

(a) This Agreement and the Notice of Grant are subject to all the terms, conditions, limitations and restrictions contained in the Plan.  In the event of any conflict or inconsistency between any terms and conditions of this Agreement, the Notice of Grant, and the terms and provisions of an employment agreement, consulting agreement, severance or change in control agreement, if any, between you and the Company or any Subsidiary or other Affiliate (the “ Employment Agreement ”), the terms and conditions of the Employment Agreement shall be controlling.  Taking into account the provisions of Section 6(a) of the Plan, if there is any conflict or inconsistency between the Plan and the Notice of Grant, this Agreement, or the Employment Agreement, then you acknowledge and agree that those terms of the Plan shall control and, if necessary, the applicable terms of the Notice of Grant, this Agreement, or the Employment Agreement shall be deemed amended so as to carry out the purpose and intent of the Plan.

(b) This Agreement and the Notice of Grant may be amended the Board or by the Committee at any time (a) without your consent, so long as the amendment does not materially and adversely affect your rights under the Option, or (b) with your consent.  For purposes of clarity, any adjustment made to the Award pursuant to Sections 8(b) through 8(g) of the Plan will be deemed not to materially and adversely affect your rights under this Award.

(c) If this Option is intended to be an incentive stock option designed pursuant to section 422 of the Code, then in the event the Option Shares (and all other options designed pursuant to section 422 of the Code granted to you by the Company or any parent of the Company or Subsidiary) that first become exercisable in any calendar year have an aggregate fair market value (determined for each Option Share as of the Date of Grant) that exceeds $100,000, the Option Shares in excess of $100,000 shall be treated as subject to a Nonstatutory Stock Option.

 

[Remainder of page intentionally left blank]

 

 

 

9

 

Exhibit 10.3

 

 

Date

 

Notice of Grant of Stock Option

(Employee)

 

 

Award Details

 

Name : Address : Employee ID : Award Amount : Grant ID :Grant Date : Award Type : Vesting Schedule :Vesting Start Date :Vesting End Date :Expiration Date : Deadline to Accept : 30 days from grant notification

 

 

Award Vesting Summary

The Option Shares shall be deemed “Nonvested Shares” unless and until they have become “Vested Shares,” as defined below.  The Option Shares will become “Vested Shares” as detailed in the table above; provided, however, that, except as otherwise provided in the Stock Option Agreement (the “Agreement”), such Nonvested Shares will become Vested Shares on such dates only if you remain in the employ of or a service provider to the Company or its Subsidiaries continuously from the Date of Grant through the applicable vesting date.

Notwithstanding the foregoing, following a Change in Control, any Option Shares that are Nonvested Shares on the date of the Change in Control shall become Vested Shares with respect to one eighteenth of all such Nonvested Shares on the one month anniversary of the Change in Control and thereafter with respect to an additional one eighteenth of all such Nonvested Shares at the time of the Change in Control on each subsequent month anniversary of the Change in

 


 

Control such that the Option Shares will be 100% Vested Shares on the eighteenth month anniversary of the Change in Control, in each case, so long as you remain in the employ of or a service provider to the Company or its Subsidiaries continuously from the Date of Grant through the applicable vesting date; provided, however, that if 100% of the Option Shares would otherwise become Vested Shares pursuant to the vesting rules set forth in the preceding paragraph prior to the eighteenth month anniversary of the date of the Change in Control, then the Option Shares will become Vested Shares in accordance with such vesting rules.

Fractions of Option Shares shall not vest on a vesting date and the Option Shares that do vest on a vesting date shall be rounded down to the nearest whole Option Share; provided, however, that such fractions of Option Shares shall be added to the number of Option Shares that vest on the final vesting date or that otherwise vest due to terms of the Agreement (with any resulting fraction of an Option Share being rounded down to the nearest whole Option Share). 

 

Online Grant Acceptance

By your acceptance of this Option, you hereby acknowledge your receipt of this Option granted on the Date of Grant indicated above, which has been issued to you under the terms and conditions of this Notice of Grant, the Second Amended and Restated  Long Term Incentive Plan (the ”Plan”) and the Agreement, including the vesting and risk of forfeiture provisions set forth therein. Capitalized terms used but not defined in this Notice of Grant shall have the meanings set forth in the Plan.

By your acceptance of this Option, you agree to the following provisions of this paragraph. You understand and acknowledge that if the purchase price of the Stock under this Option is less than the Fair Market Value of such Stock on the date of grant of this Option, then you may incur adverse tax consequences under sections 409A and/or 422 of the Code.  You acknowledge and agree that (a) you are not relying upon any determination by the Company, its affiliates, or any of their respective employees, directors, officers, attorneys or agents (collectively, the “Company Parties”) of the Fair Market Value of the Stock on the Date of Grant, (b) you are not relying upon any written or oral statement or representation of the Company Parties regarding the tax effects associated with your acceptance of this Option and your receipt, holding and exercise of this Option, and (c) in deciding to accept this Option, you are relying on your own judgment and the judgment of the professionals of your choice with whom you have consulted.  You hereby release, acquit and forever discharge the Company Parties from all actions, causes of actions, suits, debts, obligations, liabilities, claims, damages, losses, costs and expenses of any nature whatsoever, known or unknown, on account of, arising out of, or in any way related to the tax effects associated with your acceptance of this Option and your receipt, holding and exercise of this Option. You consent to receive documents from the Company and any plan administrator by means of electronic delivery, provided that such delivery complies with applicable law, including, without limitation, documents pursuant or relating to any equity award granted to you under the Plan or any other current or future equity or other benefit plan of the Company (collectively, a “Company Plan”).  This consent shall be effective for the entire time that you are a participant in a Company Plan.

 


 

 

Date

 

Notice of Grant of Stock Option

(Director/Consultant)

 

 

Award Details

 

Name : Address : Employee ID : Award Amount : Grant ID :Grant Date : Award Type : Vesting Schedule :Vesting Start Date :Vesting End Date :Expiration Date : Deadline to Accept : 30 days from grant notification

 

 

Award Vesting Summary

The Option Shares shall be deemed “Nonvested Shares” unless and until they have become “Vested Shares,” as defined below.  The Option Shares will become “Vested Shares” as detailed in the table above; provided, however, that, except as otherwise provided in the Stock Option Agreement (the “Agreement”), such Nonvested Shares will become Vested Shares on such dates only if you remain a director or employee of or a service provider to the Company or its Subsidiaries continuously from the Date of Grant through the applicable vesting date.

Notwithstanding the foregoing, in the event of (i) a Change of Control, (ii) a separation from service by reason of death, or (iii) a separation from service by reason of Disability (as defined in the Agreement), any Option Shares that are Nonvested Shares on the date of such event shall become Vested Shares on such date.

Fractions of Option Shares shall not vest on a vesting date and the Option Shares that do vest on a vesting date shall be rounded down to the nearest whole Option Share; provided, however, that

 


 

such fractions of Option Shares shall be added to the number of Option Shares that vest on the final vesting date or that otherwise vest due to terms of the Agreement (with any resulting fraction of an Option Share being rounded down to the nearest whole Option Share). 

 

Online Grant Acceptance

By your acceptance of this Option, you hereby acknowledge your receipt of this Option granted on the Date of Grant indicated above, which has been issued to you under the terms and conditions of this Notice of Grant, the Second Amended and Restated Long Term Incentive Plan (the “Plan”) and the Agreement, including the vesting and risk of forfeiture provisions set forth therein. Capitalized terms used but not defined in this Notice of Grant shall have the meanings set forth in the Plan.

By your acceptance of this Option, you agree to the following provisions of this paragraph. You understand and acknowledge that if the purchase price of the Stock under this Option is less than the Fair Market Value of such Stock on the date of grant of this Option, then you may incur adverse tax consequences under sections 409A and/or 422 of the Code.  You acknowledge and agree that (a) you are not relying upon any determination by the Company, its affiliates, or any of their respective employees, directors, officers, attorneys or agents (collectively, the “Company Parties”) of the Fair Market Value of the Stock on the Date of Grant, (b) you are not relying upon any written or oral statement or representation of the Company Parties regarding the tax effects associated with your acceptance of this option and your receipt, holding and exercise of this Option, and (c) in deciding to accept this Option, you are relying on your own judgment and the judgment of the professionals of your choice with whom you have consulted.  You hereby release, acquit and forever discharge the Company Parties from all actions, causes of actions, suits, debts, obligations, liabilities, claims, damages, losses, costs and expenses of any nature whatsoever, known or unknown, on account of, arising out of, or in any way related to the tax effects associated with your acceptance of this Option and your receipt, holding and exercise of this Option. You consent to receive documents from the Company and any plan administrator by means of electronic delivery, provided that such delivery complies with applicable law, including, without limitation, documents pursuant or relating to any equity award granted to you under the Plan or any other current or future equity or other benefit plan of the Company (collectively, a “Company Plan”).  This consent shall be effective for the entire time that you are a participant in a Company Plan.

 

 

 

Exhibit 31.1

CERTIFICATION 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

I, J. Warren Huff, certify that:

1.

I have reviewed this Quarterly Report on Form 10-Q of Reata Pharmaceuticals, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

( c )

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

( d )

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: May 9, 2019

 

By:

/s/ J. Warren Huff

 

 

 

J. Warren Huff

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

Exhibit 31.2

CERTIFICATION 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

I, Jason D. Wilson, certify that:

1.

I have reviewed this Quarterly Report on Form 10-Q of Reata Pharmaceuticals, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

( c )

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

( d )

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: May 9, 2019

 

By:

/s/ Jason D. Wilson

 

 

 

Jason D. Wilson

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Reata Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Warren Huff, as Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

Date: May 9, 2019

 

By:

/s/ J. Warren Huff

 

 

 

J. Warren Huff

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Reata Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jason D. Wilson, Chief Financial Officer, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

Date: May 9, 2019

 

By:

/s/ Jason D. Wilson

 

 

 

Jason D. Wilson

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer)