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EX-31.1 - EX-31.1 - ARATANA THERAPEUTICS, INC.petx-20150930xex311.htm
EX-31.2 - EX-31.2 - ARATANA THERAPEUTICS, INC.petx-20150930xex312.htm
EX-10.5 - EX-10.5 - ARATANA THERAPEUTICS, INC.petx-20150930ex105ec2217.htm
EX-32.1 - EX-32.1 - ARATANA THERAPEUTICS, INC.petx-20150930xex321.htm
EX-32.2 - EX-32.2 - ARATANA THERAPEUTICS, INC.petx-20150930xex322.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 September 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 November 2, 2015, there were 35,005,596 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, 2015 and December 31, 2014

 

Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2015 and 2014

 

Consolidated Statements of Comprehensive Loss for the Three and Nine Months ended September 30, 2015 and 2014

 

Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2015 and 2014

 

Notes to Consolidated Financial Statements

Item 2.

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

27 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

40 

Item 4.

Controls and Procedures

40 

PART II. OTHER INFORMATION 

 

Item 1.

Legal Proceedings

41 

Item 1A.

Risk Factors

41 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41 

Item 3.

Defaults Upon Senior Securities

41 

Item 4.

Mine Safety Disclosures

41 

Item 5.

Other Information

41 

Item 6.

Exhibits

41 

SIGNATURES 

42 

 

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, 2015

 

DECEMBER 31, 2014

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,521 

 

$

9,823 

Short-term investments

 

 

59,247 

 

 

88,249 

Accounts receivable, net

 

 

134 

 

 

352 

Inventories

 

 

1,173 

 

 

427 

Prepaid expenses and other current assets

 

 

1,100 

 

 

900 

Deferred tax asset

 

 

158 

 

 

158 

Total current assets

 

 

75,333 

 

 

99,909 

Property and equipment, net

 

 

2,317 

 

 

620 

Long-term marketable securities

 

 

 —

 

 

2,452 

Goodwill

 

 

40,176 

 

 

41,398 

Intangible assets, net

 

 

15,413 

 

 

62,323 

Other long-term assets

 

 

193 

 

 

1,201 

Total assets

 

$

133,432 

 

$

207,903 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

1,245 

 

$

1,532 

Accrued expenses

 

 

3,664 

 

 

3,229 

Current portion – contingent consideration

 

 

 —

 

 

4,248 

Deferred tax liability

 

 

381 

 

 

413 

Other current liabilities

 

 

97 

 

 

46 

Total current liabilities

 

 

5,387 

 

 

9,468 

Loan payable

 

 

14,982 

 

 

14,963 

Deferred tax liability

 

 

92 

 

 

1,610 

Other long-term liabilities

 

 

 

 

30 

Total liabilities

 

 

20,467 

 

 

26,071 

Commitments and contingencies (Notes 9 and 11)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized at September 30, 2015 and December 31, 2014, 34,445,434 and 34,147,861 issued and outstanding at September 30, 2015, and December 31, 2014, respectively

 

 

35 

 

 

34 

Treasury stock

 

 

(1,081)

 

 

(1,081)

Additional paid-in capital

 

 

261,826 

 

 

254,993 

Accumulated deficit

 

 

(139,162)

 

 

(67,964)

Accumulated other comprehensive loss

 

 

(8,653)

 

 

(4,150)

Total stockholders’ equity

 

 

112,965 

 

 

181,832 

Total liabilities and stockholders’ equity

 

$

133,432 

 

$

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

 

NINE MONTHS ENDED

 

 

SEPTEMBER 30,

 

SEPTEMBER 30,

 

 

2015

 

2014

 

2015

 

2014

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Licensing and collaboration revenue

 

$

 —

 

$

43 

 

$

 —

 

$

519 

Product sales

 

 

229 

 

 

 —

 

 

615 

 

 

 —

Total revenues

 

 

229 

 

 

43 

 

 

615 

 

 

519 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

138 

 

 

 —

 

 

357 

 

 

 —

Royalty expense

 

 

23 

 

 

17 

 

 

66 

 

 

52 

Research and development

 

 

6,197 

 

 

6,078 

 

 

18,499 

 

 

13,950 

Selling, general and administrative

 

 

4,997 

 

 

3,897 

 

 

14,061 

 

 

12,913 

In-process research and development

 

 

 —

 

 

 —

 

 

 —

 

 

1,157 

Amortization of acquired intangible assets

 

 

483 

 

 

581 

 

 

1,449 

 

 

1,702 

Impairment of acquired intangible assets

 

 

43,398 

 

 

 —

 

 

43,398 

 

 

 —

Total costs and expenses

 

 

55,236 

 

 

10,573 

 

 

77,830 

 

 

29,774 

Loss from operations

 

 

(55,007)

 

 

(10,530)

 

 

(77,215)

 

 

(29,255)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

33 

 

 

31 

 

 

147 

 

 

58 

Interest expense

 

 

(226)

 

 

(222)

 

 

(661)

 

 

(768)

Other income (expense), net

 

 

 —

 

 

(10)

 

 

5,141 

 

 

(158)

Total other income (expense)

 

 

(193)

 

 

(201)

 

 

4,627 

 

 

(868)

Loss before income taxes

 

 

(55,200)

 

 

(10,731)

 

$

(72,588)

 

$

(30,123)

Income tax benefit

 

 

758 

 

 

601 

 

 

1,389 

 

 

1,563 

Net loss

 

$

(54,442)

 

$

(10,130)

 

$

(71,199)

 

$

(28,560)

Net loss per share, basic and diluted

 

$

(1.58)

 

$

(0.35)

 

$

(2.08)

 

$

(1.01)

Weighted average shares outstanding, basic and diluted

 

 

34,405,646 

 

 

29,348,375 

 

 

34,293,357 

 

 

28,301,216 

 

 

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,

 

 

2015

 

2014

 

2015

 

2014

Net loss

 

$

(54,442)

 

$

(10,130)

 

$

(71,199)

 

$

(28,560)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(60)

 

 

(3,394)

 

 

(3,251)

 

 

(3,784)

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

 

 

 —

 

 

181 

 

 

2,622 

 

 

(171)

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

 

 

 —

 

 

 —

 

 

(3,874)

 

 

 —

Other comprehensive loss

 

 

(60)

 

 

(3,213)

 

 

(4,503)

 

 

(3,955)

Comprehensive loss

 

$

(54,502)

 

$

(13,343)

 

$

(75,702)

 

$

(32,515)

 

 

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,

 

2015

 

2014

Cash flows from operating activities

 

 

 

 

 

Net loss

$

(71,199)

 

$

(28,560)

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

 

 

 

 

 

Acquired in-process research and development

 

 —

 

 

1,157 

Stock-based compensation expense

 

6,489 

 

 

5,241 

Depreciation and amortization expense

 

1,596 

 

 

1,884 

Impairment of acquired intangible assets

 

43,398 

 

 

 —

Gain on sale of marketable securities

 

(3,874)

 

 

 —

Non-cash interest expense

 

30 

 

 

30 

Change in fair value of contingent consideration

 

(1,248)

 

 

(183)

Change in fair value of derivative instruments

 

(1,274)

 

 

202 

Deferred tax benefit

 

(1,389)

 

 

(1,563)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

208 

 

 

174 

Inventories

 

(746)

 

 

(148)

Prepaid expenses

 

(236)

 

 

(337)

Other assets

 

(114)

 

 

(41)

Accounts payable

 

(274)

 

 

(763)

Accrued expenses and other liabilities

 

529 

 

 

147 

Net cash used in operating activities

 

(28,104)

 

 

(22,760)

Cash flows from investing activities

 

 

 

 

 

Purchases of property and equipment, net

 

(1,856)

 

 

(634)

Cash paid for acquisitions, net of cash received

 

 —

 

 

(12,075)

Proceeds from sales of marketable securities

 

7,456 

 

 

 —

Purchase of investments

 

(1,592,747)

 

 

(60,200)

Proceeds from maturities of investments

 

1,621,749 

 

 

12,200 

Purchase of derivative instruments

 

 —

 

 

(643)

Purchase of in-process research and development

 

 —

 

 

(1,157)

Net cash provided by (used in) investing activities

 

34,602 

 

 

(62,509)

Cash flows from financing activities

 

 

 

 

 

Repurchase of common stock

 

 —

 

 

(1,081)

Proceeds from stock option exercises

 

311 

 

 

197 

Proceeds from public offering, net of commission

 

 —

 

 

137,220 

Payments of public offering costs

 

 —

 

 

(2,139)

Cash paid for promissory notes

 

 —

 

 

(18,067)

Cash paid for contingent consideration

 

(3,000)

 

 

(15,166)

Net cash (used in) provided by financing activities

 

(2,689)

 

 

100,964 

Effect of exchange rate on cash

 

(111)

 

 

Net increase in cash and cash equivalents

 

3,698 

 

 

15,702 

Cash and cash equivalents, beginning of period

 

9,823 

 

 

41,084 

6


 

Cash and cash equivalents, end of period

$

13,521 

 

$

56,786 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash paid for interest

$

628 

 

$

584 

Non-cash exercise of warrant

$

750 

 

$

 —

 

 

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

 

 

7


 

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 and a consolidated variable interest entity. Intercompany balances and transactions are eliminated in consolidation.

 

To determine if the Company holds a controlling financial interest in an entity, the Company first evaluates if it is required to apply the variable interest entity (“VIE”) model to the entity. Where the Company holds current or potential rights that give it the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance combined with a variable interest that gives it the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, the Company is the primary beneficiary of that VIE. When changes occur to the design of an entity, the Company reconsiders whether it is subject to the VIE model. The Company continuously evaluates whether it is the primary beneficiary of a consolidated VIE.

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 $287 and $182 as of September 30, 2015, and December 31, 2014, respectively.

Goodwill

Goodwill relates to amounts that arose in connection with the Company’s business combinations (Note 2) and represents the difference between the purchase price and the estimated fair value of the identifiable tangible and intangible net assets when accounted for using the acquisition method of accounting. Goodwill is not amortized, but is subject to periodic review for impairment.

The Company tests goodwill at the reporting unit level for impairment on an annual basis and between annual tests, if events and circumstances indicate impairment may exist. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, including a decline in market capitalization, a significant adverse change in legal factors, business climate or operational performance of the business and an adverse action or assessment by a regulator.

The Company completed its annual goodwill impairment testing during the third quarter of 2015. 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 stockholders’ 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.

Impairment charges related to goodwill and intangible assets have no impact on the Company’s compliance with financial covenants contained in the Company’s debt agreements.

8


 

Intangible Assets

The Company’s intangible assets consist of intellectual property rights acquired for currently marketed products and intellectual property rights acquired for in-process research and development (“IPR&D”). All of the Company’s intangible assets were recorded in connection with the Company’s business combinations (Note 2). The Company’s intangible assets are recorded at fair value at the time of their acquisition. The Company amortizes intangible assets over their estimated useful lives once the acquired technology is developed into a commercially viable product.

The estimated useful lives of the individual categories of intangible assets are 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 time the intangible assets are estimated to contribute to future cash flows. The Company amortizes finite-lived intangible assets using the straight-line method.

Indefinite-lived IPR&D intangible assets are assessed for impairment at least annually. In addition, all intangible assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows for definite-lived intangible assets and discounted cash flows for indefinite-lived IPR&D intangible assets expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted (definite-lived) or discounted (indefinite-lived) future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. In the three months ended September 30, 2015 and to date, the Company has recorded $43,398 of impairment losses on intangible assets (Note 8).

The Company will complete its annual indefinite-lived IPR&D intangible assets impairment testing during the fourth quarter of 2015.

Recently Issued and Adopted Accounting Pronouncements

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

In April 2015, the Financial Accounting Standards Board (“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.

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.

9


 

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.

 

10


 

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

11


 

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

In the third quarter of 2015, the Company recorded an impairment charge of $8,717 and $5,819 for AT-007 and AT-011, respectively (Note 8).

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:

 

 

 

 

 

 

 

 

 

 

 

  

NINE MONTHS ENDED

 

 

SEPTEMBER 30,

 

 

2014

 

 

(Unaudited)

Revenue

  

$

519 

Loss from operations

  

 

(28,961)

Loss before income taxes

  

 

(29,832)

Net loss per share before income taxes – basic and diluted

 

$

(1.05)

 

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.

 

12


 

 

3. Fair Value of Financial Assets and Liabilities

 

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

 

As of September 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

 

SEPTEMBER 30, 2015 USING:

 

  

VALUE

  

LEVEL 1

  

LEVEL 2

  

LEVEL 3

  

TOTAL

Assets:

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

Cash equivalents:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

5,976 

 

$

 —

 

$

5,976 

 

$

 —

 

$

5,976 

Money market fund

 

 

3,209 

 

 

3,209 

 

 

 —

 

 

 —

 

 

3,209 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term marketable securities - certificates of deposit

 

 

747 

 

 

 —

 

 

747 

 

 

 —

 

 

747 

Reverse repurchase agreements

 

 

58,500 

 

 

 —

 

 

58,500 

 

 

 —

 

 

58,500 

 

  

$

68,432 

  

$

3,209 

  

$

65,223 

  

$

 —

  

$

68,432 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

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.

13


 

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 as of September 30, 2015, 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,

  

$

 —

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 Animal Health, Inc. (“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 nine months ended September 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 September 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

SEPTEMBER 30, 2015

 

  

CARRYING VALUE

 

FAIR VALUE

Financial liabilities:

  

 

 

 

 

 

Loan payable (Level 2)

  

$

14,982 

  

$

15,112 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

DECEMBER 31, 2014

 

  

CARRYING VALUE

 

FAIR VALUE

Financial liabilities:

  

 

 

 

 

 

Loan payable (Level 2)

  

$

14,963 

  

$

14,933 

 

14


 

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.

The following table provides fair value information about the intangible assets that were impaired during the three months ended September 30, 2015. (Note 8.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

FAIR VALUE 

 

 

CARRYING

 

SEPTEMBER 30, 2015

 

  

VALUE

  

LEVEL 1

  

LEVEL 2

  

LEVEL 3

  

IMPAIRMENT

Intellectual property rights for currently marketed products

 

$

6,152 

 

$

 —

 

$

 —

 

$

6,152 

 

$

28,862 

Intellectual property rights acquired for in-process research and development

 

 

9,261 

 

 

 —

 

 

 —

 

 

9,261 

 

 

14,536 

 

  

$

15,413 

  

$

 —

  

$

 —

  

$

15,413 

  

$

43,398 

 

The fair value amount is presented as of the date of impairment, as these assets are not measured at fair value on a recurring basis. (Note 8).

The fair value reflects intangible assets written down to fair value during the three months ended September 30, 2015. Fair-value was determined using the income approach, specifically the multi-period excess earnings method, also known as the discounted cash flow method. The Company started with a forecast of all the expected net cash flows associated with the asset and then it applied an asset-specific discount rate to arrive at a net present value amount. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of competitive legal and/or regulatory forces on the product and the impact of technological risk associated with IPR&D assets; the discount rate, which seeks to reflect the various risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.

 

4. Investments

 

Marketable Securities

 

As of September 30, 2015 and December 31, 2014, the fair value of available-for-sale marketable securities by type of security was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

SEPTEMBER 30, 2015

 

  

 

 

  

GROSS

  

GROSS

 

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

747 

 

$

 —

 

$

 —

 

$

747 

Total

  

$

747 

  

$

 —

  

$

 —

 

$

747 

 

At September 30, 2015, 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.

 

15


 

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 on available-for-sale securities in the amount of $1,252 were recorded as a component of accumulated 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 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 nine months ended September 30, 2015, the Company exercised the Advaxis warrant (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

 

 

SEPTEMBER 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 nine months ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAIN RECOGNIZED IN

 

GAIN (LOSS) RECOGNIZED IN

 

 

OTHER INCOME (EXPENSE)

 

OTHER INCOME (EXPENSE)

 

 

THREE MONTHS ENDED

 

NINE MONTHS ENDED

 

 

SEPTEMBER 30,

 

SEPTEMBER 30,

 

 

2015

 

2014

 

2015

 

2014

Derivative assets:

  

 

 

 

 

 

 

 

 

 

 

 

Warrant

  

$

 —

 

$

17 

 

$

1,274 

 

$

(202)

 

As the Company exercised the warrant and subsequently sold the shares of common stock received upon exercise during the second quarter of 2015, no gain was recorded during the three months ended September 30, 2015. During the nine months ended September 30, 2015, the Company exercised the warrant and recognized a gain of $1,274 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).

16


 

6. Inventories

Inventories are comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30,

 

DECEMBER 31,

 

  

2015

  

2014

Raw materials

 

$

135 

 

 

115 

Work-in-process

  

 

565 

  

$

206 

Finished goods

 

 

473 

 

 

106 

 

  

$

1,173 

  

$

427 

 

 

7. Goodwill

Goodwill is recorded as an indefinite-lived asset and no goodwill impairment losses have been recognized. Goodwill is not amortized for financial reporting purposes but is tested for impairment on an annual basis or when indications of impairment exist. Goodwill is not expected to be deductible for income tax purposes. The Company performed its annual impairment test of the carrying value of goodwill during the third quarter of 2015.  

The following is a summary of goodwill as of September 30, 2015: