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EXCEL - IDEA: XBRL DOCUMENT - ARATANA THERAPEUTICS, INC.Financial_Report.xls

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


 

 

 

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

 

For the quarterly period ended September 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:       No:  

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

  

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:  

As of November 8, 2014, there were 34,705,312 shares of common stock outstanding.

 

 

 

 

 


 

ARATANA THERAPEUTICS, INC.

TABLE OF CONTENTS

 

 

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION 

 

Item 1.

Financial Statements

 

Unaudited Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

 

Unaudited Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2014 and 2013

 

Unaudited Consolidated Statements of Comprehensive Loss for the Three and Nine Months ended September 30, 2014 and 2013

 

Unaudited Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2014 and 2013

 

Notes to Consolidated Financial Statements

Item 2.

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

25 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35 

Item 4.

Controls and Procedures

35 

PART II OTHER INFORMATION 

 

Item 1.

Legal Proceedings

37 

Item 1A.

Risk Factors

37 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37 

Item 3.

Defaults Upon Senior Securities

37 

Item 4.

Mine Safety Disclosures

37 

Item 5.

Other Information

38 

Item 6.

Exhibits

38 

SIGNATURES 

39 

 

2


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ARATANA THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2014

 

DECEMBER 31, 2013

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

56,786 

 

$

41,084 

Short-term investments

 

 

51,470 

 

 

4,670 

Accounts receivable

 

 

90 

 

 

 —

Receivable from stockholder

 

 

 —

 

 

1,001 

Inventories

 

 

203 

 

 

55 

Prepaid expenses and other current assets

 

 

614 

 

 

274 

Deferred tax asset

 

 

1,381 

 

 

1,381 

Total current assets

 

 

110,544 

 

 

48,465 

Property and equipment, net

 

 

741 

 

 

98 

Long-term marketable securities

 

 

1,029 

 

 

 —

Goodwill

 

 

37,052 

 

 

20,796 

Intangible assets, net

 

 

71,423 

 

 

46,140 

Other long-term assets

 

 

534 

 

 

37 

Total assets

 

$

221,323 

 

$

115,536 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

1,888 

 

$

2,307 

Accrued expenses

 

 

3,007 

 

 

2,495 

Current portion—loan payable

 

 

 —

 

 

5,625 

Current portion—note payable

 

 

 —

 

 

3,000 

Current portion—deferred licensing revenue

 

 

11 

 

 

45 

Current portion—contingent consideration

 

 

4,169 

 

 

2,572 

Deferred income

 

 

800 

 

 

800 

Other current liabilities

 

 

45 

 

 

57 

Total current liabilities

 

 

9,920 

 

 

16,901 

Loan payable

 

 

14,957 

 

 

9,310 

Contingent consideration

 

 

 —

 

 

1,543 

Deferred tax liability

 

 

3,396 

 

 

1,666 

Other long-term liabilities

 

 

42 

 

 

75 

Total liabilities

 

 

28,315 

 

 

29,495 

Commitments and contingencies (Notes 11 and 12)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized at September 30, 2014 and December 31, 2013, 34,055,464 and 23,425,487 issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

 

34 

 

 

23 

Treasury stock

 

 

(1,081)

 

 

 —

Additional paid-in capital

 

 

253,067 

 

 

112,515 

Accumulated deficit

 

 

(55,057)

 

 

(26,497)

Accumulated other comprehensive loss

 

 

(3,955)

 

 

 —

Total stockholders’ equity

 

 

193,008 

 

 

86,041 

Total liabilities and stockholders’ equity

 

$

221,323 

 

$

115,536 

 

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

3


 

ARATANA THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

NINE MONTHS ENDED

 

 

SEPTEMBER 30,

 

SEPTEMBER 30,

 

 

2014

 

2013

 

2014

 

2013

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Licensing and collaboration revenue

 

$

43 

 

$

 —

 

$

519 

 

$

 —

Total revenues

 

 

43 

 

 

 —

 

 

519 

 

 

 —

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Royalty expense

 

 

17 

 

 

 —

 

 

52 

 

 

 —

Research and development

 

 

6,078 

 

 

3,234 

 

 

13,950 

 

 

7,817 

General and administrative

 

 

3,897 

 

 

1,427 

 

 

12,913 

 

 

3,911 

In-process research and development

 

 

 —

 

 

 —

 

 

1,157 

 

 

 —

Amortization of acquired intangible assets

 

 

581 

 

 

 —

 

 

1,702 

 

 

 —

Total costs and expenses

 

 

10,573 

 

 

4,661 

 

 

29,774 

 

 

11,728 

Loss from operations

 

 

(10,530)

 

 

(4,661)

 

 

(29,255)

 

 

(11,728)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

31 

 

 

26 

 

 

58 

 

 

51 

Interest expense

 

 

(222)

 

 

(80)

 

 

(768)

 

 

(182)

Other income (expense), net

 

 

(10)

 

 

44 

 

 

(158)

 

 

455 

Total other income (expense)

 

 

(201)

 

 

(10)

 

 

(868)

 

 

324 

Loss before income taxes

 

$

(10,731)

 

$

(4,671)

 

$

(30,123)

 

$

(11,404)

Income tax benefit

 

 

601 

 

 

 —

 

 

1,563 

 

 

 —

Net loss and comprehensive loss attributable to common stockholders

 

$

(10,130)

 

$

(4,671)

 

$

(28,560)

 

$

(11,404)

Net loss per share, attributable to common stockholders, basic and diluted

 

$

(0.35)

 

$

(0.22)

 

$

(1.01)

 

$

(1.50)

Weighted average shares outstanding, basic and diluted

 

 

29,348,375 

 

 

20,806,352 

 

 

28,301,216 

 

 

7,601,388 

 

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

4


 

ARATANA THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED

 

NINE MONTHS ENDED

 

 

SEPTEMBER 30,

 

SEPTEMBER 30,

 

 

2014

 

2013

 

2014

 

2013

Net loss

 

$

(10,130)

 

$

(4,671)

 

$

(28,560)

 

$

(11,404)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(3,394)

 

 

 —

 

 

(3,784)

 

 

 —

Unrealized gain (loss) on available-for-sale securities

 

 

181 

 

 

 —

 

 

(171)

 

 

 —

Other comprehensive loss

 

 

(3,213)

 

 

 —

 

 

(3,955)

 

 

 —

Comprehensive loss

 

$

(13,343)

 

$

(4,671)

 

$

(32,515)

 

$

(11,404)

 

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

5


 

 

ARATANA THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NINE MONTHS ENDED

 

 

SEPTEMBER 30,

 

 

2014

 

2013

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(28,560)

 

$

(11,404)

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

 

 

 

 

 

 

Acquired in-process research and development

 

 

1,157 

 

 

 —

Stock-based compensation expense

 

 

5,241 

 

 

427 

Depreciation and amortization expense

 

 

1,884 

 

 

Non-cash interest expense

 

 

30 

 

 

21 

Change in fair value of contingent consideration

 

 

(183)

 

 

 —

Change in fair value of derivative instruments

 

 

202 

 

 

 —

Deferred tax benefit

 

 

(1,563)

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

174 

 

 

 —

Inventories

 

 

(148)

 

 

 —

Prepaid expenses

 

 

(337)

 

 

(280)

Other assets

 

 

(41)

 

 

(11)

Accounts payable

 

 

(763)

 

 

36 

Accrued expenses and other liabilities

 

 

228 

 

 

316 

Deferred income

 

 

(81)

 

 

 —

Other liabilities

 

 

 —

 

 

Net cash used in operating activities

 

 

(22,760)

 

 

(10,884)

Cash flows from investing activities

 

 

 

 

 

 

Purchases of property and equipment, net

 

 

(634)

 

 

(11)

Cash paid for acquisitions, net of cash received

 

 

(12,075)

 

 

 —

Purchase of investments

 

 

(60,200)

 

 

(2,955)

Proceeds from maturities of investments

 

 

12,200 

 

 

3,200 

Purchase of derivative instruments

 

 

(643)

 

 

 —

Purchase of in-process research and development

 

 

(1,157)

 

 

 —

Change in restricted cash

 

 

 —

 

 

141 

Net cash (used in)/ provided by investing activities

 

 

(62,509)

 

 

375 

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from the 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

 

 

(1,081)

 

 

 —

Proceeds from stock option exercises

 

 

197 

 

 

97 

Repurchase, early exercised stock options

 

 

 —

 

 

(5)

Proceeds from public offering, net of commission

 

 

137,220 

 

 

36,897 

Payments of public offering costs

 

 

(2,139)

 

 

(2,617)

Cash paid for promissory notes

 

 

(18,067)

 

 

 —

Cash paid for contingent consideration

 

 

(15,166)

 

 

 —

Net cash provided by financing activities

 

 

100,964 

 

 

42,705 

Effect of exchange rate on cash

 

 

 

 

 —

Net increase in cash and cash equivalents

 

 

15,702 

 

 

32,196 

Cash and cash equivalents, beginning of period

 

 

41,084 

 

 

13,973 

Cash and cash equivalents, end of period

 

$

56,786 

 

$

46,169 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid for interest

 

$

584 

 

$

161 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

Conversion of preferred stock into common stock

 

 

 —

 

 

41,953 

 

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

 

 

6


 

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 investments, which include the net proceeds received in its public offering of common stock that closed on September 22, 2014, and existing Credit Facility (Note 11)  will fund operations through December 31, 2016.

 

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.

 

Cash and Cash Equivalents

In 2013, the Company held no overnight reverse repurchase agreements. Beginning in 2014, the Company accounts for its overnight reverse repurchase agreements as cash equivalents.

 

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 historical 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.

 

Reverse Repurchase Agreements

 

In 2013, the Company held no reverse repurchase agreements. Beginning in 2014, the Company accounts for its reverse repurchase agreements with maturities greater than overnight as short-term investments and classifies them as available-for-sale.

 

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 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

7


 

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 (loss).

 

Comprehensive Loss

 

For the year ended December 31, 2013, there was no difference between net loss and comprehensive loss. During the first nine 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.

 

Goodwill

 

The Company completed its annual goodwill impairment testing during the third quarter of 2014.  The Company elected to bypass the qualitative assessment. The Company determined as of the testing date that it still consisted of one operating segment which is comprised of one reporting unit. In performing step one of the assessment,  the Company determined that its fair value, determined to be its market capitalization, was greater than its carrying value, determined to be stockholder’s equity. Based on this result, step two of the assessment was not required to be performed, and the Company determined there was no impairment of goodwill as of the testing date.

 

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. 

 

Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern

In August 2014, the FASB issued guidance which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide disclosure in the footnotes under certain circumstances. This guidance is

8


 

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

effective for fiscal years ending after December 15, 2016 with early adoption permitted. The Company does not expect that this guidance will have a material impact on its consolidated financial statements.

 

3. Fair Value of Financial Assets and Liabilities

 

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

 

As of September 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).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

FAIR VALUE MEASUREMENTS AS OF

 

 

CARRYING

 

SEPTEMBER 30, 2014 USING:

 

  

VALUE

  

LEVEL 1

  

LEVEL 2

  

LEVEL 3

  

TOTAL

Assets:

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

Cash equivalents

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

4,482 

 

$

 —

 

$

4,482 

 

$

 —

 

$

4,482 

Overnight reverse repurchase agreements

 

 

3,000 

 

 

 —

 

 

3,000 

 

 

 —

 

 

3,000 

Money market fund

 

 

 

 

 

 

 —

 

 

 —

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term marketable securities

  

 

1,470 

  

 

 —

  

 

1,470 

  

 

 —

  

 

1,470 

Reverse repurchase agreements

 

 

50,000 

 

 

 —

 

 

50,000 

 

 

 —

 

 

50,000 

Long-term marketable securities

  

 

1,029 

  

 

1,029 

  

 

 —

  

 

 —

  

 

1,029 

Derivative financial instruments

  

 

441 

  

 

 —

  

 

441 

  

 

 —

  

 

441 

 

  

$

60,424 

  

$

1,031 

  

$

59,393 

  

$

 —

  

$

60,424 

Liabilities:

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

Contingent consideration

  

$

4,169 

  

$

 —

  

$

 —

  

$

4,169 

  

$

4,169 

 

  

$

4,169 

  

$

 —

  

$

 —

  

$

4,169 

  

$

4,169 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

FAIR VALUE MEASUREMENTS AS OF

 

 

CARRYING

 

DECEMBER 31, 2013 USING:

 

  

VALUE

  

LEVEL 1

  

LEVEL 2

  

LEVEL 3

  

TOTAL

Assets:

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

Short-term 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:

 

·

Cash equivalents – the fair value of the cash equivalents has been determined to be amortized cost.  

 

·

Reverse repurchase agreements – the fair value of the reverse repurchase agreements has been determined to be amortized cost.  

 

·

Marketable securities (long-term) – the fair value of marketable securities has been based on quoted prices in active markets or exchanges for identical assets.

9


 

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ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

·

Marketable securities (short-term)  the fair value of marketable securities has been estimated based on quoted prices in active markets prices for identical assets or for similar assets in markets that are not active

 

·

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 considerationthe 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 milestones.

 

Transfers Between Levels of the Fair Value Hierarchy

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. During the three and nine months ended September 30, 2014, transfer of investments between Level 1 and Level 2 were $1,029. In the third quarter of 2014, the Company re-classified its investment in Advaxis (Note 13) to a Level 1 investment from Level 2, because the Company is no longer precluded from selling shares due to restrictions imposed by Rule 144 of the Securities Act of 1933. Previously, the Company calculated a lack of marketability discount on the fair value of the Advaxis common stock because of trading restrictions on the shares. The Company considered the inputs used to calculate the lack of marketability discount Level 2 inputs and, as a result, the Company classified this investment as Level 2. The Company determined the lack of marketability discount by using a Black-Scholes model to value a hypothetical put option to approximate the cost of hedging the stock until the restriction ended.

During the year ended December 31, 2013, there were no transfers between levels of the fair value hierarchy.

 

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

  

 

123 

As of the end of the period

  

$

4,169 

 

10


 

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

 

 

 

 

 

Valuation

 

Significant

 

 

 

(Weighted

At September 30, 2014

 

Fair value

 

technique

 

unobservable inputs

 

Range

 

Average)

Contingent consideration

  

$

4,169 

  

Income approach (probability weighted discounted cash flow)

  

Probability of milestones being achieved

  

47.50% to 95.00%

 

(75.55)%

 

 

 

 

 

 

 

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 of 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 September 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

SEPTEMBER 30, 2014

 

  

Carrying Amount

 

Fair Value

Financial liabilities:

  

 

 

 

 

 

Loan payable (Level 2)

  

$

14,957 

  

$

16,358 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

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

 

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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 nine months ended September 30, 2014 is revenue totaling approximately $0 and $452, 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 charge to general and administrative expenses 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 nine months ended September 30, 2014 the Company incurred expenses totaling $161 relating to the Okapi Sciences acquisition, which were 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 consolidated balance sheet as of September 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.

 

12


 

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 as 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

13


 

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

NINE MONTHS ENDED

 

 

SEPTEMBER 30, 2013

 

SEPTEMBER 30, 2013

Revenue

  

$

 —

 

$

 —

Loss from operations

  

$

(4,657)

 

$

(13,912)

Net and comprehensive loss before income taxes

  

$

(4,910)

 

$

(14,335)

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders—basic and diluted

 

$

(0.24)

 

$

(1.89)

 

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.  Investments

 

Marketable Securities

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

SEPTEMBER 30, 2014

 

  

 

 

  

GROSS

  

GROSS

 

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

  

$

1,470 

  

$

 —

  

$

 —

 

$

1,470 

Long-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

  

 

1,200 

  

 

 —

  

 

(171)

 

 

1,029 

 

  

$

2,670 

  

$

 —

  

$

(171)

 

$

2,499 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

DECEMBER 31, 2013

 

  

 

 

  

GROSS

  

GROSS

 

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

  

$

4,670 

  

$

 —

  

$

 —

 

$

4,670 

 

  

$

4,670 

  

$

 —

  

$

 —

 

$

4,670 

 

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

 

At September 30, 2014, unrealized losses in the amount of $171 were recorded as a component of other comprehensive loss. As of September 30, 2014, no gross unrealized losses related to individual securities had been in a continuous loss position for 12 months or longer.

 

14


 

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

As of September 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 nine months ended September 30, 2014, the Company did not recognize any impairment charges.

 

Reverse Repurchase Agreements

The Company, as part of its cash management strategy, may invest excess cash in reverse repurchase agreements. All reverse repurchase agreements are tri-party and have maturities of 90 days or less at time of investment. The underlying collateral is U.S. government securities including U.S. treasuries, agency debt and agency mortgage securities. The underlying collateral posted by each counterparty is required to cover 102% of the principal amount and accrued interest after the application of a discount to fair value. The Company classifies overnight reverse repurchase agreements and term reverse repurchase agreements as cash equivalents and short-term investments, respectively on the consolidated balance sheet.

 

6. Derivative Financial Instruments

 

The Company records all derivatives in the consolidated balance sheets at fair value in the other long-term assets.  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).  

 

The following table shows the Company’s derivative instrument at gross fair value:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FAIR VALUE OF DERIVATIVES NOT

 

 

DESIGNATED AS HEDGE INSTRUMENT

 

 

SEPTEMBER 30, 2014

 

DECEMBER 31, 2013

Derivative assets:

  

 

 

  

 

 

Warrant (Notes 3 and 13)

  

$

441 

  

$

 —

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAIN/(LOSS) RECOGNIZED IN OTHER INCOME/(EXPENSE)

 

 

THREE MONTHS ENDED

 

NINE MONTHS ENDED

 

 

SEPTEMBER 30,

 

SEPTEMBER 30,

 

  

2014

 

2013

 

2014

 

2013

Derivative assets:

  

 

 

 

 

 

 

 

 

 

 

 

Warrant

  

$

17 

 

$

 —

 

$

(202)

 

$

 —

 

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 September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

SEPTEMBER 30, 2014

 

  

NOTIONAL/

  

CREDIT 

 

 

PRINCIPAL/SHARES

 

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.

 

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Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

7. Inventories

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

SEPTEMBER 30, 2014

  

DECEMBER 31, 2013

Raw materials

 

$

48 

 

 

 —

Work-in-process

  

 

155 

  

$

55 

 

  

$

203 

  

$

55 

 

 

8. Property and Equipment, Net

 

Property and equipment consisted of the following:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2014

 

DECEMBER 31, 2013

Laboratory and office equipment

 

$

459 

 

$

90 

Computer equipment and software

 

 

61 

 

 

40 

Furniture

 

 

72 

 

 

Vehicles

 

 

72 

 

 

 —

Leasehold improvements

 

 

100 

 

 

 —

Construction in process

 

 

129 

 

 

Total property and equipment

 

 

893 

 

 

139 

Less: Accumulated depreciation and amortization

 

 

(152)

 

 

(41)

Property and equipment, net

 

$

741 

 

$

98 

 

Depreciation and amortization expense was $50 and $111 for the three months and nine months ended September 30, 2014, respectively.

 

9. Goodwill

 

In October 2013, the Company completed its acquisition of Vet Therapeu