Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2014

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 001-35952

 

 

ARATANA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		38-3826477
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1901 Olathe Boulevard

Kansas City, KS 66103

(913) 353-1000

(Address of principal executive offices, zip code and telephone number, including area code)

 

 

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:  x    No:  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes:  x    No:  ¨

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

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x		Smaller reporting company		¨

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

As of August 8, 2014, there were 29,447,900 shares of common stock outstanding.

 

 

 

---

Table of Contents

ARATANA THERAPEUTICS, INC.

TABLE OF CONTENTS

 

 

 

				Page
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements
		Unaudited Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013			3
		Unaudited Consolidated Statements of Operations for the Three and Six Months ended June 30, 2014 and 2013			4
		Unaudited Consolidated Statements of Comprehensive Loss for the Three and Six Months ended June 30, 2014 and 2013			5
		Unaudited Consolidated Statements of Cash Flows for the Six Months ended June 30, 2014 and 2013			6
		Notes to Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			32
Item 4.		Controls and Procedures			32
PART II OTHER INFORMATION
Item 1.		Legal Proceedings			34
Item 1A.		Risk Factors			34
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 3.		Defaults Upon Senior Securities			35
Item 4.		Mine Safety Disclosures			35
Item 5.		Other Information			35
Item 6.		Exhibits			35
SIGNATURES					36

 

2

---

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ARATANA THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Amounts in thousands, except share and per share data)

 

		JUNE 30, 2014				DECEMBER 31, 2013
Assets
Current assets:
Cash and cash equivalents		$	68,271			$	41,084
Short-term marketable securities			2,453				4,670
Accounts receivable			387				—
Receivable from stockholder			—				1,001
Inventories			124				55
Prepaid expenses and other current assets			764				274
Deferred tax asset—current			1,381				1,381
Total current assets			73,380				48,465
Property and equipment, net			508				98
Long-term marketable securities			848				—
Goodwill			38,419				20,796
Intangible assets, net			74,273				46,140
Other long-term assets			496				37
Total assets		$	187,924			$	115,536
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	991			$	2,307
Accrued expenses			2,511				2,495
Current portion—loan payable			—				5,625
Current portion—note payable			—				3,000
Current portion—deferred licensing revenue			41				45
Current portion—contingent consideration			4,202				2,572
Deferred income			800				800
Other current liabilities			47				57
Total current liabilities			8,592				16,901
Loan payable			14,939				9,310
Contingent consideration			—				1,543
Deferred tax liability			4,274				1,666
Other long-term liabilities			53				75
Total liabilities			27,858				29,495
Commitments and contingencies (Note 11 and 12)
Stockholders’ equity :
Common stock, $0.001 par value; 100,000,000 shares authorized at June 30, 2014 and December 31, 2013, 28,783,500 and 23,425,487 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively			29				23
Treasury stock, 76,791 shares outstanding at June 30, 2014			(1,074	)			—
Additional paid-in capital			206,780				112,515
Accumulated deficit			(44,927	)			(26,497	)
Accumulated other comprehensive loss			(742	)			—
Total stockholders’ equity			160,066				86,041
Total liabilities and stockholders’ equity		$	187,924			$	115,536

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

 

3

---

Table of Contents

ARATANA THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Amounts in thousands, except share and per share data)

 

		THREE MONTHS ENDED JUNE 30,								SIX MONTHS ENDED JUNE 30,
		2014				2013				2014				2013
Revenues:
Licensing and collaboration revenue		$	300			$	—			$	476			$	—
Total revenues			300				—				476				—
Costs and expenses:
Royalty expense			17				—				35				—
Research and development			4,300				2,469				7,872				4,583
General and administrative			4,404				1,258				9,016				2,484
In-process research and development			500				—				1,157				—
Amortization of acquired intangible assets			582				—				1,121				—
Total costs and expenses			9,803				3,727				19,201				7,067
Loss from operations			(9,503	)			(3,727	)			(18,725	)			(7,067	)
Other income (expense)
Interest income			13				22				27				25
Interest expense			(218	)			(78	)			(546	)			(102	)
Other income (expense), net			95				343				(148	)			411
Total other income (expense)			(110	)			287				(667	)			334
Loss before income taxes			(9,613	)			(3,440	)			(19,392	)			(6,733	)
Income tax benefit			335				—				962				—
Net loss		$	(9,278	)		$	(3,440	)		$	(18,430	)		$	(6,733	)
Unaccreted dividends on convertible preferred stock			—				(808	)			—				(1,581	)
Net loss attributable to common stockholders		$	(9,278	)		$	(4,248	)		$	(18,430	)		$	(8,314	)
Net loss per share attributable to common stockholders, basic and diluted		$	(0.32	)		$	(4.62	)		$	(0.66	)		$	(9.35	)
Weighted average shares outstanding, basic and diluted			28,761,326				918,397				27,768,959				889,528

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

 

4

---

Table of Contents

ARATANA THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

(Amounts in thousands, except share and per share data)

 

		THREE MONTHS ENDED JUNE 30,								SIX MONTHS ENDED JUNE 30,
		2014				2013				2014				2013
Net loss		$	(9,278	)		$	(4,248	)		$	(18,430	)		$	(8,314	)
Other comprehensive loss:
Foreign currency translation adjustments			(322	)			—				(390	)			—
Unrealized gain (loss) on available-for-sale securities			80				—				(352	)			—
Other comprehensive loss			(242	)			—				(742	)			—
Comprehensive loss		$	(9,520	)		$	(4,248	)		$	(19,172	)		$	(8,314	)

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

 

5

---

Table of Contents

ARATANA THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts in thousands)

 

		SIX MONTHS ENDED JUNE 30,
		2014				2013
Cash flows from operating activities
Net loss		$	(18,430	)		$	(6,733	)
Adjustments to reconcile net loss to net cash used in operating activities:
Acquired in-process research and development			1,157				—
Stock-based compensation expense			3,700				192
Depreciation and amortization expense			1,183				6
Non-cash interest expense			20				12
Change in fair value of contingent consideration			(150	)			—
Change in fair value of derivative instruments			219				—
Deferred income taxes			(962	)			—
Changes in operating assets and liabilities:
Accounts receivable			(116	)			—
Inventories			(69	)			—
Prepaid expenses			(466	)			(2,851	)
Other assets			(40	)			(11	)
Accounts payable			(1,676	)			1,060
Accrued expenses and other liabilities			(240	)			(210	)
Deferred income			(64	)			—
Net cash used in operating activities			(15,944	)			(8,535	)
Cash flows from investing activities
Purchase of property and equipment, net			(246	)			(8	)
Cash paid for acquisitions, net of cash received			(12,075	)			—
Purchase of marketable securities			(1,200	)			(1,479	)
Proceeds from maturities of marketable securities			2,217				1,972
Purchase of derivative instruments			(643	)			—
Purchase of in-process research and development			(1,157	)			—
Net cash used in investing activities			(13,104	)			(485	)
Cash flows from financing activities
Proceeds from issuance of Series C convertible preferred stock, net of issuance costs			—				3,406
Proceeds from the issuance of debt, net of discount			—				4,927
Repurchase of common stock			(1,074	)			—
Proceeds from stock option exercises			45				98
Repurchase, early exercised stock options			—				(5	)
Proceeds from public offering, net of commission			92,224				—
Payments of public offering costs			(1,731	)			—
Cash paid for promissory notes			(18,067	)			—
Cash paid for contingent consideration			(15,166	)			—
Net cash provided by financing activities			56,231				8,426
Effect of exchange rate changes on cash			4				—
Net increase in cash and cash equivalents			27,187				376
Cash and cash equivalents, beginning of period			41,084				13,973
Cash and cash equivalents, end of period		$	68,271			$	14,349
Supplemental disclosure of cash flow information
Cash paid for interest		$	413			$	91
Supplemental disclosure of noncash investing and financing activities:
Accrued third-party milestone payment		$	—			$	500
Deferred initial public offering costs included in prepaid expenses		$	—			$	2,668

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

 

6

---

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands, except share and per share data)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The consolidated financial statements include the accounts of Aratana Therapeutics, Inc. (the “Company” or “Aratana”) and its wholly owned subsidiaries. The Company has one operating segment. All intercompany balances and transactions have been eliminated in consolidation. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2013 and the notes thereto in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 26, 2014. In the opinion of management, all adjustments, consisting of a normal and recurring nature, considered necessary for a fair presentation, have been included.

The Company expects that its cash, cash equivalents and short-term marketable securities, which includes the remaining net proceeds received in its public offering of common stock that closed on February 3, 2014, and existing Credit Facility will fund operations through at least December 31, 2015.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from those estimates.

Revenue Recognition

During 2013, the Company’s principal revenue streams were product sales and licensing revenue. Beginning in 2014, as a result of the Okapi Sciences, NV (“Okapi Sciences”) acquisition (Note 4), the Company generates revenue from research and development services. Revenues from the performance of research and development services are recorded as Licensing and collaboration revenue in the consolidated statements of operations and are recognized on a proportional basis as costs are incurred.

Accounting for Stock Based Compensation

In 2013, the Company used expected volatility based on the historic volatility of publicly-traded peer companies. Beginning in the first quarter of 2014, expected volatility is based on historical volatility of the Company’s stock as adequate historical data regarding the volatility of the Company’s common stock price became available.

Derivative Financial Instruments

In 2013, the Company held no derivative financial instruments. Beginning in 2014, the Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. The Company’s sole derivative (Note 6) has not been designated as a hedging instrument and is adjusted to fair value through current income.

Foreign Currency

During 2013, the Company had limited foreign currency exposure. With the acquisition of Okapi Sciences (Note 4) in 2014, the Company now is exposed to effects of foreign currency from translation. Transactions in foreign currencies are translated into the relevant functional currency at the rate of exchange at the date of the transaction. Transaction gains and losses are recognized in arriving at loss from operations. The results of operations for subsidiaries, whose functional currency is not the U.S. Dollar, are translated into the U.S. Dollar at the average rates of exchange during the period, with the subsidiaries’ balance sheets translated at the rates accumulated at the balance sheet date. The cumulative effect of exchange rate movements is included in a separate component of other comprehensive income (loss) in the consolidated balance sheet. Gains and losses arising from intercompany foreign currency transactions are included in loss from operations unless the gains and losses arise from permanent differences in intercompany accounts. Gains and losses from permanent differences in intercompany accounts are included in a separate component of other comprehensive income.

 

7

---

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands, except share and per share data)

 

Comprehensive Loss

For the year ended December 31, 2013, there was no difference between net loss and comprehensive loss. During the first six months of 2014, there were differences between net loss and comprehensive loss. The Company includes foreign currency translation adjustments related to the translation of foreign subsidiaries’ balance sheets, permanent differences in intercompany accounts and unrealized holding gains and losses on available-for-sale securities in comprehensive loss

New Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on recognizing revenue in contracts with customers. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This guidance will supersede the revenue recognition requirements in topic, Revenue Recognition, and most industry-specific guidance. This guidance also supersedes some cost guidance included in subtopic, Revenue Recognition – Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of topic, Property, Plant, and Equipment, and tangible assets within the scope of topic, Intangibles – Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this guidance.

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

These changes become effective for the Company on January 1, 2017 and early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently assessing the impact, if any, this new guidance will have on the Company’s financial condition, results of operations or cash flows.

Development Stage Entities — Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance, Consolidations: In June 2014, the FASB issued guidance that removes all incremental reporting requirements from GAAP for development stage entities, including the removal of the topic development stage entities. These changes eliminate the requirement to report inception-to-date information in the statements of income, cash flows, and shareholder equity. These changes become effective for the Company on January 1, 2015 and early adoption is permitted. The Company opted to adopt this guidance as of June 30, 2014. The adoption of this guidance resulted in decreased financial statement disclosures, but did not impact the Company’s financial condition, results of operations or cash flows.

3. Fair Value of Financial Assets and Liabilities

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of June 30, 2014 and December 31, 2013 the following financial assets and liabilities are measured at fair value on a recurring basis using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).

 

		CARRYING VALUE				FAIR VALUE MEASUREMENTS AS OF JUNE 30, 2014 USING:
						LEVEL 1				LEVEL 2				LEVEL 3				TOTAL
Assets:
Cash equivalents(1)		$	3,486			$	—			$	3,486			$	—			$	3,486
Short-term marketable securities			2,453				—				2,453				—				2,453
Long-term marketable securities			848				—				848				—				848
Derivative financial instruments			424				—				424				—				424
		$	7,211			$	—			$	7,211			$	—			$	7,211
Liabilities:
Contingent consideration		$	4,202			$	—			$	—			$	4,202			$	4,202
		$	4,202			$	—			$	—			$	4,202			$	4,202

 

8

---

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands, except share and per share data)

 

(1)	Cash equivalents consist solely of certificates of deposit.

 

		CARRYING VALUE				FAIR VALUE MEASUREMENTS AS OF DECEMBER 31, 2013 USING:
						LEVEL 1				LEVEL 2				LEVEL 3				TOTAL
Assets:
Marketable securities		$	4,670			$	—			$	4,670			$	—			$	4,670
		$	4,670			$	—			$	4,670			$	—			$	4,670
Liabilities:
Contingent consideration(1)		$	4,115			$	—			$	—			$	4,115			$	4,115
		$	4,115			$	—			$	—			$	4,115			$	4,115

 

(1)	Contingent consideration consists of a current portion of $2,572 and long term portion of $1,543 on the consolidated balance sheet.

Certain estimates and judgments are required to develop the fair value amounts shown above. The fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.

The following methods and assumptions were used to estimate the fair value of each material class of financial instrument:

 

•

Marketable securities (short-term and long-term)—the fair value of marketable securities has been estimated based on quoted prices in active markets for similar securities or identical assets in markets that are not active or application of discount for lack of marketability to quoted prices in active markets for similar securities.

 

•

Derivative financial instruments—the fair value of the derivative instruments has been estimated using a modified Black-Scholes model. Inputs into the Black-Scholes model include interest rates, stock volatilities and dividends data.

 

•

Contingent consideration—the fair value of the contingent consideration payable has been estimated using the income approach using a probability weighted discounted cash flow method. Inputs into the discounted cash flow method include the probability of and period in which the relevant milestone event is expected to be achieved and the discount rate to be applied in calculating the present values of the relevant milestone.

During the six months ended June 30, 2014 and year ended December 31, 2013, there were no transfers between Level 1, Level 2 and Level 3.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

The change in the fair value of the Company’s contingent consideration payable, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3), is as follows:

Contingent consideration

 

		2014
As of January 1		$	4,115
Initial recognition of contingent consideration payable			15,166
Settlement of contingent consideration payable			(15,235	)
Expense recognized in the consolidated statement of operations (within general and administrative) due to change in fair value			156
As of the end of the period		$	4,202

 

9

---

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands, except share and per share data)

 

Quantitative Information about Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

Quantitative information about the Company’s recurring Level 3 fair value measurements is included below:

 

Financial liabilities:

FAIR VALUE AT MEASUREMENT DATE

At June 30, 2014

Fair value

Valuation technique

Significant unobservable inputs

Range

(Weighted Average)

Contingent consideration

$

4,202

Income approach (probability weighted discounted cash flow)

Probability of milestones being achieved

3.80% to 95.00%

(71.75

%)

Assumed market participant discount rate

5.50%

Periods in which milestones are expected to be achieved

2014 to 2015

Contingent consideration payable represents the future amount the Company may be required to pay in conjunction with the Vet Therapeutics, Inc. (“Vet Therapeutics”) acquisition in October 2013. The amount of contingent consideration which may ultimately be payable by the Company in relation to the Vet Therapeutics acquisition is dependent upon the achievement of specified future milestones, such as certain regulatory and manufacturing milestones for AT-004. The Company assesses the probability, and estimated timing, of these milestones being achieved and re-measures the related amounts contingent consideration at each balance sheet date.

The fair value of the Company’s contingent consideration payable could significantly increase or decrease due to changes in certain assumptions which underpin the fair value measurements. Each set of assumptions and milestones are specific to the contingent consideration payable. The assumptions include, among other things, the probability and expected timing of certain milestones being achieved. The Company regularly reviews these assumptions, and makes adjustments to the fair value measurements as required by facts and circumstances.

Financial Assets and Liabilities that are not Measured at Fair Value on a Recurring Basis

The carrying amounts and estimated fair value as at June 30, 2014 and December 31, 2013 of the Company’s financial assets and liabilities which are not measured at fair value on a recurring basis are as follows:

 

Year to		JUNE 30, 2014
		Carrying Amount				Fair Value
Financial liabilities:
Loan payable (Level 2)		$	14,939			$	15,600

 

Year to		DECEMBER 31, 2013
		Carrying Amount				Fair Value
Financial liabilities:
Loan payable (Level 2)		$	14,935			$	15,040

Certain estimates and judgments were required to develop the fair value amounts. The fair value amount shown above is not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.

The following methods and assumptions were used to estimate the fair value of each material class of financial instrument:

 

•

Loan payable—discounted cash flow analysis discounted at current rates

 

10

---

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands, except share and per share data)

 

4. Business Combinations

Acquisition of Okapi Sciences

On January 6, 2014, the Company acquired Okapi Sciences, a Leuven, Belgium based company with a proprietary antiviral platform and three clinical/development stage product candidates. This acquisition further expanded the existing Company pipeline. The aggregate purchase price was approximately $44,439, which consisted of $14,139 in cash, a promissory note in the principal amount of $15,134 with a maturity date of December 31, 2014, and a contingent consideration of up to $16,308 with an acquisition fair value of $15,166. The promissory note bore interest at a rate of 7% per annum, payable quarterly in arrears, and was subject to mandatory prepayment in the event of a specified equity financing by the Company. On February 4, 2014, the promissory note and accrued interest was paid in cash in the amount of $15,158. On March 17, 2014, the contingent consideration was settled in cash in the amount of $15,235.

Included in the Company’s consolidated statements of operations for the three and six months ended June 30, 2014 is revenue totaling approximately $300 and $476, respectively, related to Okapi Sciences.

The acquisition-date fair value of the consideration transferred to the sellers of Okapi Sciences, less cash acquired, was $43,376, which consisted of the following:

 

Cash consideration		$	14,139
Fair value of promissory note			15,134
Fair value of contingent consideration			15,166
Fair value of total consideration			44,439
Less cash acquired			(1,063	)
Total consideration transferred, net of cash acquired		$	43,376

Fair Value of Contingent Consideration: The Company agreed to pay up to $16,308 on or prior to April 7, 2014, subject to mandatory prepayment in cash in the event of a specified future equity financing, provided that if not paid in cash by April 7, 2014, payment was to be made in the form of shares of the Company’s common stock-based on the average closing price of the Company’s common stock during the 10-trading day period ending April 4, 2014, subject to a maximum of 1,060,740 shares and a minimum of 707,160 shares. This contingent consideration was recorded as a liability and measured at fair value using a probability-weighted model utilizing significant observable and unobservable inputs, including the volatility in the market price of the Company’s common stock, the expected probability of settling the contingent consideration in either cash or shares and an estimated discount rate commensurate with the risks of these outcomes. The analysis resulted in an estimated fair value of contingent consideration of $15,166. The contingent consideration was settled March 17, 2014 for $15,235 and the difference between the initial fair value amount and settlement amount was $69 which is reflected as a credit to or charge to General and administrative in the consolidated statement of operations.

The acquisition of Okapi Sciences was accounted for as a business combination under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded at fair value with the remaining purchase price recorded as goodwill. The assets acquired and the liabilities assumed from Okapi Sciences have been recorded at their fair values at the date of acquisition, being January 6, 2014. The Company’s consolidated financial statements and results of operations include the results of Okapi Sciences from January 6, 2014.

In the six months ended June 30, 2014 the Company incurred expenses totaling $161 relating to the Okapi Sciences acquisition, which was recorded within General and administrative expenses in the Company’s consolidated statement of operations.

The Company has preliminarily valued the acquired assets and assumed liabilities based on their estimated fair values. These estimates are subject to change as additional information becomes available, including finalization of certain tax matters and finalization of the working capital adjustment. The preliminary fair values included in the balance sheet as of June 30, 2014 are based on the best estimates of management. The completion of the valuation may result in adjustments to the carrying value of Okapi Sciences’ assets and liabilities, revision of useful lives of intangibles assets, the determination of any residual amount that will be allocated to goodwill and the related tax effects. The related amortization of acquired assets is also subject to revision based on the final valuation. Any adjustments to the preliminary fair values will be made as soon as practicable but no later than one year from the January 6, 2014 acquisition date.

 

11

---

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands, except share and per share data)

 

The Company’s allocation of the purchase price to the assets acquired and liabilities assumed was as follows:

 

Cash		$	1,063
Accounts receivable			149
Other receivables			60
Prepaid expenses and other current assets			82
Property and equipment			217
Other long-term assets			18
Identifiable intangible assets			29,400
Accounts payable and accrued expenses			(586	)
Deferred revenue			(83	)
Deferred tax liabilities, net			(3,588	)
Long-term debt			(4	)
Total identifiable net assets			26,728
Goodwill			17,711
Total net assets acquired			44,439
Less:
Promissory note			15,134
Contingent consideration			15,166
Cash paid		$	14,139

The following are the intangible assets acquired by drug program and their estimated useful lives as of the date of the acquisition:

 

		FAIR VALUE				USEFUL LIFE
AT-006		$	3,400				13 years
AT-007			13,500				15 years
AT-008			5,300				13 years
AT-011			7,200				14 years
Total intangible assets subject to amortization		$	29,400

The identifiable intangible assets recognized by the Company as a result of the Okapi Sciences acquisition relate to Okapi Sciences technology, and consist primarily of its intellectual property related to Okapi Sciences AT-006, AT-007, AT-008 and AT-011 programs, and the estimated net present value of future cash flows from commercial agreements related to the AT-006 program.

All Okapi Sciences programs, which were considered In-process research and development (“IPR&D”) at the acquisition date, were valued using a multi-period excess earnings method, a form of the income approach, which incorporates the estimated future cash flows to be generated from this technology. Excess earnings are the earnings remaining after deducting the market rates of return on the estimated values of contributory assets, including debt-free net working capital, tangible, and intangible assets. The excess earnings are thereby calculated for each year of a multi-year projection period and discounted to present value. Accordingly, the primary components of this method consist of the determination of excess earnings and an appropriate rate of return.

The Company will not amortize the assets related to the Okapi Sciences programs until commercialization has been achieved.

The preliminary valuation analysis conducted by the Company determined that the aggregate fair value of identifiable assets acquired less the aggregate fair value of identifiable liabilities assumed by the Company is less than the purchase price. As the purchase price exceeds the fair value of assets and liabilities acquired or assumed, goodwill will be recognized. Goodwill is calculated as the difference between the Okapi Sciences acquisition date fair value of the consideration transferred and the fair values of the assets acquired and liabilities assumed. The goodwill is not expected to be deductible for income tax purposes. Goodwill is recorded as an indefinite-lived asset and is not amortized but tested for impairment on an annual basis or when indications of impairment exist.

The difference between the total consideration and the fair value of the net assets acquired of $17,711 was recorded to Goodwill in the consolidated balance sheet. This goodwill represents the excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed, principally representing the tax attributes of the acquisition and certain operational and strategic synergies such as advancement toward becoming a commercial company and acquiring a proprietary antiviral platform.

Pro forma financial information

The following pro forma financial information summarizes the combined results of operations for the Company as though the acquisition of Okapi Sciences occurred on January 1, 2013. The unaudited pro forma financial information is as follows:

 

		THREE MONTHS ENDED JUNE 30, 2013				SIX MONTHS ENDED JUNE 30, 2013
Revenue		$	—			$	—
Loss from operations		$	(4,799	)		$	(9,249	)
Net and comprehensive loss before income taxes		$	(4,754	)		$	(9,420	)
Net loss attributable to common stockholders before income taxes		$	(5,562	)		$	(11,001	)

 

12

---

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands, except share and per share data)

 

The pro forma financial information for all periods presented has been calculated after adjusting the results of the Company and Okapi Sciences to reflect the business combination accounting effects resulting from these acquisitions including the amortization expenses from acquired intangible assets, the depreciation expenses from acquired tangible assets, the stock-based compensation expense for unvested stock options and restricted stock units assumed and the related tax effects as though the acquisition occurred as of January 1, 2013. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the Company’s 2013 fiscal year.

5. Marketable Securities

As of June 30, 2014 and December 31, 2013, the fair value of available-for-sale marketable securities by type of security was as follows:

 

		JUNE 30, 2014
		AMORTIZED COST				GROSS UNREALIZED GAINS				GROSS UNREALIZED LOSSES				FAIR VALUE
Certificates of deposit		$	2,453			$	—			$	—			$	2,453
Common stock			1,200				—				(352	)			848
		$	3,653			$	—			$	(352	)		$	3,301

 

		DECEMBER 31, 2013
		AMORTIZED COST				GROSS UNREALIZED GAINS				GROSS UNREALIZED LOSSES				FAIR VALUE
Certificates of deposit		$	4,670			$	—			$	—			$	4,670
		$	4,670			$	—			$	—			$	4,670

At June 30, 2014, and at December 31, 2013, certificates of deposit consisted of investments that mature within one year.

At June 30, 2014, unrealized losses in the amount of $352 were recorded as a component of other comprehensive income. As of June 30, 2014, no gross unrealized losses related to individual securities had been in a continuous loss position for 12 months or longer.

As of June 30, 2014, the Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature and does not consider any of its investments other-than-temporarily impaired. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis. During the three months and six months ended June 30, 2014, the Company did not recognize any impairment charges.

6. Derivative Financial Instruments

The Company records all derivatives in the consolidated balance sheets at fair value in the other long-term assets financial statement line item. In 2014, the Company’s derivative financial instrument is not designated as a hedging instrument and is adjusted to fair value through earnings in the other income (expense) financial statement line item.

The following table shows the Company’s derivative instrument at gross fair value as reflected in the consolidated balance sheet as of June 30, 2014:

 

		JUNE 30, 2014				DECEMBER 31, 2013
		FAIR VALUE OF DERIVATIVES NOT DESIGNATED AS HEDGE INSTRUMENT				FAIR VALUE OF DERIVATIVES NOT DESIGNATED AS HEDGE INSTRUMENT
Derivative assets:
Warrant (Notes 3 and 13)		$	424			$	—

 

13

---

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands, except share and per share data)

 

The following table shows the gain (loss) recognized in other income (expense) for the three months and six months ended:

 

		THREE MONTHS ENDED JUNE 30,								SIX MONTHS ENDED JUNE 30,
		2014				2013				2014				2013
		GAIN/(LOSS) RECOGNIZED IN OTHER INCOME/(EXPENSE)				GAIN/(LOSS) RECOGNIZED IN OTHER INCOME/(EXPENSE)				GAIN/(LOSS) RECOGNIZED IN OTHER INCOME/(EXPENSE)				GAIN/(LOSS) RECOGNIZED IN OTHER INCOME/(EXPENSE)
Derivative assets:
Warrant		$	27			$	—			$	(219	)		$	—

The following table shows the notional principal amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of June 30, 2014:

 

		JUNE 30, 2014
		NOTIONAL/ PRINCIPAL/SHARES				CREDIT RISK
Instruments not designated as accounting hedges:
Warrant			153,061			$	—

The notional principal shares amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. The credit risk amount represents the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current market prices at each respective date.

7. Inventories

Inventories are stated at the lower of cost or market and are comprised of the following:

 

		JUNE 30, 2014				DECEMBER 31, 2013
Work-in-process		$	124			$	55
		$	124			$	55

8. Property and Equipment, Net

Property and equipment consisted of the following as of June 30, 2014 and December 31, 2013:

 

		JUNE 30, 2014				DECEMBER 31, 2013
Laboratory and office equipment		$	248			$	90
Computer equipment and software			70				40
Furniture			69				2
Vehicles			114				—
Leasehold improvements			102				—
Construction in process			4				7
Total property and equipment			607				139
Less: Accumulated depreciation			(99	)			(41	)
Property and equipment, net		$	508			$	98

Depreciation expense was $35 and $61 for the three months and six months ended June 30, 2014, respectively.

9. Goodwill

In October 2013, the Company completed its acquisition of Vet Therapeutics. The fair value of consideration exceeded the fair value of assets and liabilities acquired, which resulted in goodwill of $20,796. In January 2014, the Company completed its acquisition of Okapi Sciences. The fair value of consideration paid totaled $43,376, net of cash received which resulted in goodwill of $17,711.

Goodwill is recorded as an indefinite-lived asset and is not amortized for financial reporting purposes but is tested for impairment on an annual basis or when indications of impairment exist. No goodwill impairment losses have been recognized. Goodwill is not expected to be deductible for income tax purposes. The Company will perform its annual impairment test of the carrying value of the Company’s goodwill during the third quarter of each year.

 

14

---

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands, except share and per share data)

 

The following is a summary of goodwill as of June 30, 2014:

 

		GROSS CARRYING AMOUNT				IMPAIRMENT LOSSES				NET CARRYING VALUE
Goodwill		$	38,419			$	—			$	38,419

The change in the net book value of goodwill for the six months ended June 30, 2014 is shown in the table below:

 

		2014
As of January 1		$	20,796
Acquisitions			17,711
Effect of foreign currency exchange			(88	)
As of the end of the period		$	38,419

10. Intangible Assets, Net

In January 2014, the Company completed its acquisition of Okapi Sciences (Note 4). The Company acquired certain identifiable intangible assets related to Okapi Sciences’ technology.

The following is a summary of intangible assets acquired during the six months ended June 30, 2014:

 

		GROSS CARRYING AMOUNT
Unamortized intangible assets:
Intellectual property rights acquired for IPR&D		$	29,254

The change in the net book value of other intangible assets for the six months ended June 30, 2014 is shown in the table below:

 

		2014
As of January 1		$	46,140
Acquisitions			29,400
Amortization charged			(1,121	)
Effect of foreign currency exchange			(146	)
As of the end of the period		$	74,273

The estimated useful lives of the individual categories of intangible assets were based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with finite lives is recognized over the shorter of the respective lives of the agreement or the period of time the intangible assets are expected to contribute to future cash flows. The Company amortizes finite-lived intangible assets using the straight-line method. Amortization of intangible assets for the three months and six months ended June 30, 2014 amounted to $582 and $1,121, respectively.

11. Debt

Converted Loans

On March 4, 2013, the Company entered into a credit facility (the “Credit Facility”) with Square 1 Bank (“Square 1”) as lender. The Credit Facility provided for an initial term loan of $5,000 in principal (the “Initial Term Loan”) and additional term loans not to exceed $5,000 in principal, with total borrowings not to exceed $10,000. On October 11, 2013, the Company and Vet Therapeutics entered into an amendment of the Credit Facility (the “Credit Facility Amendment”), which, among other things, increased the amount that remained available for the Company to draw by an additional $5,000, to a total of $10,000 (the “Additional Term Loan”). Simultaneously with the closing of the Credit Facility Amendment on October 11, 2013, the Company borrowed the total $10,000 available, and upon consummation of the merger with Vet Therapeutics, Vet Therapeutics became a co-borrower under the Credit Facility.

On June 13, 2014, the Company and Vet Therapeutics entered into an additional amendment of the Credit Facility (the “Second Credit Facility Amendment”), which, among other things, converted $15,000 in outstanding term loans under the Credit Facility into non-revolving loans (the “Converted Loans”) and modified certain terms and conditions of the loans, including fixing the interest rate at a fixed annual rate of 5.50%. The Company is obligated to make interest-only payments on any loans funded under the Credit Facility until June 13, 2016, on which date such non-revolving term loans will be due. If the Company and Vet Therapeutics remain in compliance with the terms of the Credit Facility through June 13, 2016 and Square 1, the Company and Vet Therapeutics mutually agree to new financial covenants, the Company and Vet Therapeutics shall have the option (subject to Square 1’s agreement to such new financial covenants) to amortize the principal amount of the loans under the Credit Facility starting on June 13, 2016. If the Company and Vet Therapeutics elect to amortize the principal amount of the loans under the Credit Facility on June 13, 2016 (subject to Square 1’s agreement to new financial covenants), the principal amount of the loans shall be payable in 24 equal monthly installments of principal, plus all accrued but unpaid interest, beginning on the date that is one month immediately following June 13, 2016.

 

15

---

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands, except share and per share data)

 

Simultaneously with the closing of the Second Credit Facility Amendment on June 13, 2014, the Company entered into a pledge and security agreement with Square 1, pursuant to which the Company pledged 65% of the issued and outstanding shares of Wildcat Acquisition BVBA, a private limited liability company formed in Belgium and a wholly owned subsidiary of the Company, to Square 1 as collateral under the Credit Facility.

On the issuance date of March 4, 2013, the Initial Term Loan was recorded in the consolidated balance sheet net of discount of $73, related to fees assessed by the lender at the time of borrowing.

The additional $11 of fees assessed by Square 1 in connection with the Second Credit Facility Agreement were capitalized and will be recognized over the term of the loan as the amendment was determined to be a debt modification. The carrying value of this debt is being accreted to the principal amount of the debt by charges to interest expense using the effective-interest method over the two-year term of the term to the maturity date of June 13, 2016. At June 30, 2014, the debt discount balance totaled $61. Accretion amounts recognized as interest expense for the three months and six months ended June 30, 2014 were $7 and $15, respectively and for the three and six months ended June 30, 2013 were $6 and $8, respectively.

Estimated future principal payments under the Credit Facility, as amended are as follows:

 

YEARS ENDING DECEMBER 31,
2014		$	—
2015			—
2016			15,000
2017			—
Thereafter			—
Total		$	15,000

During the three months and six months ended June 30, 2014, the Company recognized $216 and $433 of interest expense related to the Credit Facility, respectively.

Promissory Note

In connection with the acquisition of Vet Therapeutics, the Company executed a promissory note in the principal amount of $3,000 with a maturity date of December 31, 2014. The promissory note bore interest at a rate of 7% per annum, payable quarterly in arrears, and was subject to prepayment in the event of specified future equity financings by the Company. On February 4, 2014, the promissory note and accrued interest of $20 was paid by the Company.

12. Accrued Expenses

Accrued expenses consisted of the following as of June 30, 2014 and December 31, 2013:

 

		JUNE 30, 2014				DECEMBER 31, 2013
Accrued expenses:
Accrued payroll and related expenses		$	1,123			$	1,017
Accrued professional fees			382				600
Accrued minimum royalties			35				70
Accrued interest			75				71
Accrued research and development costs			806				662
Accrued other			90				75
		$	2,511			$	2,495

13. Agreements

Kansas Bioscience Authority (“KBA”) Programs

During the three months and six months ended June 30, 2014, the Company recognized income from a research and development grant from the KBA of $62. The Company received $641 during the life of the agreement.

Option Programs

During June 2014, the Company entered into an amendment to extend the option for one of the option agreements (AT-Beta) for an additional 12 months in exchange for a non-refundable, non-creditable extension fee.

 

16

---

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands, except share and per share data)

 

In August 2014, the Company elected to exercise the opt-in right, for a CRth2 antagonist for atopic dermatitis (AT-Gamma) which triggers the commencement of an exclusive negotiation period for a definitive agreement between the parties.

The principal terms of any option agreement entered into by the Company will generally consist of an exclusive, world-wide license to all non-human animal health applications in exchange for an upfront license fee, milestone payments upon the achievement of certain regulatory milestones, as well as royalties on sales.

During the three and six months ended June 30, 2014, the Company recognized expenses of $69 and $154 respectively, due to these option programs as Research and development expense.

Novartis Animal Health (“NAH”)

On August 21, 2013, Okapi Sciences entered into an Exclusive License, Development, and Commercialization Agreement with NAH (the “NAH AT-006 Agreement”) that granted NAH global rights for development and commercialization of licensed animal health products for an anti-viral for the treatment of feline herpes virus induced ophthalmic conditions. As a result of the Company’s acquisition of Okapi Sciences, the Company has assumed the rights and obligations under this agreement. The Company is responsible for the development and obtaining regulatory approval of AT-006 and NAH is responsible for the commercialization. The Company will be entitled to receive from NAH milestone payments of up to €7,500 upon Aratana’s achievement of certain regulatory milestones and NAH achievement of certain commercial milestones, as well as tiered royalties on NAH’s product sales, if any. The Company is entitled to receive from NAH up to $2,500 in reimbursement for development expenses, unless additional monies are approved by the joint steering committee. As of the acquisition date, Okapi Sciences had incurred $930 of development expenses. The remaining funding of up to $1,570 will be recognized as revenue as development expenses are incurred by the Company.

During the three and six months ended June 30, 2014, the Company recognized $300 and $476 of research and development services revenue related to the NAH AT-006 Agreement. As of June 30, 2014, the Company had not accrued or received any milestone or royalty payments since execution of the NAH AT-006 Agreement.

Advaxis Inc. (“Advaxis”)

On March 19, 2014, the Company entered into an Exclusive License Agreement with Advaxis (the “Advaxis Agreement”) that granted the Company global rights for development and commercialization of licensed animal health products for Advaxis’ ADXS-cHER2 for the treatment of osteosarcoma in dogs (“AT-014”) and three additional cancer immunotherapy products for the treatment of three other types of cancer. Under the terms of the Advaxis Agreement, the Company paid $2,500 in exchange for the license, 306,122 shares of common stock, and a warrant to purchase 153,061 shares of common stock. The consideration was allocated to the common stock and warrant based on their fair values on the date of issuance of $1,200 and $643, respectively. The remaining consideration of $657 was allocated to the licensed technology. On the date of acquisition, the licensed technology had not reached technological feasibility in animal health indications and had no alternative future use in the field of animal health. Accordingly, in-process research and development of $657 was expensed upon acquisition. The Company will be required to pay Advaxis milestone payments of up to an additional $6,000 in clinical and regulatory milestones for each of the four products, assuming approvals in both cats and dogs, in both the United States and the European Union. In addition, the Company agreed to pay up to $28,500 in commercial milestones, as well as tiered royalties ranging from mid-single digit to 10% on the Company’s product sales, if any.

The Company does not expect to achieve additional milestones related to the Advaxis Agreement within the next twelve months.

Under the terms of the subscription agreement, the Company acquired 306,122 shares of common stock and a warrant to purchase another 153,061 shares of common stock for $1,843. The warrant is exercisable through March 19, 2024, at an exercise price of $4.90 per share of common stock and to be settled through physical share issuance or net share settlement where the total number of issued shares is based on the amount the market price of common stock exceeds the exercise price of $4.90 on date of exercise. Neither the common stock nor warrant have registration rights. The remaining consideration of $1,843 was allocated to the common stock, $1,200, and the warrant $643 based on fair value and recorded in Marketable securities and Other long-term assets respectively.

Vet-Stem, Inc. (“Vet-Stem”)

On June 12, 2014, the Company entered into an Exclusive License Agreement with Vet-Stem (the “Vet-Stem Agreement”) that granted the Company the exclusive United States rights for commercialization and development of Vet-Stem’s allogeneic stem cells being developed for the treatment of pain and inflammation of canine osteoarthritis (“AT-016”). Vet-Stem is responsible for the development and obtaining regulatory approval of AT-016 and the Company is responsible for the commercialization. Under the terms of the Vet-Stem Agreement, the Company paid an initial license fee of $500. On the date of acquisition, the licensed technology had not reached technological feasibility in animal health indications and had no alternative future use in the field of animal health. Accordingly, in-process research and development of $500 was expensed upon acquisition. The Company will be required to pay Vet-Stem milestone payments of up to $4,500 upon Vet-Stem’s achievement of certain development and regulatory milestones, as well as tiered royalties on the Company’s product sales, if any. The Company could be required to pay to Vet-Stem up to $3,600 in reimbursement for development expenses, unless additional monies are approved by the joint steering committee.

 

17

---

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands, except share and per share data)

 

The Company does not expect Vet-Stem to achieve any milestones related to the Vet-Stem Agreement within the next twelve months.

14. Common Stock

Public Offering

On February 3, 2014, the Company completed a public offering of its common stock in which the Company issued and sold 5,150,000 shares of common stock at a public offering price of $19.00 per share. The Company received net proceeds of approximately $90,507 after deducting underwriting discounts and commissions of approximately $5,871 and other offering expenses of approximately $1,483.

As of June 30, 2014, there were 28,783,500 shares of the Company’s common stock outstanding, net of 663,888 shares of unvested restricted common stock.

Authorized Common Stock

In February 2013, the board of directors of the Company approved an amendment of the Company’s Certificate of Incorporation and increased the number of authorized shares of common stock to 25,041,667. On July 2, 2013, the Company increased the number of authorized shares of its common stock from 25,041,667 to 100,000,000, par value $0.001 per share.

Treasury Stock

As part of the Company’s stock plans, the Company offers employees the opportunity to make required tax payments with cash or through a net share settlement. For employees choosing net share settlement, the Company makes required tax payments on behalf of employees as their stock awards vest and then withholds a number of vested shares having a value on the date of vesting equal to the tax obligation. The shares withheld are recorded as treasury shares. During the three and six months ended June 30, 2014, the Company repurchased 864 and 4,873 shares, respectively, in settlement of employees’ tax obligations for a total of $88 or an average of $18.05 per share. The Company accounts for treasury stock using the cost method.

On April 15, 2014, the Company purchased 71,918 shares from a former stockholder of a subsidiary of the Company in a non-recurring private transaction for $986 or $13.71 per share.

Reverse Stock Split

On May 22, 2013, the Company effected a 1-for-1.662 reverse stock split of its issued and outstanding shares of common stock. No fractional shares were issued in connection with the reverse stock split. Accordingly, all share and per share amounts for all periods presented in these consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the reverse stock split.

Stock-Based Awards

The Company issued common stock pursuant to the 2010 Equity Incentive Plan during the year ended December 31, 2013, and both 2010 Equity Incentive Plan and 2013 Incentive Award Plan for the six months ended June 30, 2014, and year ended December 31, 2013 (Note 15).

15. Stock-Based Awards

The following table summarizes stock option activity under the 2010 Equity Incentive Plan (the “2010 Plan”) for the six months ended June 30, 2014:

 

		SHARES ISSUABLE UNDER OPTIONS				WEIGHTED AVERAGE EXERCISE PRICE				WEIGHTED AVERAGE REMAINING CONTRACTUAL TERM				AGGREGATE INTRINSIC VALUE
										(IN YEARS)
Outstanding as of December 31, 2013			263,467			$	1.25				8.94			$	4,704
Granted			—				—
Exercised			(47,055	)			0.40
Forfeited			(45,446	)			0.40
Expired			—				—
Outstanding as of June 30, 2014			170,986			$	1.71				8.55			$	2,258

 

18

---

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands, except share and per share data)

 

For the six months ended June 30, 2014, the total intrinsic value of options exercised was $865. The Company received $19 during the six months ended June 30, 2014 from stock option exercises.

The table below summarizes activity under the 2010 Plan related to restricted stock for the six months ended June 30, 2014:

 

		SHARES				WEIGHTED AVERAGE GRANT DATE FAIR VALUE
Unvested restricted common stock as of December 31, 2013			237,740			$	0.82
Restricted common stock issued			—				—
Restricted common stock vested			(112,044	)			0.74
Restricted common stock forfeited			—				—
Unvested restricted common stock as of June 30, 2014			125,696			$	0.89

As of June 30, 2014, options for the purchase of 1,447,332 shares of the Company’s common stock (net of repurchased shares) have been exercised, of which 258,159 are unvested and subject to repurchase.

The following table summarizes stock option activity under the 2013 Incentive Award Plan (the “2013 Plan”) for the six months ended June 30, 2014:

 

		SHARES ISSUABLE UNDER OPTIONS				WEIGHTED AVERAGE EXERCISE PRICE				WEIGHTED AVERAGE REMAINING CONTRACTUAL TERM				AGGREGATE INTRINSIC VALUE
Outstanding as of December 31, 2013			685,934			$	15.32				9.68			$	4,151
Granted			770,711				18.50
Exercised			(4,386	)			6.00
Forfeited			(25,893	)			6.97
Expired			—				—
Outstanding as of June 30, 2014			1,426,366			$	17.21				9.41			$	2,585

For the six months ended June 30, 2014, the weighted average grant date fair value of stock options granted was $13.39. For the six months ended June 30, 2014, the total intrinsic value of options exercised was $55. The Company received $26 during the three months ended June 30, 2014 from stock option exercises.

The table below summarizes activity under the 2013 Plan related to restricted stock for the six months ended June 30, 2014:

 

		SHARES				WEIGHTED AVERAGE GRANT DATE FAIR VALUE
Unvested restricted common stock as of December 31, 2013			89,766			$	19.07
Restricted common stock issued			225,000				18.42
Restricted common stock vested			(34,733	)			17.78
Restricted common stock forfeited			—				—
Unvested restricted common stock as of June 30, 2014			280,033			$	18.71

For the six months ended June 30, 2014, the weighted average grant date fair value of restricted common stock granted was $18.42. For the six months ended June 30, 2014, the total fair value of restricted common stock vested was $473. The Company did not receive cash proceeds for any of the restricted common stock granted during the six months ended June 30, 2014.

Stock-Based Compensation

The Company recognizes compensation expense for only the portion of awards that are expected to vest. In developing a forfeiture rate estimate, the Company has considered its historical experience to estimate pre-vesting forfeitures for service-based awards. The impact of a forfeiture rate adjustment will be recognized in full in the period of adjustment, and if the actual forfeiture rate is materially different from the Company’s estimate, the Company may be required to record adjustments to stock-based compensation expense in future periods.

 

19

---

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands, except share and per share data)

 

The Company recorded stock-based compensation expense related to stock options and restricted stock for the three and six months ended June 30, 2014 and 2013 as follows:

 

		THREE MONTHS JUNE 30,								SIX MONTHS JUNE 30,
		2014				2013				2014				2013
Research and development		$	378			$	31			$	782			$	62
General and administrative			1,089				58				2,918				130
		$	1,467			$	89			$	3,700			$	192

The Company had an aggregate of $14,898 and $4,863 of unrecognized stock-based compensation expense for options outstanding and restricted stock awards, respectively, as of June 30, 2014, which is expected to be recognized over a weighted average period of 3.2 years.

16. Net Loss Per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows for the three and six months ended June 30, 2014 and 2013.

 

		THREE MONTHS ENDED								SIX MONTHS ENDED
		JUNE 30,								JUNE 30,
		2014				2013				2014				2013
Basic and diluted net loss per share attributable to common stockholders:
Numerator:
Net Loss		$	(9,278	)		$	(3,440	)		$	(18,430	)		$	(6,733	)
Unaccreted dividends on convertible preferred stock			—				(808	)			—				(1,581	)
Net loss attributable to common stockholders		$	(9,278	)		$	(4,248	)		$	(18,430	)		$	(8,314	)
Denominator:
Weighted average shares outstanding, basic and diluted			28,761,326				918,397				27,768,959				889,528
Net loss per share attributable to common stockholders, basic and diluted		$	(0.32	)		$	(4.62	)		$	(0.66	)		$	(9.35	)

Stock options for the purchase of 1,597,332 shares of common stock were excluded from the computation of diluted net loss per share attributable to common stockholders for both the three and six months ended June 30, 2014, respectively, because those options had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the period.

17. Income Taxes

The Company recorded income tax benefit of $335 and $962 during the three and six months ended June 30, 2014, respectively, compared to $0 during the three and six months ended June 30, 2013. The Company’s effective tax rate of 5.0% for the six months ended June 30, 2014, was based on the Company’s projected annual estimated effective tax rate for 2014. The Company’s income tax benefit consists of deferred tax benefit for losses incurred that would reduce the amount of deferred tax liability related to intangible assets.

As of June 30, 2014, the Company had net deferred tax liability of approximately $2,900. On January 6, 2014, the Company completed the acquisition of Okapi Sciences. As a result of the acquisition, the company recognized approximately $3,600 of net deferred tax liability primarily related to the step-up of intangible assets for book purposes, net of foreign net operating loss carryforwards.

 

20

---

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands, except share and per share data)

 

18. Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss, net of their related tax effects, for the six months ended June 30, 2014 were:

 

		FOREIGN CURRENCY TRANSLATION ADJUSTMENT				UNREALIZED HOLDING GAIN/(LOSS) ON AVAILABLE FOR SALE SECURITIES				ACCUMULATED OTHER COMPREHENSIVE LOSS
As of January 1, 2014		$	—			$	—			$	—
Current period change			(390	)			(352	)			(742	)
As of June 30, 2014		$	(390	)		$	(352	)		$	(742	)

19. Related Party Transactions

On May 7, 2014 the Company amended its corporate office lease in Kansas City, Kansas with MPM Heartland House, LLC, a company in which the current Chief Executive Officer and President of the Company, also a director of the Company, is the principal owner. The amendment was made effective May 1, 2014. Under the terms of the amendment, the Company expanded leased office space, shared access areas and parking spaces for a total rent of $115 per year. All other lease terms remain unaltered. The Company believes the terms of the lease agreement, as amended, are no less favorable than those that the Company could have obtained from an unaffiliated third party.

 

21

---

Table of Contents

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 financial statements and the related notes and other financial information included elsewhere 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, includes forward-looking statements that involve risks and uncertainties. In this Quarterly Report on Form 10-Q, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” “estimates,” “plans,” “would,” “should,” “potential,” “continues” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. These forward-looking statements involve risks, uncertainties and other important 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 the forward-looking statements, including, but not limited to: our history of operating losses and our expectation that we will continue to incur losses for the foreseeable future; failure to obtain sufficient capital to fund our operations; market conditions and our ability to raise capital under the shelf registration statement from the sale of our securities; our substantial dependence upon the success of our product candidates; development of our biologic product candidates is dependent upon relatively novel technologies and uncertain regulatory pathways, and biologics may not be commercially viable; denial or delay of regulatory approval for our existing or future product candidates; failure of our product candidates that receive regulatory approval to obtain market approval or achieve commercial success; failure to realize anticipated benefits of our acquisitions and difficulties associated with integrating the acquired businesses; development of pet therapeutics is a lengthy and expensive process with an uncertain outcome; competition in the pet therapeutics market, including from generic alternatives to our product candidates, and failure to compete effectively; failure to identify, license or acquire, develop and commercialize additional product candidates; failure to attract and retain senior management and key scientific personnel; our reliance on third-party manufacturers, suppliers and partners; regulatory restrictions on the marketing of our product candidates; our lack of an internal sales organization, and any failure to create a sales force or partner with third-parties to commercialize our product candidates; difficulties in managing the growth of our company; significant costs of being a public company; our current exemption from the requirement to maintain internal control over financial reporting, and any failure to achieve and maintain effective internal control over financial reporting in the future; changes in distribution channels for pet therapeutics; consolidation of our veterinarian customers; limitations on our ability to use our net operating loss carryforwards; safety or efficacy concerns with respect to our product candidates; failure to obtain ownership of issued patents covering our product candidates or failure to prosecute or enforce licensed patents; failure to comply with our obligations under our license agreements; risks associated with our intellectual property rights; effects of patent or other intellectual property lawsuits; failure to protect our intellectual property; changing patent laws and regulations; non-compliance with any legal or regulatory requirements; the uncertainty of the regulatory approval process and the costs associated with government regulation of our product candidates; failure to obtain regulatory approvals in foreign jurisdictions; effects of legislative or regulatory reform with respect to pet therapeutics; the volatility of the price of our common stock; our status as an emerging growth company, which could make our common stock less attractive to investors; dilution of our common stock as a result of future financings; the influence of certain significant shareholders over our business; the eligibility of a significant portion of our total outstanding shares to be sold into the market in the near future, which could cause the market price of our common stock to drop significantly; and provisions in our charter documents and under Delaware law could delay or prevent a change in control. These and other important factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities and Exchange Commission (the “SEC”) on March 26, 2014 and the “Risk Factors” section of this Quarterly Report on Form 10-Q, could cause actual results to differ materially from those indicated by the forward-looking statements made in this Quarterly Report on Form 10-Q.

Overview

We are a pet therapeutics company focused on licensing, developing and commercializing innovative biopharmaceutical products for companion animals. We operate in one business segment. We operate at the intersection of the more than $50 billion annual U.S. pet market and the more than $20 billion annual worldwide animal health market. Our current portfolio includes over 15 therapeutic candidates in development consisting of small molecule pharmaceuticals and large molecule biologics that target large opportunities in serious medical conditions in pets. Our most advanced products from a development and commercialization perspective, AT-004 and AT-005, are monoclonal antibodies for treating lymphoma in dogs. AT-004, which treats B-cell lymphoma, received a conditional license from the U.S. Department of Agriculture (“USDA”) in November 2012. AT-005, which treats T-cell lymphoma, received a conditional license from the USDA in January 2014, and we expect to commence limited marketing of the product to our clinical investigator sites and certain other sites later this year as we complete the activities required to obtain a full license. We have also filed for a product license from the USDA for AT-014, a novel her2/neu-directed cancer immunotherapy for the treatment of canine osteosarcoma and other cancers. This product was licensed from Advaxis, Inc. (“Advaxis”) in March 2014. Our other lead products include small molecules directed at treating osteoarthritis pain and inflammation, loss of appetite and post-operative pain in dogs and cats. We are also developing antiviral drugs, focused on the treatment of herpes and immunodeficiency in cats, including AT-006, our partnered antiviral for the treatment of ocular lesions associated with feline ocular herpes infection. We have closed enrollment on a partially-enrolled pivotal field study in Germany to harmonize the program to enable a concurrent U.S. and EU development plan. The closed study will not enable a pivotal EU submission in 2015. In June 2014, we entered into an exclusive license agreement with Vet-Stem, Inc., (“Vet-Stem”) for its novel, allogeneic stem cell therapy technology. Under the agreement, Aratana obtained the exclusive rights to commercialize Vet-Stem’s allogeneic stem cells in the United States, which if approved, would be the first FDA-regulated, “off the shelf” regenerative cell therapy for the treatment of osteoarthritis in dogs (AT-016). Our product candidates and development activities are designed to enable veterinarians and pet owners to manage pets’ medical needs safely and effectively, potentially resulting in longer and improved quality of life for pets. We can provide no assurance, however, that regulatory approval of our product candidates will be obtained.

 

22

---

Table of Contents

We have assembled a portfolio of therapeutic candidates that are in various stages of development in either cats or dogs, and frequently in both. The following table identifies the primary molecules in our current therapeutic portfolio and their current status in development:

 

COMPOUND		SPECIES		INDICATION		PROGRAM STATUS
AT-001 (grapiprant)		Dog		Pain and inflammation associated with osteoarthritis		Pivotal field effectiveness study. Expect U.S. marketing approval in 2016.
		Cat		Pain and inflammation associated with degenerative joint disease		Pilot studies.
AT-002 (capromorelin)		Dog		Stimulation of appetite		Pivotal field effectiveness study. Expect U.S. marketing approval in 2016.
		Dog		Maintain or gain body weight in chronically diseased dogs.		Pilot studies.
		Cat		Maintain or gain body weight in chronically diseased cats		Pilot studies.
AT-003 (bupivacaine ER)		Dog		Post-operative pain management		Dose confirmation study.
		Cat		Post-operative pain management		Proof of concept studies.
AT-004		Dog		B-cell lymphoma monoclonal antibody		Submitted pivotal field effectiveness study to USDA. Licensed to Novartis Animal Health Inc. (“NAH”). Full license expected in 2014.
AT-005		Dog		T-cell lymphoma monoclonal antibody		Completed pivotal field effectiveness study. Two additional effectiveness studies under practice conditions. Full license expected in 2015.
AT-006		Cat		Ocular herpes virus infection		Closed the field study in Europe. Planning for additional studies. Licensed to NAH.
AT-007		Cat		Feline immunodeficiency virus infection		Pilot study in Europe.
AT-008		Dog		Lymphoma chemotherapy		Planning pivotal field effectiveness study in Europe.
AT-009		Dog		Mast cell tumor		Lead selection.
AT-010		Dog		Atopic dermatitis		Lead selection.
AT-011		Dog		Parvovirus infection		Lead selection.
AT-012		Cat		Calicivirus infection		Lead selection.
AT-014		Dog		Osteosarcoma immunotherapy		Filed for USDA product license.
AT-015		Cat		Lymphoma monoclonal antibody		Lead selection.
AT-016		Dog		Allogeneic stem cell therapy in osteoarthritis		Dose confirmation study.
AT-017		Dog		Lymphoma immunotherapy		Lead selection.

In addition to the above-listed product candidates, we are evaluating additional molecules for applications in other diseases and we are researching new product concepts internally through our recently acquired antibody and antiviral research expertise. We have two options with third parties for two additional molecules that we are considering licensing for further development, one of which is a CRTh2 antagonist for atopic dermatitis and the other is for seizures in dogs. We aim to submit drug applications for U.S. approval

 

23

---

Table of Contents

for the majority of these potential products and to make similar regulatory filings for European approval. Furthermore, where appropriate, we attempt to develop and submit regulatory filings for therapeutic indications in both cats and dogs, which will be separate products and require separate approvals.

Our strategy is to in-license proprietary technology from human biopharmaceutical companies and academia or leverage existing insights in human biology applicable in pets and to develop therapeutics specifically for use in pets. We seek to identify human therapeutics that have demonstrated safety and effectiveness in at least two species and are in, or have completed, Phase I or Phase II clinical trials in humans, with well-developed active pharmaceutical ingredient, process chemistry and a well-defined manufacturing process. We also seek to identify products already in development for pets and to license or acquire these products. To date we have in-licensed and are further developing pharmaceutical compounds from Pacira Pharmaceuticals, Inc., RaQualia Pharma, Inc., Advaxis, Vet-Stem and others.

We expect to use the time between now and full commercialization of our product candidates to build veterinarian and pet owner awareness of our company and our products. We believe that our product candidates, if approved, will enable veterinarians to deliver a higher level of medical care to pets while providing an important revenue stream to the veterinarian’s practice.

We have incurred significant net losses since our inception. We incurred net losses of $4.3 million, $11.6 million and $3.5 million for the years ended December 31, 2013, 2012, and 2011, respectively. These losses have resulted principally from costs incurred in connection with in-licensing our product candidates, research and development activities and general and administrative costs associated with our operations. As of June 30, 2014, we had an accumulated deficit of $44.9 million and cash, cash equivalents and short-term investments of $70.7 million.

We expect to continue to incur operating losses for the next several years as we work to develop and commercialize our product candidates. As a result, we expect to seek to fund our operations through public or private equity offerings, debt financings, corporate collaborations and licensing arrangements. We cannot assure you that such funds will be available on terms favorable to us, if at all. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies or product candidates. In addition, there is a risk that we may never successfully complete development of any of our product candidates, obtain adequate patent protection for our technology, obtain necessary regulatory approval for our product candidates or achieve commercial viability for any approved product candidates. If we are not able to raise additional capital on terms acceptable to us, or at all, as and when needed, we may be required to curtail our operations, and we may be unable to continue as a going concern. As of the date of the filing of this quarterly report, we believe that our existing cash, cash equivalents, and short-term marketable securities, which include the net proceeds received by us in our public offering of common stock, as discussed below, and existing Credit Facility, will allow us to fund our operations through at least December 31, 2015.

Recent Developments

Option Programs

As part of the Company’s product selection and development effort, we enter into option agreements with human biopharmaceutical companies to assess certain product candidates for potential use in companion animals. During June 2014, we entered into an amendment to extend the option for one of the option agreements (AT-Beta) for an additional 12 months in exchange for a non-refundable, non-creditable extension fee.

In August 2014, we elected to exercise the opt-in right on the remaining option, for a CRTh2 antagonist for atopic dermatitis (AT-Gamma) which triggers the commencement of an exclusive negotiation period for a definitive agreement between the parties.

License agreements

Vet-Stem, Inc. – We entered into an exclusive license agreement with Vet-Stem in June 2014 for its novel, allogeneic stem cell therapy technology. Under the agreement, we obtained exclusive rights to Vet-Stem’s allogeneic stem cells in the United States for the treatment of osteoarthritis in dogs. Aratana and Vet-Stem initiated a blinded, multi-center, placebo-controlled, dose confirmation study.

Under the terms of the agreement, we will have an exclusive license to develop and commercialize products in the U.S., based upon Vet-Stem technology for the treatment of pain and inflammation of canine osteoarthritis. Vet-Stem will continue to be responsible for the ongoing development of its allogeneic stem cell technology. We paid $0.5 million upon signing of the license as a reimbursement to Vet-Stem for a portion of its past development expenses and will be responsible for funding future budgeted development. The current agreed upon amount for development is $3.6 million, and this amount is subject to adjustments as approved by the joint steering committee. We will also pay up to $4.5 million in success-based development and regulatory milestones, as well as tiered royalties upon potential commercialization of the stem cell therapy, based on potential sales. We will also have the exclusive right to negotiate expansion of the agreement to include the European Union countries during the calendar year of 2014.

 

24

---

Table of Contents

Shelf Registration Statement

On July 15, 2014, we filed a shelf registration statement on Form S-3 (Reg. No. 333-197414) (the “Shelf Registration Statement”) with the Securities and Exchange Commission (“SEC”). The Shelf Registration Statement was declared effective by the SEC on July 30, 2014.

The Shelf Registration Statement gives us the flexibility to offer and sell, from time to time, up to $100 million of common stock, preferred stock, warrants, units or any combination of the foregoing in one or more future public offerings. The Shelf Registration Statement also registered for sale of up to 500,000 shares in the aggregate of our common stock by certain of our stockholders. There are no specific plans to offer securities under the Shelf Registration Statement at this time. The terms of any future offering would be determined at the time of the offering and would be subject to market conditions and approval by the Company’s Board of Directors. Any offering of securities covered by the Shelf Registration Statement will be made only by means of a written prospectus and prospectus supplement authorized and filed by us.

Amendment to Square 1 Credit Facility

On June 13, 2014, we entered into an additional amendment of the Square 1 Bank (“Square 1”) credit facility (the “Credit Facility”). A more detailed description of our Credit Facility is available under the caption “Liquidity and Capital Resources - Indebtedness.”

Financial Overview

Revenue

With the purchase of Vet Therapeutics in October 2013, we acquired AT-004 for the treatment of B-cell lymphoma in dogs. This product is licensed in the United States and Canada to NAH and has been granted a conditional approval from the USDA. Under the terms of the agreement, we receive a royalty for commercial product sales. We are responsible for the manufacturing of AT-004 until the successful transfer of the manufacturing technology to NAH’s chosen manufacturer. NAH purchases the product we manufacture at cost plus an agreed upon margin. We also acquired AT-005 for the treatment of T-cell lymphoma in dogs. This product was granted conditional approval in early 2014. We have initiated additional studies to generate more data for our AT-005 product to help position it in cancer treatment protocols. During this time, we plan to provide commercial product to those investigating veterinarians who request AT-005 to treat additional dogs that are not eligible for our clinical studies. Since we are under a conditional approval, we anticipate that we will generate very modest revenue for AT-005 in 2014. We believe we may gain full USDA licensure for AT-004 in 2014 and full USDA licensure for AT-005 in 2015.

We continue to recognize revenue from R&D services we provide for the ongoing development of AT-006, which is licensed to NAH for the treatment of ocular herpes infection.

Operating Expenses

The majority of our operating expenses to date have been for the licensing of and the research and development activities related to our research and development pipeline.

Research and Development Expense

Research and development costs, which consist primarily of costs associated with our product development efforts, including target animal studies, are expensed as incurred. Research and development expense consists primarily of contracted development costs, wages, stock-based compensation and employee benefits for all employees engaged in scientific research and development functions, and other operational costs related to our research and development activities, including facility-related expenses, regulatory, professional and consulting fees, travel costs and allocated corporate costs.

We have been developing our pipeline programs in parallel and typically use our employee and infrastructure resources across multiple development programs. We track contracted development costs by development compound but do not allocate personnel or other internal costs related to development to specific programs or development compounds. These expenses are included in personnel costs and other internal costs, respectively.

During 2013, we entered into option agreements relating to three molecules. We have decided not to pursue one of these molecules. During June 2014, we entered into an amendment to extend the option for one of the option agreements (AT-Beta) for an additional 12 months in exchange for a non-refundable, non-creditable extension fee. In August 2014, we elected to exercise the opt-in right on the remaining option, for a CRTh2 antagonist for atopic dermatitis (AT-Gamma) which triggers the commencement of an exclusive negotiation period for a definitive agreement between the parties.

General and Administrative Expense

General and administrative expense consists primarily of personnel costs, including salaries, related benefits and stock-based compensation for employees in administration, finance, legal, human resources, commercialization and business development. General and administrative expenses also includes allocated rent and other facilities costs; professional and consulting fees for general business purposes and for accounting and tax services, business development activities, and general legal services; and travel and other costs.

 

25

---

Table of Contents

In-Process Research and Development Expense

In-process research and development (“IPR&D”) expense consists of costs associated with acquired in-licensed technology, including upfront and milestone payments. As this technology has not reached technological feasibility in animal health indications and has no alternative future use in the field of animal health, it is expensed upon acquisition.

Other Income (Expense)

Interest Income

Interest income consists of interest earned on our cash, cash equivalents and short-term marketable securities.

Interest Expense

We incur interest expense associated with our $15.0 million of outstanding borrowings. In March 2013, we borrowed $5.0 million under our Credit Facility with Square 1 and in October 2013, we borrowed an additional $10.0 million under our Credit Facility.

On June 13, 2014, we entered into an additional amendment of the Credit Facility, which, among other things, converted the $15.0 million in outstanding term loans under the Credit Facility into non-revolving loans and modified certain terms and conditions of the loans, including fixing the interest rate at a fixed annual rate of 5.50%. We are only required to pay interest on the non-revolving term loans until June 13, 2016, on which date such non-revolving term loans will be due. If, however, we remain in compliance with the terms of the Credit Facility through June 13, 2016 and we mutually agree with Square 1 to new financial covenants, we shall have the option to amortize the principal amount of the loans under the Credit Facility starting on June 13, 2016. If we elect to amortize the principal amount of the loans under the Credit Facility on June 13, 2016 (subject to Square 1’s agreement to new financial covenants), the principal amount of the loans shall be payable in 24 equal monthly installments of principal, plus all accrued but unpaid interest, beginning on the date that is one month immediately following June 13, 2016.

A more detailed description of our Credit Facility is available under the caption “Liquidity and Capital Resources - Indebtedness.”

Other Income (Expense)

Other income consists primarily of amounts received under a research and development voucher program grant agreement with the Kansas Bioscience Authority (“KBA”), which was executed in March 2012. We were eligible to receive up to $1.3 million over an estimated two year period, in the form of a quarterly reimbursement of 33% of costs incurred during that period for pre-formulation, formulation, manufacture and pivotal studies associated with the AT-001 and AT-002 programs, to the extent that such costs are incurred with specifically named Kansas companies. This agreement terminated during the quarter ended June 30, 2014, as scheduled. From inception through June 30, 2014, we have received $0.6 million under this agreement.

In 2014, in conjunction with the Advaxis license agreement we obtained a warrant to purchase shares of common stock. The unrealized gain (loss) in fair value of the warrant is recorded in Other income (expense).

Income Taxes

Our effective tax rate of 5.0% for the six months ended June 30, 2014 was based on our projected annual estimated effective tax rate for 2014.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenues, costs and expenses and related disclosures during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Other than as described below, there have been no material changes to our critical accounting policies through June 30, 2014 from those discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on March 26, 2014.

 

26

---

Table of Contents

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from those estimates.

Revenue Recognition

During 2013, our principal revenue streams were product sales, royalty revenue and licensing revenue. Beginning in 2014, as a result of the Okapi Sciences acquisition, we will generate revenue from research and development services. Revenues from the performance of research and development services are recorded as Licensing and collaboration revenue in the consolidated statements of operations and are recognized on a proportional basis as costs are incurred.

Accounting for Stock Based Compensation

In 2013, we used expected volatility based on the historic volatility of publicly-traded peer companies. Beginning in the first quarter of 2014, expected volatility became based on historical volatility of our stock as adequate historical data regarding the volatility of our common stock price became available.

Derivative Financial Instruments

In 2013, we held no derivative financial instruments. We account for our derivative instruments as either assets or liabilities and carry them at fair value. Our sole derivative has not been designated as a hedging instrument and is adjusted to fair value through current income.

Foreign Currency

During 2013, we had limited foreign currency exposure. With the acquisition of Okapi Sciences in 2014, we now are exposed to effects of foreign currency from translation. Transactions in foreign currencies are translated into the relevant functional currency at the rate of exchange at the date of the transaction. Transaction gains and losses are recognized in arriving at loss from operations. The results of operations for subsidiaries, whose functional currency is not the U.S. Dollar, are translated into the U.S. Dollar at the average rates of exchange during the period, with the subsidiaries’ balance sheets translated at the rates accumulated at the balance sheet date. The cumulative effect of exchange rate movements is included in a separate component of other comprehensive income (loss) in the consolidated balance sheet. Gains and losses arising from intercompany foreign currency transactions are included in loss from operations unless the gains and losses arise from permanent differences in intercompany accounts. Gains and losses from permanent differences in intercompany accounts is included in a separate component of other comprehensive income.

Comprehensive Loss

For the year ended December 31, 2013, there was no difference between net loss and comprehensive loss. During the first six months of 2014, there was a difference between net loss and comprehensive loss. We include in comprehensive loss, foreign currency translation adjustments related to the translation of foreign subsidiaries’ balance sheets and permanent differences in intercompany accounts and unrealized holding gains and losses on available-for-sale securities.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2014 and 2013

 

		THREE MONTHS ENDED JUNE 30,								%				SIX MONTHS ENDED JUNE 30,								%
		2014				2013				Change				2014				2013				Change
		(Dollars in thousands)												(Dollars in thousands)
Revenues:
Licensing and collaboration revenue		$	300			$	—				NA			$	476			$	—				NA
Costs and expenses:
Royalty expense			17				—				NA				35				—				NA
Research and development			4,300				2,469				74	%			7,872				4,583				72	%
General and administrative			4,404				1,258				250	%			9,016				2,484				263	%
In-process research and development			500				—				NA				1,157				—				NA
Amortization of acquired intangible assets			582				—				NA				1,121				—				NA
Interest income			13				22				-41	%			27				25				8	%
Interest expense			(218	)			(78	)			180	%			(546	)			(102	)			436	%
Other income (expense)			95				343				-72				(148	)			411				-136	%
Income tax benefit			335				—				NA				962				—				NA

 

27

---

Table of Contents

Revenue

During the three months and six months ended June 30, 2014 we recorded $0.3 million and $0.5 million revenue, respectively, from research and development services we provide for the ongoing development of AT-006, which is licensed to NAH for the treatment of ocular herpes infection. Revenues from the performance of research and development services are recorded as Licensing and collaboration revenue in the consolidated statements of operations and are recognized on a proportional basis as costs are incurred.

Research and development expense

 

		THREE MONTHS ENDED JUNE 30,								% CHANGE
		2014				2013
		(Dollars in thousands)
Contracted development costs		$	2,285			$	1,602				42.6	%
Personnel costs			1,154				509				126.7	%
Other costs			861				358				140.5	%
Total research and development		$	4,300			$	2,469				74.2	%

During the three months ended June 30, 2014, research and development expenses totaled $4.3 million compared to $2.5 million for the three months ended June 30, 2013. The increase in research and development expense is due primarily to various in-licensing deals, as well as advancing the development of ongoing programs, and the increase in the headcount and number of products in development as a result of the Vet Therapeutics and Okapi Sciences acquisitions.

 

		SIX MONTHS ENDED JUNE 30,								% CHANGE
		2014				2013
		(Dollars in thousands)
Contracted development costs		$	3,778			$	3,007				25.6	%
Personnel costs			2,529				1,006				151.4	%
Other costs			1,565				570				174.6	%
Total research and development		$	7,872			$	4,583				71.8	%

During the six months ended June 30, 2014, research and development expense increased by $3.3 million as compared to the same period in 2013. This increase was primarily due to a $1.5 million increase in personnel costs as a result of increased headcount, a $1.0 million increase in other costs primarily related to increase in travel, professional fees/dues, rent, supplies and other indirect expenses and $0.8 million increase in contracted development costs as a result of the development of the expanded pipeline.

We expect research and development expense will increase for the foreseeable future as we continue to increase our staffing, commence pivotal field effectiveness studies and further develop our compounds. At this time, due to the inherently unpredictable nature of our development, we cannot reasonably estimate or predict the nature, specific timing or estimated costs of the efforts that will be necessary to complete the development of our product candidates. We expect to fund our research and development expenses from our cash and cash equivalents, a portion of the net proceeds from our offerings and any future collaboration arrangements. We cannot forecast with any degree of certainty which product candidates may be subject to future collaborations or contracts, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

General and administrative expense

During the three months ended June 30, 2014, general and administrative expense increased by $3.1 million as compared to the same period in 2013. The increases are related primarily to costs associated with becoming a public company, as well as the addition of general operating expenses related to our San Diego and Belgium locations during the 2014 period. We continue to establish a commercial infrastructure to prepare for commercialization of our later stage products. We currently have two products in our portfolio with conditional approval from the USDA. During the quarter, we presented data from several of our programs at the American College of Veterinarians Internal Medicine (ACVIM) meeting in Nashville, TN.

During the six months ended June 30, 2014, general and administrative expense increased by $6.5 million as compared to the same period in 2013. This increase was primarily due to increase in personnel-related costs, which was the result of increased headcount, higher salaries, employee benefits, travel and supplies; increased professional fees associated with acquisitions and the higher costs of

 

28

---

Table of Contents

public company requirements; and $1.2 million in costs associated with our commercial infrastructure and business development initiatives. We also had certain one-time costs of approximately $1.0 million associated with the accelerated vesting of equity awards held by a former employee during the 2014 period.

We expect general and administrative expense to continue to increase as we continue to build our corporate infrastructure in the support of continued development and commercialization of our advanced lymphoma franchise, AT-001, AT-002, AT-003 and other development programs.

In-process research and development expense

During the three months ended June 30, 2014, we acquired the exclusive rights to Vet-Stem’s allogeneic stem cells in the United States for the treatment of osteoarthritis in dogs. This resulted in a $0.5 million upfront payment. We did not acquire any in-process research and development programs during the three months ended June 30, 2013.

In-process research and development expense was $1.2 million for the six months ended June 30, 2014 due to the Advaxis and Vet-Stem agreements. We did not acquire any in-process research and development programs during the six months ended June 30, 2013.

Amortization of acquired intangible assets

Amortization expense was $0.6 million and $1.1 million for the three and six months ended June 30, 2014, respectively. We did not have any amortization expense during the three and six months ended June 30, 2013. The increase in amortization expense during the three months ended June 30, 2014, is solely due to the acquisition of Vet Therapeutics. We identified certain intangible assets associated with AT-004 and began amortizing this intangible over its 20 year estimated useful life during the period as conditional approval had already been received. Conditional approval of AT-005 was received in January 2014 and we began amortizing this intangible over its 20 year estimated useful life during the first quarter.

Interest expense

Interest expense increased by $0.1 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. This increase was due to interest expense related to our Credit Facility, which was entered into during March 2013. Our borrowings under the Credit Facility increased by approximately $10.0 million following the 2013 three month period.

Interest expense increased by $0.4 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. This increase was due to interest expense related to our Credit Facility, which was entered into during March 2013 and notes payable associated with the acquisition of Vet Therapeutics and Okapi Sciences. Our borrowings under the Credit Facility increased by approximately $10.0 million following the 2013 six month period.

Other income/ (expense)

Other income (expense) decreased by $0.2 million and $0.6 million during the three and six months ended June 30, 2014, respectively, as compared to the three months ended June 30, 2013. In 2014 other income (expense) was due to unrealized holding losses on the Advaxis warrant. Other income during the 2013 period was related primarily to our research and development voucher program grant agreement with the KBA.

Income tax benefit

Income tax benefit increased by $0.3 million and $1.0 million for the three and six months ended June 30, 2014, respectively. This increase is solely due to the Okapi Sciences acquisition. As a result, we recognized approximately $3.6 million of net deferred tax liability, primarily related to the step-up of intangible assets for book purposes, net of foreign net operating loss carryforwards.

Liquidity and Capital Resources

We have incurred losses and negative cash flows from operations and have not generated significant revenue.

As of June 30, 2014, we had an accumulated deficit of $44.9 million and cash, cash equivalents and short-term investments of $70.7 million.

On January 6, 2014, we acquired Okapi Sciences. We paid its equity holders approximately €10.3 million (equivalent to $14.1 million) in cash and issued a promissory note for €11 million (approximately $14.9 million). The promissory note bore interest at 7% per annum payable quarterly in arrears and was scheduled to mature on December 31, 2014, subject to mandatory prepayment in the event of an equity financing. Such an equity offering closed on February 3, 2014, as indicated below, and, in connection with that financing, the holders of the note payable related to the Okapi Sciences acquisition were repaid. We also agreed to pay up to an additional $16.3 million

 

29

---

Table of Contents

in cash or shares of common stock calculated in the manner specified in the purchase agreement within 90 days of the closing, subject to mandatory prepayment in cash in the event of an equity financing, which also includes the equity offering that closed on February 3, 2014. Subsequent to the equity offering this obligation was settled through the payment in cash of $15.2 million.

On February 3, 2014, we completed a public offering of our common stock in which we issued and sold 5,150,000 shares of common stock at a public offering price of $19.00 per share. We received net proceeds of approximately $90.5 million after deducting underwriting discounts and commissions of approximately $5.9 million and other offering expenses of approximately $1.5 million.

We believe that our existing cash, cash equivalents, short-term marketable securities, and existing Credit Facility will allow us to fund our operations through at least December 31, 2015. We anticipate that we will continue to incur losses for at least the next several years. We expect an increase in investment related to our research and development and commercial activities and, as a result, we may need additional capital to fund our operations, which we may obtain from public or private equity, debt financings or other sources, such as corporate collaborations and licensing arrangements.

Indebtedness

In March 2013, we entered into a loan and security agreement, or Credit Facility, with Square 1, as lender. The Credit Facility originally provided for an initial term loan of $5.0 million in principal and additional term loans not to exceed $5.0 million in principal. We borrowed $5.0 million under the Credit Facility.

On October 11, 2013, we entered into an amendment of the Credit Facility, or the Credit Facility amendment, which, among other things, increased the amount that remains available for us to draw by an additional $5.0 million, to a total of $10.0 million. Simultaneously with the closing of the Credit Facility amendment on October 11, 2013, we borrowed the total $10.0 million available under the Credit Facility, as amended. The term loans are to be used to supplement our growth capital needs and for general corporate purposes. Pursuant to the terms of the Credit Facility amendment, upon consummation of the merger with Vet Therapeutics, Vet Therapeutics then became a co-borrower under the Credit Facility, as amended, and granted a security interest in substantially all of its assets to Square 1. Pursuant to the terms of the Credit Facility, we are not permitted to encumber, or grant a security interest in, our intellectual property. On June 13, 2014, the Company entered into an additional amendment of the Credit Facility (the “Second Credit Facility Amendment”), which, among other things, converted the $15.0 million in outstanding term loans under the Credit Facility into non-revolving loans and modified certain terms and conditions of the loans, including fixing the interest rate at a fixed annual rate of 5.50%. The Company is obligated to make interest-only payments on any loans funded under the Credit Facility until June 13, 2016, on which date such non-revolving term loans will be due. If the Company and Vet Therapeutics remain in compliance with the terms of the Credit Facility through June 13, 2016 and Square 1, the Company and Vet Therapeutics mutually agree to new financial covenants, the Company and Vet Therapeutics shall have the option (subject to Square 1’s agreement to such new financial covenants) to amortize the principal amount of the loans under the Credit Facility starting on June 13, 2016. If the Company and Vet Therapeutics elect to amortize the principal amount of the loans under the Credit Facility on June 13, 2016 (subject to Square 1’s agreement to new financial covenants), the principal amount of the loans shall be payable in 24 equal monthly installments of principal, plus all accrued but unpaid interest, beginning on the date that is one month immediately following June 13, 2016. At June 30, 2014, total borrowings under the Credit Facility were $15.0 million.

Simultaneously with the closing of the Second Credit Facility Amendment on June 13, 2014, we entered into a pledge and security agreement with Square 1, pursuant to which we pledged 65% of the issued and outstanding shares of Wildcat Acquisition BVBA, a private limited liability company formed in Belgium and a wholly owned subsidiary of Aratana Therapeutics, to Square 1 as collateral under the Credit Facility.

We are obligated to pay a success fee of up to $0.3 million if we close a sale of substantially all of our assets or capital stock, or consummate a reorganization where our voting stockholders before such transaction hold less than 50% of our voting securities after such transaction.

The Credit Facility includes restrictions on, among other things, our ability to incur additional indebtedness, pay dividends in cash or make other distributions in cash, make certain investments, create liens, sell assets, make loans and make capital expenditures. Under the Credit Facility, we are required to maintain a liquidity ratio of at least 1.00-to-1.00 of unrestricted cash and 50% of account receivables to all indebtedness at the bank beginning January 1, 2014. At June 30, 2014, we were in compliance with all financial covenants.

The Credit Facility also includes events of default, the occurrence and continuation of any of which provide Square 1 the right to exercise remedies against us and the collateral securing the loans under the Credit Facility, including our cash. These events of default include, among other things, our failure to pay any amounts due under the Credit Facility, our insolvency, the occurrence of a material adverse effect, the occurrence of any default under certain other indebtedness and a final judgment against us in an amount greater than $0.4 million.

In October 2013, in connection with the acquisition of Vet Therapeutics, we issued to the former shareholders of Vet Therapeutics’ common stock a promissory note in the principal amount of $3.0 million with a maturity date of December 31, 2014. The promissory note bore interest at a rate of 7% per annum, payable quarterly in arrears, and was subject to prepayment by us in the event of specified future equity financings, which included the public offering that closed February 3, 2014.

 

30

---

Table of Contents

In January 2014, in connection with the acquisition of Okapi Sciences, we issued as partial consideration for all of the outstanding capital stock of Okapi Sciences, a promissory note in the principal amount of €11.0 million (approximately $14.9 million), which bore interest at a rate of 7% per annum, payable quarterly in arrears, with a maturity date of December 31, 2014, subject to mandatory prepayment by us in the event of a specified future equity financing, which included the public offering that closed on February 3, 2014.

The promissory note payable resulting from the Vet Therapeutics acquisition of $3.0 million and accrued interest as well as the promissory note payable resulting from the Okapi Sciences acquisition of €11.0 million and accrued interest were paid in full during February 2014.

Cash Flows

The following table shows a summary of our cash flows for the periods set forth below:

 

		SIX MONTHS ENDED JUNE 30,
		2014				2013
		(Dollars in thousands)
Net cash used in operating activities		$	(15,944	)		$	(8,535	)
Net cash used in investing activities		$	(13,104	)		$	(485	)
Net cash provided by financing activities		$	56,231			$	8,426

Net cash used in operating activities

During the six months ended June 30, 2014, net cash used in operating activities was $15.9 million. We had a pretax loss of $18.4 million, which included a non-cash expense related to stock-based compensation of $3.7 million and a non-cash deferred income tax benefit of $0.9 million and a change in working capital of $2.7 million. Our net losses were primarily attributed to research and development activities related to our programs and our general and administrative expenses. Net cash used by changes in our working capital consisted primarily of a decrease of $1.7 million in accounts payable, an increase of $0.5 million in prepaid expenses and a decrease of $0.2 million in accrued expenses. The increase in prepaid expenses relates primarily to research and development agreements. The decrease in accrued expenses primarily related to the timing of payments made for our contracted research and development activities.

During the six months ended June 30, 2013, net cash used in operating activities was $8.5 million. Net cash used in operating activities primarily resulted from our net loss of $6.7 million, increased by net cash used from changes in operating assets and liabilities of $2.0 million. Our net losses were primarily attributed to research and development activities related to our AT-001, AT-002 and AT-003 programs and our general and administrative expenses, as we had no revenue in the period. Net cash used by changes in our operating assets and liabilities consisted primarily of an increase of $2.9 million in prepaid expenses and a decrease of accrued expenses of $0.2 million, partially offset by an increase of $1.1 million in accounts payable. The increase in accounts payable related primarily to the timing of payments made for our contracted research and development activities. The increase in prepaid expenses relate primarily to our initial public offering. The decrease in accrued expenses related primarily to research and development expenses during the period.

Net cash used in investing activities

During the six months ended June 30, 2014, net cash used in investing activities was $13.1 million, which related to the acquisition and related expenses for Okapi Sciences of $13.1 million, purchase of warrants of $0.6 million, purchase of marketable securities of $1.2 million, partially offset by the sale of $2.2 million of short-term marketable securities.

During the six months ended June 30, 2013, net cash used in by investing activities was $0.5 million, which related to maturities and purchases of marketable securities. During this period, we sold $2.0 million of marketable securities, and purchased $1.5 million of marketable securities.

Net cash provided by financing activities

During the six months ended June 30, 2014, net cash provided by financing activities was $56.2 million. Net cash provided by financing activities primarily resulted from public offering net proceeds of $92.2 million, net of commissions. This was partially offset by payments of $15.2 million related to promissory note and $15.0 million related to the contingent consideration for the Okapi Sciences acquisition, and $1.7 million related to our public offering and a payment of $3.0 million for the Vet Therapeutics promissory note.

During the six months ended June 30, 2013, net cash provided by financing activities was $8.4 million. Net cash provided by financing activities primarily resulted from net proceeds of $3.4 million raised from the private placement of our series C convertible preferred stock, net proceeds of $4.9 million from our Credit Facility and proceeds of $0.1 million received from the exercise of stock options.

Off-Balance Sheet Arrangements

We have not engaged in the use of any off-balance sheet arrangements, such as structured finance entities, special purpose entities or variable interest entities.

 

31

---

Table of Contents

Recently Issued and Adopted Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the FASB issued guidance on recognizing revenue in contracts with customers. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This guidance will supersede the revenue recognition requirements in topic, Revenue Recognition, and most industry-specific guidance. This guidance also supersedes some cost guidance included in subtopic, Revenue Recognition – Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of topic, Property, Plant, and Equipment, and tangible assets within the scope of topic, Intangibles – Goodwill and Other are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this guidance.

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

These changes become effective for us on January 1, 2017 and early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently assessing the impact, if any, this new guidance will have on our financial condition, results of operations or cash flows.

Development Stage Entities — Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance, Consolidations: In June 2014, the FASB issued guidance that removes all incremental reporting requirements from GAAP for development stage entities, including the removal of the topic development stage entities. These changes eliminate the requirement to report inception-to-date information in the statements of income, cash flows, and shareholder equity. These changes become effective for us on January 1, 2015 and early adoption is permitted. We opted to adopt this guidance as of June 30, 2014. The adoption of this guidance resulted in decreased financial statement disclosures, but did not impact our financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our market risks, and the ways we manage them are summarized in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on March 26, 2014. There have been no material changes to our market risks or management of such risks since that date.

Item 4. Controls and Procedures

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

32

---

Table of Contents

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2014.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control performed during the fiscal quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

33

---

Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently a party to any material legal proceedings.

Item 1A. Risk Factors

Our business faces significant risks and uncertainties. Certain factors may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations. Below, we are providing, in supplemental form, the material changes to our risk factors that occurred during the past quarter. Our risk factors disclosed in Part 1, Item 1A, of our Annual Report, on Form 10-K for the fiscal year ended December 31, 2013, provide additional disclosure and context for these supplemental risks and are incorporated herein by reference.

We may not realize all of the anticipated benefits of our acquisitions of Vet Therapeutics or Okapi Sciences, or those benefits may take longer to realize than expected. We may also encounter significant unexpected difficulties in integrating three businesses.

Our ability to realize the anticipated benefits of our acquisitions of Vet Therapeutics and Okapi Sciences will depend in part on our ability to integrate their businesses with ours. The difficulties of combining the operations of the companies include, among others, challenges in maintaining previously-established relationships with licensors and licensees. Many of these factors will be outside of our control, for instance, the agreement by Eli Lilly and Company (through its Elanco Animal Health division) to acquire NAH by the end of the first quarter 2015, which was announced in April 2014. We are a party to exclusive license agreements with NAH for two of our therapeutic candidates, AT-004 and AT-006, through our acquisitions of Vet Therapeutics and Okapi Sciences, respectively. There is no assurance that the proposed transaction will not cause delays or changes in the development and commercialization of these therapeutic candidates that could negatively affect our collaborations and/or could result in increased costs and diversion of management’s time and energy, which could materially impact our business, financial condition and results of operations. In addition, even if the operations of the businesses are integrated successfully, we may not realize the full benefits of the transaction, including the synergies or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all.

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

Our repurchase activity for the three months ended June 30, 2014, was as follows:

 

		Total number of shares purchased				Average price paid per share				Total number of shares purchased as part of publicly announced plan or program				Maximum number of shares that may yet be purchased under the plan or program
April 1–April 30(2)			72,206	(1) (2)		$	13.71				—			$	N/A
May 1–May 31			288	(1)			12.57				—				N/A
June 1–June 30			288	(1)		$	14.79				—				N/A
Total			72,782			$	13.71				—				N/A

 

(1)	For the three months ended June 30, 2014, 864 shares of restricted stock were withheld to satisfy employee tax withholding obligations arising in conjunction with the vesting of restricted stock pursuant to our 2010 Equity Incentive Plan.

(2)	On April 15, 2014, we purchased 71,918 shares from a former shareholder of a subsidiary of the Company in a non-recurring private transaction for $986 or $13.71 per share.

Unregistered Sales of Equity Securities

None.

Use of Proceeds from the Sale of Registered Securities

On June 26, 2013, the SEC declared effective our registration statement on Form S-1 (File No. 333-187372), as amended, filed in connection with our IPO. There has been no change to our prior disclosure regarding our use of proceeds from our IPO contained in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.

 

34

---

Table of Contents

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

A list of exhibits is set forth on the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.

 

35

---

Table of Contents

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.

 

				ARATANA THERAPEUTICS, INC.
Date: August 13, 2014		By:		/s/    Steven St. Peter
				Steven St. Peter, M.D.
				President and Chief Executive Officer
				(Principal Executive Officer)
Date: August 13, 2014		By:		/s/    Craig Tooman
				Craig Tooman
				Chief Financial Officer
				(Principal Financial and Accounting Officer)

 

36

---

Table of Contents

Exhibit Index

 

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Filed/ Furnished Herewith

3.1

Restated Certificate of Incorporation

8-K

001-35952

3.1

7/3/13

3.2

Amended and Restated Bylaws

8-K

001-35952

3.2

7/3/13

10.1

Non-Employee Director Compensation Program (as amended)

*

10.2

Second Amendment to Loan and Security Agreement, dated as of June 13, 2014, by and among Square 1 Bank, Aratana Therapeutics, Inc. and Vet Therapeutics, Inc.

8-K

001-35952

10.1

3/10/14

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

*

31.2

Certification of Principal Financial Officer 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 200

**

101.INS†

XBRL Instance Document

101.SCH†

XBRL Taxonomy Extension Schema Document

101.CAL†

XBRL Taxonomy Extension Calculation Linkbase

101.DEF†

XBRL Taxonomy Extension Definition Linkbase

101.LAB†

XBRL Taxonomy Extension Label Linkbase

101.PRE†

XBRL Taxonomy Extension Presentation Linkbase

 

*	Filed herewith.

**	Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

†

Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

 

37