Attached files

file filename
EX-31.2 - EX-31.2 - ARATANA THERAPEUTICS, INC.petx-20150630xex312.htm
EX-32.2 - EX-32.2 - ARATANA THERAPEUTICS, INC.petx-20150630xex322.htm
EX-31.1 - EX-31.1 - ARATANA THERAPEUTICS, INC.petx-20150630xex311.htm
EX-32.1 - EX-32.1 - ARATANA THERAPEUTICS, INC.petx-20150630xex321.htm

 

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 June 30, 2015

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 August 3, 2015, there were 34,964,956 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 June 30, 2015 and December 31, 2014

 

Consolidated Statements of Operations for the Three and Six Months ended June 30, 2015 and 2014

 

Consolidated Statements of Comprehensive Loss for the Three and Six Months ended June 30, 2015 and 2014

 

Consolidated Statements of Cash Flows for the Six Months ended June 30, 2015 and 2014

 

Notes to Consolidated Financial Statements

Item 2.

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

20 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

30 

Item 4.

Controls and Procedures

30 

PART II. OTHER INFORMATION 

 

Item 1.

Legal Proceedings

31 

Item 1A.

Risk Factors

31 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31 

Item 3.

Defaults Upon Senior Securities

31 

Item 4.

Mine Safety Disclosures

31 

Item 5.

Other Information

31 

Item 6.

Exhibits

31 

SIGNATURES 

32 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30, 2015

 

DECEMBER 31, 2014

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,591 

 

$

9,823 

Short-term investments

 

 

71,000 

 

 

88,249 

Accounts receivable

 

 

148 

 

 

352 

Inventories

 

 

882 

 

 

427 

Prepaid expenses and other current assets

 

 

927 

 

 

900 

Deferred tax asset

 

 

158 

 

 

158 

Total current assets

 

 

85,706 

 

 

99,909 

Property and equipment, net

 

 

1,616 

 

 

620 

Long-term marketable securities

 

 

 —

 

 

2,452 

Goodwill

 

 

40,165 

 

 

41,398 

Intangible assets, net

 

 

59,332 

 

 

62,323 

Other long-term assets

 

 

68 

 

 

1,201 

Total assets

 

$

186,887 

 

$

207,903 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

1,732 

 

$

1,532 

Accrued expenses

 

 

3,743 

 

 

3,229 

Current portion – loan payable

 

 

14,976 

 

 

 —

Current portion – contingent consideration

 

 

 —

 

 

4,248 

Deferred tax liability

 

 

380 

 

 

413 

Other current liabilities

 

 

101 

 

 

46 

Total current liabilities

 

 

20,932 

 

 

9,468 

Loan payable

 

 

 —

 

 

14,963 

Deferred tax liability

 

 

855 

 

 

1,610 

Other long-term liabilities

 

 

10 

 

 

30 

Total liabilities

 

 

21,797 

 

 

26,071 

Commitments and contingencies (Notes 9 and 11)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized at June 30, 2015 and December 31, 2014, 34,345,197 and 34,147,861 issued and outstanding at June 30, 2015, and December 31, 2014, respectively

 

 

34 

 

 

34 

Treasury stock

 

 

(1,081)

 

 

(1,081)

Additional paid-in capital

 

 

259,451 

 

 

254,993 

Accumulated deficit

 

 

(84,721)

 

 

(67,964)

Accumulated other comprehensive loss

 

 

(8,593)

 

 

(4,150)

Total stockholders’ equity

 

 

165,090 

 

 

181,832 

Total liabilities and stockholders’ equity

 

$

186,887 

 

$

207,903 

 

 

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
JUNE 30,

 

SIX MONTHS ENDED
JUNE 30,

 

 

2015

 

2014

 

2015

 

2014

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Licensing and collaboration revenue

 

$

 —

 

$

300 

 

$

 —

 

$

476 

Product sales

 

 

230 

 

 

 —

 

 

386 

 

 

 —

Total revenues

 

 

230 

 

 

300 

 

 

386 

 

 

476 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

109 

 

 

 —

 

 

219 

 

 

 —

Royalty expense

 

 

23 

 

 

17 

 

 

43 

 

 

35 

Research and development

 

 

6,081 

 

 

4,300 

 

 

12,302 

 

 

7,872 

Selling, general and administrative

 

 

4,879 

 

 

4,404 

 

 

9,064 

 

 

9,016 

In-process research and development

 

 

 —

 

 

500 

 

 

 —

 

 

1,157 

Amortization of acquired intangible assets

 

 

483 

 

 

582 

 

 

966 

 

 

1,121 

Total costs and expenses

 

 

11,575 

 

 

9,803 

 

 

22,594 

 

 

19,201 

Loss from operations

 

 

(11,345)

 

 

(9,503)

 

 

(22,208)

 

 

(18,725)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

43 

 

 

13 

 

 

114 

 

 

27 

Interest expense

 

 

(217)

 

 

(218)

 

 

(435)

 

 

(546)

Other income (expense), net

 

 

3,176 

 

 

95 

 

 

5,141 

 

 

(148)

Total other income (expense)

 

 

3,002 

 

 

(110)

 

 

4,820 

 

 

(667)

Loss before income taxes

 

 

(8,343)

 

 

(9,613)

 

$

(17,388)

 

$

(19,392)

Income tax benefit

 

 

360 

 

 

335 

 

 

631 

 

 

962 

Net loss

 

$

(7,983)

 

$

(9,278)

 

$

(16,757)

 

$

(18,430)

Net loss per share, basic and diluted

 

$

(0.23)

 

$

(0.32)

 

$

(0.49)

 

$

(0.66)

Weighted average shares outstanding, basic and diluted

 

 

34,278,105 

 

 

28,761,326 

 

 

34,236,282 

 

 

27,768,959 

 

 

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
JUNE 30,

 

SIX MONTHS ENDED
JUNE 30,

 

 

2015

 

2014

 

2015

 

2014

Net loss

 

$

(7,983)

 

$

(9,278)

 

$

(16,757)

 

$

(18,430)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(1,390)

 

 

(322)

 

 

(3,191)

 

 

(390)

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

 

 

958 

 

 

80 

 

 

2,622 

 

 

(352)

Net gain reclassified into income on sale of available-for-sale securities

 

 

(2,864)

 

 

 —

 

 

(3,874)

 

 

 —

Other comprehensive loss

 

 

(3,296)

 

 

(242)

 

 

(4,443)

 

 

(742)

Comprehensive loss

 

$

(11,279)

 

$

(9,520)

 

$

(21,200)

 

$

(19,172)

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SIX MONTHS ENDED

 

JUNE 30,

 

2015

 

2014

Cash flows from operating activities

 

 

 

 

 

Net loss

$

(16,757)

 

$

(18,430)

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

 

 

 

 

 

Acquired in-process research and development

 

 —

 

 

1,157 

Stock-based compensation expense

 

4,389 

 

 

3,700 

Depreciation and amortization expense

 

1,056 

 

 

1,183 

Gain on sale of marketable securities

 

(3,874)

 

 

 —

Non-cash interest expense

 

20 

 

 

20 

Change in fair value of contingent consideration

 

(1,248)

 

 

(150)

Change in fair value of derivative instruments

 

(1,274)

 

 

219 

Deferred tax benefit

 

(631)

 

 

(962)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

194 

 

 

(116)

Inventories

 

(455)

 

 

(69)

Prepaid expenses

 

(57)

 

 

(466)

Other assets

 

15 

 

 

(40)

Accounts payable

 

213 

 

 

(1,676)

Accrued expenses and other liabilities

 

553 

 

 

(250)

Deferred income

 

50 

 

 

(64)

Net cash used in operating activities

 

(17,806)

 

 

(15,944)

Cash flows from investing activities

 

 

 

 

 

Purchases of property and equipment, net

 

(1,098)

 

 

(246)

Cash paid for acquisitions, net of cash received

 

 —

 

 

(12,075)

Proceeds from sales of marketable securities

 

7,456 

 

 

 —

Purchase of investments

 

(905,000)

 

 

(1,200)

Proceeds from maturities of investments

 

922,249 

 

 

2,217 

Purchase of derivative instruments

 

 —

 

 

(643)

Purchase of in-process research and development

 

 —

 

 

(1,157)

Net cash provided by (used in) investing activities

 

23,607 

 

 

(13,104)

Cash flows from financing activities

 

 

 

 

 

Repurchase of common stock

 

 —

 

 

(1,074)

Proceeds from stock option exercises

 

47 

 

 

45 

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

 

(3,000)

 

 

(15,166)

Net cash (used in) provided by financing activities

 

(2,953)

 

 

56,231 

Effect of exchange rate on cash

 

(80)

 

 

Net increase in cash and cash equivalents

 

2,768 

 

 

27,187 

Cash and cash equivalents, beginning of period

 

9,823 

 

 

41,084 

Cash and cash equivalents, end of period

$

12,591 

 

$

68,271 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash paid for interest

$

415 

 

$

413 

Non-cash exercise of warrant

$

750 

 

$

 —

 

 

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. Summary of Significant Accounting Policies

 

Business Overview

Aratana Therapeutics, Inc., including its subsidiaries (the “Company” or “Aratana”), is a pet therapeutics company focused on licensing, developing and commercializing innovative biopharmaceutical products for companion animals. The Company has one operating segment: pet therapeutics.

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. 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, 2014 and the notes thereto in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2015. 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 will fund operations through December 31, 2016.

Consolidation

The Company’s consolidated financial statements include its financial statements and those of its wholly-owned subsidiaries. Intercompany balances and transactions are eliminated in consolidation. The Company does not have any interests in any variable interest entities.

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.

Property and Equipment, net

Property and equipment is recorded at historical cost, net of accumulated depreciation and amortization of $262 and $182 as of June 30, 2015, and December 31, 2014, respectively.

Recently Issued and Adopted Accounting Pronouncements

Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement

In April 2015, the FASB issued guidance on how purchasers of hosted computing services should evaluate whether such arrangements contain a software license that should be accounted for separately. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted and is to be applied prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. The Company does not expect that this guidance will have a material impact on its consolidated financial statements.

Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs

In April 2015, the FASB issued guidance which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted and is to be applied on a retrospective basis. The Company does not expect that this guidance will have a material impact on its consolidated financial statements.

Revenue from Contracts with Customers

In July 2015, the FASB approved a one year delay in the effective date of the new revenue standard. These changes become effective for the Company on January 1, 2018, and early adoption is permitted but not before the original effective date of January 1, 2017. The Company is currently assessing the impact, if any, this new guidance will have on its financial condition, results of operations or cash flows.

7


 

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Inventory – Simplifying the Measurement of Inventory

In July 2015, the FASB issued guidance which requires entities to measure most inventory “at lower of cost and net realizable value” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted and is to be applied on a prospective basis. The Company does not expect that this new guidance will have a material impact on its consolidated financial statements.

 

2. Business Combinations

 

Acquisition of Okapi Sciences

On January 6, 2014, the Company acquired Okapi Sciences NV  (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 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.

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 selling, general and administrative expenses in the consolidated statements 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 three months ended March 31, 2014, the Company incurred expenses totaling $139 relating to the Okapi Sciences acquisition, which were recorded within selling, general and administrative expenses in the Company’s consolidated statement of operations.

 

8


 

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

  

 

(3,786)

Long-term debt

  

 

(4)

Total identifiable net assets

  

 

26,530 

Goodwill

  

 

17,909 

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

  

$

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 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 $17,909 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 operational and strategic synergies such as advancement toward becoming a commercial company and acquiring a proprietary antiviral platform.

9


 

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

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:

 

 

 

 

 

 

 

 

 

 

 

  

SIX MONTHS ENDED

 

 

JUNE 30,

 

 

2014

 

 

(Unaudited)

Revenue

  

$

476 

Loss from operations

  

 

(18,431)

Loss before income taxes

  

 

(19,101)

Net loss per share before income taxes – basic and diluted

 

$

(0.69)

 

Pro forma results include non-recurring pro forma adjustments that were directly attributable to the business combination. The following material non-recurring pro forma adjustments relating to charges recorded in 2014 have been assumed to have occurred in 2013 for pro forma purposes:

 

 

Pre-tax increase in income of $440 in 2014, relating to acquisition-related transaction costs incurred by the Company and Okapi Sciences.

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 for Okapi Sciences. 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 2014 fiscal year.

 

3. Fair Value of Financial Assets and Liabilities

 

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

 

As of June 30, 2015 and December 31, 2014, 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

 

JUNE 30, 2015 USING:

 

  

VALUE

  

LEVEL 1

  

LEVEL 2

  

LEVEL 3

  

TOTAL

Assets:

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

Cash equivalents:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

6,474 

 

$

 —

 

$

6,474 

 

$

 —

 

$

6,474 

Money market fund

 

 

177 

 

 

177 

 

 

 —

 

 

 —

 

 

177 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reverse repurchase agreements

 

 

71,000 

 

 

 —

 

 

71,000 

 

 

 —

 

 

71,000 

 

  

$

77,651 

  

$

177 

  

$

77,474 

  

$

 —

  

$

77,651 

 

10


 

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

FAIR VALUE MEASUREMENTS AS OF

 

 

CARRYING

 

DECEMBER 31, 2014 USING:

 

  

VALUE

  

LEVEL 1

  

LEVEL 2

  

LEVEL 3

  

TOTAL

Assets:

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

Cash equivalents:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

6,972 

 

$

 —

 

$

6,972 

 

$

 —

 

$

6,972 

Money market fund

 

 

45 

 

 

 —

 

 

45 

 

 

 —

 

 

45 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term marketable securities - certificate of deposit

 

 

249 

 

 

 —

 

 

249 

 

 

 —

 

 

249 

Reverse repurchase agreements

 

 

88,000 

 

 

 —

 

 

88,000 

 

 

 —

 

 

88,000 

Long-term marketable securities:

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

Common stock

 

 

2,452 

 

 

2,452 

 

 

 —

 

 

 —

 

 

2,452 

Derivative financial instruments

  

 

1,108 

  

 

 —

  

 

1,108 

  

 

 —

  

 

1,108 

 

  

$

98,826 

  

$

2,452 

  

$

96,374 

  

$

 —

  

$

98,826 

Liabilities:

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

Contingent consideration

  

$

4,248 

  

$

 —

  

$

 —

  

$

4,248 

  

$

4,248 

 

  

$

4,248 

  

$

 —

  

$

 —

  

$

4,248 

  

$

4,248 

 

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 or has been based on the quoted prices in active markets or exchanges for identical assets.

·

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.

·

Marketable securities (short-term) the fair value of marketable securities has been estimated based on quoted prices in active markets 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.

 

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

 

 

 

 

 

 

 

 

 

 

  

2015

As of January 1,

  

$

4,248 

Cash settlement of contingent consideration earned

  

 

(3,000)

Derecognition of remaining contingent consideration recorded in the consolidated statement of operations (within selling, general and administrative)

  

 

(1,248)

As of the end of the period,

  

$

 —

 

11


 

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

On January 2, 2015, the Company was granted a full product license for AT-004. The approval resulted in $3,000 of the contingent consideration being earned and due to the former Vet Therapeutics, Inc. (“Vet Therapeutics”) shareholders per the terms of Vet Therapeutics merger agreement. Further, on February 24, 2015, in connection with the mutual termination of the Elanco Agreement for AT-004 (Note 11), the Company obtained consent from the shareholder representative of the former Vet Therapeutics shareholders that the $3,000 payment shall cause the Company to have no further obligation or liability under the merger agreement. The Company paid the $3,000 contingent consideration in March 2015. During the six months ended June 30, 2015, the Company recorded a credit of $1,248 to selling, general and administrative expense to reduce the fair value of the contingent consideration to zero as a result of the agreement with the Vet Therapeutics shareholders.

 

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

 

The carrying amounts and estimated fair value at June 30, 2015 and December 31, 2014 of the Company’s financial assets and liabilities which are not measured at fair value on a recurring basis are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

JUNE 30, 2015

 

  

CARRYING VALUE

 

FAIR VALUE

Financial liabilities:

  

 

 

 

 

 

Loan payable (Level 2)

  

$

14,976 

  

$

15,067 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

DECEMBER 31, 2014

 

  

CARRYING VALUE

 

FAIR VALUE

Financial liabilities:

  

 

 

 

 

 

Loan payable (Level 2)

  

$

14,963 

  

$

14,933 

 

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 does it indicate the Company’s intent or ability to dispose of the financial instrument.

The fair value of loan payable was estimated using discounted cash flow analysis discounted at current rates.

 

4. Investments

 

Marketable Securities

 

As of June 30, 2015, the Company did not hold any marketable securities.

 

The fair value of available-for-sale marketable securities by type of security as of December 31, 2014 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

DECEMBER 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

GROSS

  

GROSS

 

 

 

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Certificate of deposit

  

$

249 

  

$

 —

  

$

 —

 

$

249 

Long-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

  

 

1,200 

  

 

1,252 

  

 

 —

 

 

2,452 

Total

  

$

1,449 

  

$

1,252 

  

$

 —

 

$

2,701 

At December 31, 2014, short-term marketable securities consisted of investments that mature within one year. Short-term marketable securities are recorded as short-term investments in the consolidated balance sheets.

At December 31, 2014, unrealized gains in the amount of $1,252 were recorded as a component of other comprehensive loss.

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 three months or less at the 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

12


 

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

each counterparty is required to cover 102% of the principal amount and accrued interest after the application of a discount to fair value.

 

5. Derivative Financial Instruments

The Company records all derivatives in the consolidated balance sheets at fair value in other long-term assets. In 2015, the Company’s derivative financial instrument, the Advaxis warrant, was not designated as a hedging instrument and was adjusted to fair value through earnings in other income (expense). During the three months ended June 30, 2015, the Company exercised the Advaxis warrant (see Note 11) and subsequently sold the shares of common stock received upon exercise.  

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FAIR VALUE OF DERIVATIVES NOT

 

 

DESIGNATED AS HEDGING INSTRUMENT

 

 

JUNE 30, 2015

 

DECEMBER 31, 2014

Derivative assets:

  

 

 

  

 

 

Warrant (Notes 3 and 11)

  

$

 —

  

$

1,108 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAIN RECOGNIZED IN

 

GAIN (LOSS) RECOGNIZED IN

 

 

OTHER INCOME (EXPENSE)

 

OTHER INCOME (EXPENSE)

 

 

THREE MONTHS ENDED

 

SIX MONTHS ENDED

 

 

JUNE 30,

 

JUNE 30,

 

 

2015

 

2014

 

2015

 

2014

Derivative assets:

  

 

 

 

 

 

 

 

 

 

 

 

Warrant

  

$

316 

 

$

27 

 

$

1,274 

 

$

(219)

 

During the three months ended June 30, 2015, the Company exercised the warrant and recognized a gain of $316 in other income (expense), and subsequently sold the shares of common stock received upon exercise and recognized a gain of $341 in other income (expense).

 

 

6. Inventories

Inventories are comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30,

 

DECEMBER 31,

 

  

2015

  

2014

Raw materials

 

$

115 

 

 

115 

Work-in-process

  

 

514 

  

$

206 

Finished goods

 

 

253 

 

 

106 

 

  

$

882 

  

$

427 

 

 

 

 

 

 

 

 

7. Goodwill

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 performs its annual impairment test of the carrying value of the Company’s goodwill during the third quarter of each year.

13


 

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, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS

 

IMPAIRMENT

 

NET

 

  

CARRYING AMOUNT

  

LOSSES

  

CARRYING VALUE

Goodwill

  

$

40,165 

  

$

 —

  

$

40,165 

 

The change in the net book value of goodwill for the six months ended June 30, 2015, is shown in the table below:

 

 

 

 

 

 

 

 

 

 

  

2015

As of January 1,

  

$

41,398 

Effect of foreign currency exchange

  

 

(1,233)

As of the end of the period,

  

$

40,165 

 

 

 

 

 

 

 

8. Intangible Assets, Net

The following is a summary of unamortized intangible assets as of June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

GROSS

 

 

CARRYING

Unamortized intangible assets:

  

VALUE

Intellectual property rights acquired for IPR&D

  

$

23,834 

 

Based on the completed pilot study results in Europe for AT-007 received late in the first quarter of 2015, the Company determined additional pilot studies were needed before advancing to a pivotal program. During the third quarter of 2015, the Company intends to meet with key opinion leaders to review the pilot study results and determine relevant treatment population and acceptable protocols for treatment for this potential indication (feline immunodeficiency virus). Based on the information obtained from the key opinion leaders, the Company may determine that the initial market size and treatment regimen assumed by the Company at time of acquisition may need to be revised. Any negative change in the market size, regimen, development timeline, or budget could result in a change in discounted cash flows or abandonment resulting in an impairment charge to the carrying value of $10,945. Based on these factors, the Company has determined AT-007 is at-risk for impairment in future periods.

The Company has been conducting early pre-development studies, including lead selection and proof of concept on several of our programs. These programs have an inherent risk due to the stage of development. The Company is currently evaluating several molecules in the canine parvovirus program or AT-011. However, possible development delays due to inability to find a suitable candidate to advance into development or future reprioritization of resources may result in a negative change in the development timeline or budget that could impact the discounted cash flows or abandonment resulting in an impairment charge to the carrying value of $5,837.  

The following is a summary of amortized intangible assets as of June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS

 

 

 

 

NET

 

 

 

 

 

CARRYING

 

ACCUMULATED

 

CARRYING

 

AVERAGE

Amortized intangible assets:

 

VALUE

 

AMORTIZATION

 

VALUE

 

USEFUL LIFE

Intellectual property rights for currently marketed products:

 

 

 

 

 

 

 

 

 

 

 

 

AT-004

 

$

28,572 

 

$

2,440 

 

$

26,132 

 

20 

Years

AT-005

 

$

10,080 

 

$

714 

 

$

9,366 

 

20 

Years

 

The change in the net book value of intangible assets for the six months ended June 30, 2015, is shown in the table below:

 

 

 

 

 

 

 

 

 

 

 

  

2015

As of January 1,

  

$

62,323 

Amortization expense

  

 

(966)

Effect of foreign currency exchange

  

 

(2,025)

As of the end of the period,

  

$

59,332 

 

14


 

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

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. The Company recognized amortization expense of $483 and $966 for the three and six months ended June 30, 2015, respectively, and $582 and $1,121 for the three and six months ended June 30, 2014, respectively. Indefinite-lived IPR&D intangible assets are not amortized until a product reaches its first conditional license or approval, then they are amortized over their estimated useful lives.

On February 24, 2015, the Company and Elanco mutually terminated the Elanco Agreement associated with AT-004 (Note 11). Due to the termination, the Company became responsible for all commercial and manufacturing activities associated with AT-004 beginning in 2015. The Company conducted an impairment assessment and concluded that the AT-004 intangible asset was not impaired. As part of the assessment, the Company considered that the product would be made available in the second half of 2015, as well as manufacturing expenses, technology royalties, post-approval studies, marketing, and selling expenses to commercialize the product.

 

9. Debt

Converted Loans

As of June 30, 2015, the Company had $15,000 in aggregate principal amount of 5.50% non-revolving loans due June 13, 2016.  This loan has been reclassified from long-term loan payable to current portion-loan payable as it is now due within one year. The Company has an option to amortize the principal amount equally over 24 months if it remains compliant with all the conditions under the loan security agreement through June 13, 2016 and it mutually agrees with the bank to any further financial covenants. During the three and six months ended June 30, 2015, the Company recognized interest expense related to the non-revolving loans of $219 and $435, respectively. During the three and six months ended June 30, 2014, the Company recognized interest expense related to the non-revolving loans of $216 and $433, respectively.

 

10. Accrued Expenses

 

Accrued expenses consisted of the following as of June 30, 2015, and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30,

 

DECEMBER 31,

 

 

2015

 

2014

Accrued expenses:

 

 

 

 

 

 

Accrued payroll and related expenses

 

$

1,307 

 

$

2,017 

Accrued professional fees

 

 

315 

 

 

429 

Accrued royalty expense

 

 

44 

 

 

72 

Accrued interest expense

 

 

39 

 

 

41 

Accrued research and development costs

 

 

1,413 

 

 

663 

Accrued milestone

 

 

500 

 

 

 —

Accrued other

 

 

125 

 

 

Total accrued expenses

 

$

3,743 

 

$

3,229 

 

 

 

 

 

 

 

11. Agreements

Elanco Animal Health, Inc. (“Elanco”) (formerly Novartis Animal Health, Inc. “NAH”)

On January 2, 2015, the Company was granted a full product license from the USDA for AT-004. The approval resulted in a $3,000 milestone being earned and due to the Company per the terms of the Exclusive Commercial License Agreement (the “Elanco Agreement”). During the first quarter of 2015, the Company recognized $3,000 of licensing revenue related to the milestone payment.

On February 24, 2015, the Company and Elanco agreed to terminate the Elanco Agreement. In consideration for the return of the commercial license granted to Elanco, the Company paid Elanco $2,500 in March 2015, and will be required to pay an additional $500 upon the first commercial sale by the Company. The Company has determined that it is probable that the $500 payment will be paid, and recorded the $500 as a current liability in the first quarter of 2015, as the Company believes the first commercial sale will occur in the second half of 2015. The Company recorded the $3,000 paid to Elanco as a reduction in revenues received from Elanco as the payment was to re-acquire rights that the Company had previously licensed to Elanco.

15


 

Table of Contents

ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 for the Advaxis 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, and is 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 Company allocated the consideration of $1,843 to Advaxis common stock ($1,200) and the Advaxis warrant ($643) based on their respective fair values and recorded the purchase in marketable securities and other long-term assets, respectively. See Note 3 for subsequent fair value matters related to the Advaxis common stock and warrant.

In January 2015, the Company sold 124,971 shares of Advaxis common stock for proceeds of $1,500,  and recognized a gain of $1,010 in other income (expense). Further in April 2015, the Company sold the remaining 181,151 shares of Advaxis common stock for proceeds of $3,233,  recognizing a gain of $2,523 in other income (expense) during the second quarter of 2015.

In May 2015, the Company, through net share settlement, exercised the Advaxis warrant for a total  exercise price equivalent to $750 and received 116,411 net shares of Advaxis common stock. Subsequently, the Company sold this Advaxis common stock for proceeds of $2,724, a gain of $341, recorded in other income (expense) during the second quarter of 2015.

 

12. Common Stock

As of June 30, 2015, there were 34,345,197 shares of the Company’s common stock outstanding, net of 619,123 shares of unvested restricted common stock.

 

13. 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, 2015: