ARATANA THERAPEUTICS, INC.
N
otes
to
C
onsolidated
Financial
S
tatements (Unaudited)
(A
mounts 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”)
was incorporated on December 1, 2010 under the laws of the State of Delaware. T
he Company is a pet therapeutics company focused on licensing, developing and commercializing innovative therapeutics for dogs and cats. The Company has
one
operating segment: pet therapeutics.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U
nited
S
tates
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, 2016
and the notes thereto in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2017. 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 has incurred recurring losses and negative cash flows from operations and has an accumulated deficit of
$208,798
as of
June 30, 2017
. The Company expects to continue to generate operating losses for the foreseeable future. The Company believes that its cash, cash equivalents and short-term investments
will be sufficient to fund operations and debt obligations f
or at least one year from the issuance of the
se
consolidated financial statements.
The Company expects to continue
to incur operating losses for the next several years as
it
work
s
to develop and commercialize
its
therapeutics and therapeutic candida
tes. If the Company cannot generate sufficient cash from operations in the future, it may
seek to fund
its
operations through collaborations and licensing arrangements, as well as public or private equity offerings or further debt (re)financings. If the Company is not able to raise additional capital on terms acceptable to it, or at all, as and when needed, it may be required to curtail
its
operations
which could include delaying the commercial launch of
its
therapeutics, discontinuing therapeutic development programs, or granting rights to develop and market therapeutics or therapeutic candidates that it would otherwise prefer to develop and market
itself
. As disclosed i
n Note 7 t
o the consolidated financial statements, the Company has a term loan and a revolving credit facility with an aggregate principa
l
balance of
$37,667
as
of
June 30, 2017
. The loan agreement requires that the Company maintain certain minimum liquidity at all times
(the greater of cash equal to fifty percent (
50%
) of outstanding balance or remaining months’ liquidity, which is calculated on an average trailing three (3) month basis, equal to six (6) months or greater)
,
which as of
June 30, 2017
, was approximately
$
22,523
.
If the minimum liquidity covenant is not met, the Company may be required to repay the loans prior to their scheduled maturity dates. At
June 30, 2017
, the Company was in compliance with all financial covenants.
Consolidation
The Company’s consolidated financial statements include its financial statements and those of its wholly-owned subsidiaries
and a consolidated variable interest entity (“VIE”)
through the deconsolidation date in December 2016.
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
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 and upon determination that the Company no longer remains the primary beneficiary, the Company deconsolidates the entity and a gain or loss is recognized upon deconsolidation.
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
$1,378
and
$920
as of
June 30, 2017
and
December 31, 2016
, respectively.
New Accounting Standards
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on recognizing revenue in contracts with customers. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This guidance will supersede the revenue recognition requirements in topic,
Revenue Recognition
, and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
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. Early adoption is permitted but not before the original effective date of January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently assessing the method of adoption and the impact this new guidance will have on its consolidated financial statements. The timing of revenue recognition for variable consideration under
the Company’s
licensing and collaboration agreements may be different as a result of this new guidance. The Company is reviewing its licensing and collaboration agreements for variable consideration, and if any such consideration exists, whether it should be estimated and recognized earlier than under the current revenue guidance.
Inventory
In July 2015, the FASB issued guidance that 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 using a prospective basis. The Company adopted this guidance on January 1, 2017, and the adoption did not have a material impact on its consolidated financial statements.
Leases
In February 2016, the FASB issued guidance that requires, for operating leases, a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted and is to be applied using a modified retrospective method. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.
Compensation – Stock Compensation
In March 2016, the FASB issued guidance that simplifies several aspects of the accounting for employee share-based payment transactions including accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. 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.
The Company adopted this guidance on January 1, 2017, and the adoption did not have a material impact on its consolidated financial statements.
Statement of Cash Flows
In August 2016, the FASB issued guidance on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company adopted this guidance on January 1, 2017, and the adoption did not have a material impact on its consolidated financial statements.
Intangibles—Goodwill and Other
In January 2017, the FASB issued guidance on simplifying the subsequent measurement of goodwill by eliminating Step 2 (measuring a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill) from the goodwill impairment test. Under the amendments in this guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The guidance requires application using a prospective method. The Company adopted this guidance on January 1, 2017, and the adoption did not have a material impact on its consolidated financial statements.
Compensation – Stock Compensation
In May 2017, the FASB issued guidance on determining which changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption
is
permitted, and is applied prospectively to changes in terms or conditions of awards occurring on or after the adoption date. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.
2. Fair Value of Financial Assets and Liabilities
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following financial assets 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).
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Fair Value Measurements as of
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Carrying
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|
June 30, 2017 Using:
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Value
|
|
Level 1
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Level 2
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Level 3
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Total
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Assets:
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Cash equivalents:
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Certificates of deposit
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$
|
7,221
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|
$
|
—
|
|
$
|
7,221
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|
$
|
—
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$
|
7,221
|
Short-term investments:
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Short-term marketable securities - certificates of deposit
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1,494
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—
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|
1,494
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—
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1,494
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|
$
|
8,715
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|
$
|
—
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|
$
|
8,715
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|
$
|
—
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|
$
|
8,715
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Fair Value Measurements as of
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Carrying
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|
December 31, 2016 Using:
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Value
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Level 1
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Level 2
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Level 3
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Total
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Assets:
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Cash equivalents:
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Certificates of deposit
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$
|
7,719
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|
$
|
—
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$
|
7,719
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|
$
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—
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$
|
7,719
|
Short-term investments:
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Short-term marketable securities - certificates of deposit
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|
996
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|
|
—
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|
|
996
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|
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—
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|
996
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$
|
8,715
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|
$
|
—
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|
$
|
8,715
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|
$
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—
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$
|
8,715
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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:
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Cash equivalents – the fair value of the cash equivalents has been determined to be amortized cost
given the short duration of the securities.
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Marketable securities (short-term) – the fair value of marketable securities has been determined to be amortized cost given the short duration of the securities.
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Financial Assets and Liabilities that are not Measured at Fair Value on a Recurring Basis
The carrying amounts and estimated fair value of the Company’s financial liabilities which are not measured at fair value on a recurring basis was as follows:
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June 30, 2017
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Carrying Value
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Fair Value
|
Liabilities:
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Loans payable (Level 2)
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$
|
38,093
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$
|
38,172
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December 31, 2016
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Carrying Value
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Fair Value
|
Liabilities:
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Loans payable (Level 2)
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$
|
40,188
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$
|
40,709
|
Loans payable values above include both
the current
and the long-term
loans
balances as of
June 30, 2017
and December 31, 2016.
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 loans payable was estimated using discounted cash flow analysis discounted at current
rates.
3. Investments
Marketable Securities
Marketable securities consisted of the following:
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June 30, 2017
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Gross
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Gross
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Amortized
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Unrealized
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Unrealized
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Fair
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Cost
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Losses
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Losses
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Value
|
Short-term marketable securities:
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Certificates of deposit
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$
|
1,494
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|
$
|
—
|
|
$
|
—
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|
$
|
1,494
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Total
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$
|
1,494
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$
|
—
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$
|
—
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$
|
1,494
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December 31, 2016
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Gross
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Gross
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Amortized
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Unrealized
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Unrealized
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Fair
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Cost
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Losses
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Losses
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Value
|
Short-term marketable securities:
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Certificates of deposit
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$
|
996
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$
|
—
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$
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—
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$
|
996
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Total
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$
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996
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$
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—
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$
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—
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$
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996
|
At
June 30, 2017
and
December 31, 2016
, 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.
4
. Inventories
Inventories are stated at the lower of cost or
net realizable value
and
consisted
of the following:
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June 30, 2017
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December 31, 2016
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Raw materials
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$
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1,491
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$
|
1,441
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Work-in-process
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5,199
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8,153
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Finished goods
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271
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1,536
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$
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6,961
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$
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11,130
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As of
June 30, 2017
a
nd December 31, 2016,
the Company had non-cancellable open orders for
the purchase of
inventories of
approximately
$
27,
667
and
$17,800
, respectively
.
As of
June 30, 2017
and December 31, 2016
, the Company had
deposits for
inventories of
$
5,313
and
$
0
, resp
ectively
, recorded as
prepaid expenses and other current assets
in the consolidated balance sheets.
5
. 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
to date
. 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.
Goodwill as of
June 30, 2017
, was as follows:
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Gross
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Impairment
|
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Net
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Carrying Value
|
|
Losses
|
|
Carrying Value
|
Goodwill
|
|
$
|
40,500
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$
|
—
|
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$
|
40,500
|
The change in the net book value of goodwill for the
six
months ended
June 30, 2017
, was as follows:
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2017
|
As of January 1,
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$
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39,382
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Effect of foreign currency exchange
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1,118
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As of the end of the period,
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$
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40,500
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6
. Intangible Assets, Net
The change in the net book value of intangible assets for the
six
months ended
June 30, 2017
, was as follows:
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2017
|
As of January 1,
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$
|
7,639
|
Additions (Note 9)
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3,000
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Amortization expense
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(150)
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Effect of foreign currency exchange
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544
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As of the end of the period,
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$
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11,033
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The Company recognized amortization expense of
$8
6
and
$150
for the three
and six
months
ended
June 30, 2017
,
respectively
, and
$95
and
$190
for the three and six months ended June 30, 2016, respectively
.
Unamortized Intangible Assets
Unamortized intangible assets as of
June 30, 2017
, were as follows:
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Net
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Carrying
|
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|
Value
|
Intellectual property rights acquired for in-process research and development
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$
|
7,217
|
The net carrying value above includes asset impairment charges to date of
$16,765
.
Amortized Intangible Assets
Amortized intangible assets as of
June 30, 2017
, were as follows:
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Gross
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Net
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Weighted
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Carrying
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Accumulated
|
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Carrying
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Average
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Value
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Amortization
|
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Value
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Useful Life
|
Intellectual property rights for currently marketed products
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$
|
42,652
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$
|
38,836
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$
|
3,816
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11.7
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Years
|
Accumulated amortization
above
includes both amortization expense and asset impairment charges
. Asset impairment charges to date are
$34,575
.
Unfavorable outcomes of the Company’s developm
ent activities or the Company’s estimates of the market opportunities for the
therapeutic
candidates could result in
additional
impairment charges in future periods.
7. Debt
Loan and Security Agreements
Effective as of October 16, 2015, the Company and Vet Therapeutics, Inc., (the “Borrowers”), entered into a Loan and Security Agreement, as amended on February 24, 2017 (“Loan Agreement”), with Pacific Western Bank, or Pacific Western, as a collateral agent and Oxford Finance, LLC (the “Lenders”). The loan is secured by substantially all of the Borrowers’ personal property other than intellectual property
and certain other customary exclusions. Subject to customary exceptions, the Company is not permitted to encumber its intellectual property
. The outstanding principal balance under the Loan
Agreement was
$32,667
under the term
loan facility and
$5,000
under the revolving credit facility at
June 30, 2017
.
Under the Loan Agreement,
t
he Company
was
required to make interest-only payments on the term loan for
18
months, and beginning on May 1, 2017,
began
to make payments of principal and accrued interest on the term loan in equal monthly installments over a term of
30
months. The Company
was
required to make interest-only payments on the revolving credit facility until October 16, 2017, when all principal and accrued interest
were
due. The
term loan and revolving credit facility bear interes
t per annum at the greater of (i)
6.91%
or (ii)
3.66%
plus the prime rate, which is customarily defined. As of
June 30, 2017
, the interest rate for the term loan and the revolving credit facility was
7.91%
. D
uring the three and six months ended
June 30, 2017
, the Company recognized interest expense of
$871
and
$1,731
, respectively, and d
uring the three and six months ended June 30, 2016, the Company recognized interest expense of
$843
and
$1,687
, respectively
.
The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, limits or restrictions on the Borrowers’ ability to incur liens, incur indebtedness, make certain restricted payments, make certain investments, merge, consolidate, make an acquisition, enter into certain licensing arrangements and dispose of certain assets. In addition, the Loan Agreement contains customary events of default that entitle the Lenders to cause the Borrowers’ indebtedness under the Loan Agreement to become immediately due and payable. The events of default, some of which are subject to cure periods, include, among others, a non-payment default, a covenant default, the occurrence of a material adverse change, the occurrence of an insolvency, a material judgment default, defaults regarding other indebtedness and certain actions by governmental authorities. Upon the occurrence and for the duration of an event of default, an additional default interest rate equal to
4%
per annum will apply to all obligations owed under the Loan Agreement.
The Loan Agreement requires that the Company maintain certain minimum liquidity at all times
(the greater of cash equal to fifty percent (
50%
) of outstanding credit extensions or remaining months’ liquidity, which is calculated on an average trailing three (3) month basis, equal to six (6) months or greater)
, which as of
June 30, 2017
, was approximately $
22,523
. If the minimum liquidity covenant is not met, the Company may be required to repay the term loan and the revolving credit facility prior to their scheduled maturity dates. At
June 30, 2017
, the Company was in compliance with all financial covenants.
The Company’s
loans payable balance as of
June 30, 2017
, was as follows:
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Principal amounts
|
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Term loan,
7.91%
, principal payments from
May 1, 2017
through
October 16, 2019
|
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$
|
32,667
|
Revolving credit facility,
7.91%
, due
October 16, 2017
|
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5,000
|
Add: accretion of final payment and termination fees
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631
|
Less: unamortized debt issuance costs
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(205)
|
As of the end of the period
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$
|
38,093
|
As of
June 30, 2017
,
$
8,667
and
$130
related to the term loan and the revolving credit facility, respectively, were classified as current portion – loans payable. Portions of the term loan and the revolving credit facility have been reclassified from current portion – loans payable to loans payable as the Company refinance
d its debt
after the balance sheet date
.
Effective as of
July 31, 2017
, the Borrowers and Lenders entered into a second amendment to the Loan Agreement (“the Second Amendment”). The terms of the Second Amendment, among other things, extend the maturity date of the existing revolving credit facility to
October 16, 2019
(the “Revolving Line Maturity
Date”), with amortized equal repayments of the principal outstanding under the revolving credit facility beginning November 1, 2018, and provide a
six
-month interest only period for the term loans, starting on the date of the Second Amendment. The Company is not subject to any new financial covenants as a result of the Second Amendment. At the closing of the Second Amendment, the Company paid the Lenders an amendment fee of
$150
and a facility fee of
$60
. The Company is also obligated to pay a new termination fee equal to
$165
upon the earliest to occur of the Revolving Line Maturity Date, the acceleration of the revolving credit facility or the termination of the revolving credit facility. The existing termination fee of
$165
will continue to be payable upon the earliest to occur of the original revolving maturity date (
October 16, 2017
), the acceleration of the revolving credit facility or the termination of the revolving credit facility.
8
. Accrued Expenses
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Accrued expenses:
|
|
|
|
|
|
|
Payroll and related expenses
|
|
$
|
1,489
|
|
$
|
2,321
|
Professional fees
|
|
|
236
|
|
|
219
|
Royalty expense
|
|
|
370
|
|
|
71
|
Interest expense
|
|
|
240
|
|
|
247
|
Research and development costs
|
|
|
511
|
|
|
364
|
Unbilled inventories
|
|
|
—
|
|
|
465
|
Accrued loss on a firm purchase commitment
|
|
|
1,983
|
|
|
1,983
|
Milestone
|
|
|
481
|
|
|
17
|
Other
|
|
|
292
|
|
|
140
|
Total
|
|
$
|
5,602
|
|
$
|
5,827
|
9
. Agreements
RaQualia Pharma Inc. (“RaQualia”)
On December 27, 2010, the Company entered into
two
Exclusive License Agreements with RaQualia (
as amended,
the “RaQualia Agreements”) that granted the Company global rights, subject to certain exceptions for injectables in Japan, Korea, China and Taiwan for development and commercialization of licensed animal health products for compounds RQ-00000005 (ENTYCE
®
, also known as AT-002) and RQ-00000007 (GALLIPRANT
®
, also known as AT-001). The Company will be required to pay RaQualia
remaining
milestone payments associated with GALLIPRANT and ENTYCE of up t
o
$4,000
and
$6,000
, respectivel
y, upon the Company’s achievement of certain development, regulatory and commercial milestones, as well as mid-single digit royalties on the Company’s or the Company’s sublicensee’s product sales.
T
he Company
achieved a
$3,000
milestone during the
six
m
onths ended
June 30, 2017
,
which
was
paid and
capitalized as an intangible asset
in the first quarter of 2017
.
As of
June 30, 2017
, the
Company had p
aid
$
8
,
5
00
in
m
ilestone payments
since execution of the RaQualia Agreements
.
It is possible that multiple additional milestones related to the RaQualia Agreements are achieved within the next 12 months totaling
$
3
,000
.
Elanco
GALLIPRANT
On April 22, 2016, the Company entered into a Collaboration, License, Development and Commercialization Agreement (the “Collaboration Agreement”) with
Eli Lilly and Company, acting on behalf of its Elanco Animal Health Division (“Elanco”)
pursuant to which the Company granted Elanco rights to develop, manufacture, market and commercialize the Company’s products based on licensed grapiprant rights an
d technology
, including GALLIPRANT (collectively, “Grapiprant Products”)
. Pursuant to the Collaboration Agreement, Elanco will have exclusive rights globally outside the United States and co-exclusive rights with the Company in the United States during the term of the Collaboration Agreement.
Under the terms of the Collaboration Agreement,
the Company received a non-refundable, non-creditable
upfront payment of
$45,000
.
The Company is entitled to
a
$4,000
milestone payment
upon
European approval of
a
Grapiprant Product
for the treatment of pain and inflammation
,
a
nother
$4,000
payment
u
pon achievement of a development milestone related to the manufacturing
of
a Grapiprant Product,
and
payments
up to
$75,000
upon the achievement of certain sales milestones. The sales milestone payments are subject to a
one
-third reduction for each year the occurrence of the milestone is not achieved beyond December 31, 2021, with any non-occurrence beyond December 31, 2023
,
cancelling out the applicable milestone payment obligation entirely.
The Collaboration Agreement also provides that Elanco will pay the Company royalty payments on a percentage of net sales in the mid-single to low-double digits.
The Company is responsible f
or all development activities required to obtain the first registration or regulatory approval
for
a Grapiprant
Product for use in dogs in each of the European Union (“the EU Product Regist
ration”) and the United States,
and Elanco is responsible for all
other development activities.
First
r
egistration for
a Grapiprant
Product in the
United States
was achieved before the completion of the Collaboration Agreement.
In addition, the Company and Elanco have agreed to pay
25%
and
75%
, respectively, of all third-party development fees and expenses through December 31, 2018
,
in connection with preclinical and clinical trials necessary for any
additional
registration or regulatory approval of the
Grapiprant
Products, provided that the Company’s contribution to such development fees and expenses is capped at
$7,000
(“R&D Cap”),
which was recorded as licensing and collaboration commitment liability in the consolidated b
alance sh
eet
s
at
June 30, 2017
and December 31, 2016.
Th
e Company classified the licensing and collaboration commitment liability as a current liability due to the Company having no control over when R&D Cap expenses will be incurred and the expected timing of R&D Cap expenses being unknown as of
June 30, 2017
.
The licensing and collaboration commitment liability will be reduced in future periods as the related expenses are incurred by Elanco and paid for by the Company. Any remaining balance not paid to Elanco will be recognized as licensing and collaboration revenue on December 31, 2018
,
when the Company’s obligation to fund 25% of Elanco’s development efforts expires.
Commencing on the effective date of the Collaboration Agreement, the Company is responsible for the manufacture and supply of all of Elanco’s reasonable requirements of
active pharmaceutical ingredient
(“API”)
and/or finished
Grapiprant Products
under the supply terms agreed upon pursuant to the Collaboration Agreement
. However, Elanco retains the ability to assume all or a portion of the manufacturing responsibility during the term of the Collaboration Agreement.
On April 28, 2017, the Company and Elanco entered into an amendment (the “Amendment”) to the Collaboration Agreement. Under the Amendment, Elanco has agreed to submit binding purchase orders to the Company, within
15
days of the effective date of the Amendment, for certain finished Grapiprant Products to be produced from certain batches of API the Company has agreed to purchase from its third
-
party manufacturer (the “API Batches”). In addition, Elanco has agreed to pay the Company for the API Batches within
30
days after the Company provides Elanco with proof of payment to the manufacturer for such API Batches. The Amendment provides that, in the event Elanco provides notice of its intent to assume responsibility for manufacturing, Elanco would assume all responsibilities of the Company with respect to any undelivered API, including paying the third
-
party manufacturer for such undelivered API.
In July 2017, pursuant to Sections 8.2.2 and 10.1(c) of the Collaboration Agreement, as amended, Elanco provided the Company notice of its intent to assume responsibility for manufacturing of the Grapiprant Products and its intent to assume the
applicable regulatory approvals
.
The Company believes the transfers of manufacturing
responsibility
and
such regulatory approvals
in the U
nited
S
tates
will be completed by December 31, 2017.
On April 22, 2016, in connection with the Collaboration Agreement, the Company entered into a Co-Promotion Agreement (the “Co-Promotion Agreement”) with Elanco to co-promote
Grapiprant Products
in the United States.
Under the terms of the Co-Promotion Agreement, Elanco has agreed to pay the Company, as a fee for
promotional
services performed and expenses incurred by the Company under the Co-Promotion Agreement, (i)
25%
of the gross margin on net sales of
Grapiprant
Product sold in the United States under the Collaboration Agreement prior to December 31, 2018 (unless extended by mutual agreement), and (ii) a mid-single digit percentage of net sales of the
Grapiprant
Product in the United States after December 31, 2018 through 2028 (unless
extended by mutual agreement).
10. Common Stock
As of
June 30, 2017
, there were
42,402,677
shares of the Company’s common stock outstanding, net of
584,591
shares of unvested restricted common stock.
At-the-Market Offering
On October 16, 2015, the Company entered into a Sales Agreement (“Sales Agreement”) with Barclays Capital
,
Inc. (“Barclays”) pursuant to which the Company could sell from time to time, at its option, up to an aggregate of
$52,000
of shares of its common stock (the “Shares”) through Barclays, as sales agent (“ATM Program”). Sales of the Shares were made under the Company’s previously filed and
then
effective
r
egistration
s
tatement on Form S-3 (Reg. No. 333-197414), by means of ordinary brokers’ transactions on the NASDAQ Global Market or otherwise. Additionally, under the terms of the Sales Agreement, the Shares could be sold at market prices, at negotiated prices or at prices related to the prevailing market price. The Company paid Barclays a commission of
2.75%
of the gross proceeds from the sale of the Shares.
During the
three and six
months ended
June 30, 2017
,
the Company sold 305,372 and
546,926
Shares for aggregate net proceeds of $1,565 and $2,78
8
, respectively.
On April 28, 2017, the Company terminated its Sales Agreement. Prior to termination, the Company sold approximately
$18,000
of the
$52,000
available to be sold under the Sales Agreement. The Company terminated the Sales Agreement because it
did
not intend to raise additional capital through the ATM Program, and no additional shares of the Company’s common stock
were
sold pursuant to the Sales Agreement. The Company did not incur any termination penalties as a result of its termination of the Sales Agreement.
Registered Direct Offering
On May 3, 2017, the Company entered into a Placement Agency Agreement (“PAA”) with Barclays, pursuant to which Barclays agreed to serve as placement agent for an offering of shares of common stock. In conjunction with the PAA, on May 3, 2017, the Company also entered into a Securities Purchase Agreement with certain investors for the sale by the Company of
5,000,000
shares of common stock at a purchase price of
$5.25
per share (the “Offering”). The shares of common stock were offered and sold pursuant to
the Company’s
previously filed and then
effective registration statement on Form S-3 (File No. 333-197414) and a related prospectus supplement. The Company agreed to pay Barclays an aggregate fee equal to
6.0%
of the gross proceeds received by the Company from the Offering. The Offering closed on
May 9, 2017
. During the three months ended June 30, 2017,
t
he Company receive
d aggregate net
proceeds from the Offering of
approximately
$24,400
, after deducting placement agent fees of
$1,575
and offering expenses of
$273
.
1
1
. Stock-Based Awards
2010 Equity Incentive Plan
Activity related to stock options under the 2010 Equity Incentive Plan (the “2010 Plan”) for the
six
months ended
June 30, 2017
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Shares
|
|
Weighted
|
|
Average
|
|
|
|
|
Issuable
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
Under
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Options
|
|
Price
|
|
Term
|
|
Value
|
|
|
|
|
|
|
|
(In Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
65,931
|
|
$
|
3.73
|
|
6.09
|
|
$
|
228
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
(8,537)
|
|
|
0.40
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
Expired
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding as of June 30, 2017
|
|
57,394
|
|
$
|
4.22
|
|
5.62
|
|
$
|
173
|
No
stock options have been granted under the 2010 Plan since
the effective date of
the
2013 Incentive Award Plan (the “2013 Plan”)
.
For
the
six
months ended
June 30, 2017
, the total intrinsic value of options exercised was
$53
and the total received from stock option
exercises was
$3
.
2013 Incentive Award Plan
On January 1, 2017, the
annual increase
in
the
number of shares available for issuance under the
2013 Plan
was determined to be
1,203,369
shares
in accordance with the automatic annual increase provisions of the 2013 Plan
. As of
June 30, 2017
, there were
1,609,078
shares available for future grant under the
2013 Plan
.
Activity related to stock options under the 2013 Plan for the
six
months ended
June 30, 2017
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighed
|
|
|
|
|
|
Shares
|
|
Weighted
|
|
Average
|
|
|
|
|
|
Issuable
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
Under
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Options
|
|
Price
|
|
Term
|
|
Value
|
|
|
|
|
|
|
|
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
2,251,518
|
|
$
|
12.43
|
|
7.78
|
|
$
|
2,261
|
Granted
|
|
503,400
|
|
|
7.82
|
|
|
|
|
|
Exercised
|
|
(47,416)
|
|
|
3.14
|
|
|
|
|
|
Forfeited
|
|
(28,351)
|
|
|
10.91
|
|
|
|
|
|
Expired
|
|
(83,753)
|
|
|
19.15
|
|
|
|
|
|
Outstanding as of June 30, 2017
|
|
2,595,398
|
|
$
|
11.50
|
|
7.85
|
|
$
|
2,115
|
For the
six
mo
nths
ended
June 30, 2017
, the weighted average grant date fair value of stock options granted was
$5.18
. For the
six
months ended
June 30, 2017
, the total intrinsic value of options exercised was
$114
and the total received from stock option exercises was
$149
.
Activity related to restricted stock under the 2013 Plan for the
six
months ended
June 30, 2017
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average Grant
|
|
|
Shares
|
|
Date Fair Value
|
Unvested restricted common stock as of December 31, 2016
|
|
461,463
|
|
$
|
8.30
|
Issued
|
|
326,700
|
|
|
7.89
|
Vested
|
|
(192,780)
|
|
|
10.12
|
Forfeited
|
|
(10,792)
|
|
|
7.32
|
Unvested restricted common stock as of June 30, 2017
|
|
584,591
|
|
$
|
7.49
|
For the
six
months ended
June 30, 2017
, the total fair value of restricted common stock vested was
$
1,418
. The Company did
not
receive cash proceeds for any of the restricted common stock issued during the
six
months ended
June 30, 2017
.
Stock-Based Compensation
Upon adoption of ASU 2016-09 (
Compensation – Stock Compensation
)
on January
1
, 2017
, the Company elected to change its accounting policy to account for forfeitures as they occur.
The change was applied on a modified retrospective basis with a cumulative-effect adjustment to
accumulated deficit
o
f
$213
(which
increased
the accumulated deficit) as of January 1, 201
7
. Prior to adoption of this guidance the Company estimated forfeitures
.
The Company recorded stock-based compensation expense related to stock options and restricted stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost of product sales and inventories
|
|
$
|
44
|
|
$
|
19
|
|
$
|
84
|
|
$
|
50
|
Research and development
|
|
|
238
|
|
|
264
|
|
|
488
|
|
|
629
|
Selling, general and administrative
|
|
|
1,562
|
|
|
1,913
|
|
|
3,086
|
|
|
3,770
|
|
|
$
|
1,844
|
|
$
|
2,196
|
|
$
|
3,658
|
|
$
|
4,449
|
A
s o
f
June 30, 2017
,
t
he Company had an aggre
gate of
$
6,634
and
$
3,582
of unrecognized stock-based compensation expense for options outstandin
g and restricted stock awards, respectively, which is expected to be recognized over a weighted average period of
2.32
years and
1.95
yea
rs, respectively.
1
2
. Net
Income (
Loss
)
Per Share
Basic and diluted net
income (
loss
)
per share was calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Basic net income (loss) per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,380)
|
|
$
|
21,196
|
|
$
|
(22,992)
|
|
$
|
3,129
|
Net income attributable to participating securities
|
|
|
—
|
|
|
(20)
|
|
|
—
|
|
|
(3)
|
Net income (loss) attributable to common stockholders
|
|
$
|
(10,380)
|
|
$
|
21,176
|
|
$
|
(22,992)
|
|
$
|
3,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
|
|
40,206,042
|
|
|
34,762,533
|
|
|
38,486,329
|
|
|
34,708,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders – basic
|
|
$
|
(0.26)
|
|
$
|
0.61
|
|
$
|
(0.60)
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,380)
|
|
$
|
21,196
|
|
$
|
(22,992)
|
|
$
|
3,129
|
Net income attributable to participating securities
|
|
|
—
|
|
|
(20)
|
|
|
—
|
|
|
(3)
|
Net income (loss) attributable to common stockholders
|
|
$
|
(10,380)
|
|
$
|
21,176
|
|
$
|
(22,992)
|
|
$
|
3,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
|
|
40,206,042
|
|
|
34,762,533
|
|
|
38,486,329
|
|
|
34,708,006
|
Dilutive effect of outstanding stock awards
|
|
|
—
|
|
|
175,922
|
|
|
—
|
|
|
71,780
|
Weighted average shares outstanding – diluted
|
|
|
40,206,042
|
|
|
34,938,455
|
|
|
38,486,329
|
|
|
34,779,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders – diluted
|
|
$
|
(0.26)
|
|
$
|
0.61
|
|
$
|
(0.60)
|
|
$
|
0.09
|
The Company’s participating securities consist
ed
of unvested restricted common stock issued from early exercised stock options and restricted common stock awards granted under the 2010 Plan
as these
shares
have
non-forfeitable dividend rights.
S
tock options for the
purchase of
2,652,792
shares
of common stock were excluded from the computation of diluted net loss per share attributable to common stockholders for the three
and six
months ended
June 30, 2017
,
b
ecause
those options had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the period.
Stock options for the purchase of
1,705,396
and
1,941,521
weighted average shares of common stock and
551,709
and
557,149
of unvested restricted stock awards were excluded from the computation of diluted net income per share attributable to common stockholders for the three and six months ended June 30, 2016, respectively, because those awards had an anti-dilutive impact on the net income attributable to common stockholders.
1
3
. Income Taxes
The Company recorded
no
income tax expense or benefit during the three
and six
months ended
June 30, 2017
and 2016,
due to a full valuation allowance recognized against its deferred tax assets.
1
4
. Accumulated Other Comprehensive
Loss
The changes in accumulated other comprehensive
loss
,
net of their related tax effects,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
Accumulated
|
|
|
Currency
|
|
Other
|
|
|
Translation
|
|
Comprehensive
|
|
|
Adjustment
|
|
Loss
|
As of December 31, 2016
|
|
$
|
(9,862)
|
|
$
|
(9,862)
|
Foreign currency translation adjustment
|
|
|
1,721
|
|
|
1,721
|
As of June 30, 2017
|
|
$
|
(8,141)
|
|
$
|
(8,141)
|
1
5
.
Legal Contingencies
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business, including those related to patents, product liability and government investigations. Except as described below, the Company is not presently a party to any litigation which it believes to be material, and is not aware of any pending or threatened litigation against the Company which it believes could have a material effect on its financial statements. The Company accrues contingent liabilities when it is probable that a future liability has been incurred and such liability can be reasonably estimated.
In February 2017, two purported class action lawsuits were filed in the United States District Court for the Southern District of New York against the Company and two of its current officers. Those cases have been consolidated into one purported class action lawsuit under the caption, In re Aratana Therapeutics, Inc. Securities Litigation, Case No. 1:17-cv-00880. The consolidated lawsuit asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and is premised on allegedly false and/or misleading statements, and alleged non-disclosure of material facts, regarding the Company’s business, operations, prospects and performance during the proposed class period of March 16, 2015 to February 3, 2017. The Company intends to vigorously defend all claims asserted. Given the early stage of the litigation, at this time a loss is not probable or reasonably estimable.
Item 2. Manage
ment’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Some of the statements contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q that are not statements of historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. In this Quarterly Report on Form 10-Q, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” “estimates,” “plans,” “would,” “should,” “potential,” “continues” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. The forward-looking statements herein include without limitation, statements with respect to our plans and strategy for our business, anticipated timing of regulatory submissions and approvals, anticipated timing of availability and announcement of study results, anticipated timing of launch and commercialization of therapeutic candidates, ongoing efforts in preparation for commercialization of therapeutic candidates, beliefs regarding market opportunities for our products and potential success of our therapeutic candidates; Elanco’s intent to assume manufacturing responsibility for GALLIPRANT under the Collaboration Agreement; and anticipated milestone payments. These and other forward-looking statements included in this Quarterly Report on Form 10-Q involve risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to: our history of operating losses and our expectation that we will continue to incur losses for the foreseeable future; failure to obtain sufficient capital to fund our operations; risks relating to the impairment of intangible assets BLONTRESS, TACTRESS, AT-007 and AT-011;
effects of
stockholder class action lawsuits; unstable market and economic conditions; restrictions on our financial flexibility due to the terms of our credit facility; our substantial dependence upon the commercial success of our therapeutics GALLIPRANT, ENTYCE and NOCITA; development of our biologic therapeutic candidates is dependent upon relatively novel technologies and uncertain regulatory pathways, and biologics may not be commercially viable; denial or delay of regulatory approval for our existing or future therapeutic candidates; failure of our therapeutics, and our current or future therapeutic candidates that may obtain regulatory approval to achieve market acceptance or commercial success; effects of product liability lawsuits; failure to realize anticipated benefits of our acquisitions and difficulties associated with integrating the acquired businesses; development of pet therapeutics is a lengthy and expensive process with an uncertain outcome; competition in the pet therapeutics market, including from generic alternatives to our therapeutic candidates, and failure to compete effectively; failure to identify, license or acquire, develop and commercialize additional therapeutic candidates; failure to attract and retain senior management and key scientific personnel; our reliance on third-party manufacturers, suppliers and collaborators; regulatory restrictions on the marketing of our approved therapeutics and therapeutic candidates; our small commercial sales organization, and any failure to create a sales force or collaborate with third-parties to commercialize our approved therapeutics and therapeutic candidates; difficulties in managing the growth of our company; significant costs of being a public company; risks related to the restatement of our financial statements for the year ended December 31, 2013, and the identification of a material weakness in our internal control over financial reporting; changes in distribution channels for pet therapeutics; consolidation of our veterinarian customers; limitations on our ability to use our net operating loss carryforwards; impacts of generic products; safety or efficacy concerns with respect to our therapeutics; effects of system failures or security breaches; failure to perform under our agreements with Elanco Animal Health, or termination thereof; failure to obtain ownership of issued patents covering our therapeutic candidates or failure to prosecute or enforce licensed patents; failure to comply with our obligations under our license agreements; effects of patent or other intellectual property lawsuits; failure to protect our intellectual property; changing patent laws and regulations; non-compliance with any legal or regulatory requirements; litigation resulting from the misuse of our confidential information; the uncertainty of the regulatory approval process and the costs associated with government regulation of our therapeutic candidates; failure to obtain regulatory approvals in foreign jurisdictions; effects of legislative or regulatory reform with respect to pet therapeutics; the volatility of the price of our common stock; our status as an emerging growth company, which could make our common stock less attractive to investors; dilution of our common stock as a result of future financings; the influence of certain significant stockholders over our business; and provisions in our charter documents and under Delaware law could delay or prevent a change in control. These and other important factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2017, and the “Risk Factors” section of this Quarterly Report on Form 10-Q, could cause actual results to differ materially from those indicated by the forward-looking statements made in this Quarterly Report on Form 10-Q.
Overview
We are a pet therapeutics company focused on licensing, developing and commercializing innovative
therapeutics
for
dogs and cats
. We operate in one business segment
:
p
et therapeutics
.
Our current portfolio includes multiple therapeutics and therapeutic candidates in development consisting of both small molecule pharmaceuticals and biologics. We intend for our portfolio to capture opportunities in unmet or underserved medical conditions in dogs and cats.
We have three United States Food and Drug Administration (“FDA”) approved therapeutics including, GALLIPRANT
®
(grapiprant tablets) for the control of pain and inflammation associated with osteoarthritis in dogs; ENTYCE
®
(capromorelin oral solution) for appetite stimulation in dogs; and NOCITA
®
(bupivacaine liposome injectable suspension) as a local post-operative analgesia for cranial cruciate ligament surgery in dogs. BLONTRESS
®
and TACTRESS
®
are our two canine-specific monoclonal antibody (MAb) therapies that are fully licensed by the United States Department of Agriculture (“USDA”) to aid in the treatment of dogs with B-cell
and T-cell lymphoma, respectively. Our pipeline has multiple therapeutic candidates in development for the potential treatment of pain,
management of weight loss
, viral diseases, allergy and cancer for dogs and cats.
We have incurred significant net
losses since our inception. These losses have resulted principally from costs incurred in connection with in-licensing ou
r therapeutic ca
ndidates, research and development activities
,
and selling, general and administrative costs associated with our operations. As of
June 30, 2017
, we had a deficit accumulated since inception
of
$208.8
million
and
cash, cash equivalents
, restricted cash
and short-term investments
of
$80.7
million
.
Business Updates
During the three months ended Jun
e 30, 2017, we continued to grow our
commercial
presence by gaining access to target clinics and driving re-orders for existing accounts.
The second quarter
of 2017
was the first full quarter
of sales
of GALLIPRANT
, which we are selling in collaboration with Eli Lilly and Company, operating on behalf of its Elanco Animal Health division (“Elanco”), and total GALLIPRANT revenues which included product sales for supply sold to Elanco and GALLIPRANT licensing and collaboration revenue increased sequentially during the quarter
. Additionally, we continued to leverage our relationships with veterinary surgeons to increase the number of new accounts and drive existing account re
-orders of NOCITA.
NOCITA sales also increased sequentially during the second quarter of 2017.
We
continued to
advance
our late-stage pipeline of
therapeutic
candidates
for dogs and cats. Specifically
,
in June
2017
,
we submitted final pivotal field safety study data from an evaluation of AT-014
to the US
DA
and
we
filed the target animal safety technical section for AT-003 in cats with
the FDA’s Center for Veterinary Medicine (“
CVM
”). In July 2017,
we
demonstrated
positive
results from the
AT-003 pivotal field effectiveness study
in cats
.
In July 2017, pursuant to the
Collaboration, License, Development and Commercialization Agreement with Elanco (the “Collaboration Agreement”)
, Elanco provided us with notice of its intent to assume responsibility for the manufacturing of the Company’s products based on licensed grapiprant rights and technology, including GALLIPRANT (collectively, “Grapiprant Products”) and its intent to assume applicable regulatory approvals. We believe the transfers of manufacturing responsibility and such regulatory approvals in the United States to Elanco will be completed by December 31, 2017. Additionally, in late-June 2017, we re-submitted the
prior-approval supplement (“
PAS”) to CVM for the manufacturing transfer of ENTYCE
.
Research
and Development
The following table identifies
the most advanced therapeutic candidates
being developed under
CVM
or
the USDA
’s
Center for Veterinary Biologics
(“CVB”)
regulations and their current regulatory
status
:
ENTYCE (capromorelin oral solution) for dogs
ENTYCE was approved by the FDA for appetite stimulation in dogs in 2016.
We
continue to
anticipate that ENTYCE will be commercially available by the fall of 2017, depending on the timing of CVM’s approval, if any, of the PAS
.
See
“Manufacturing and Supply Chain”
below for additional information.
AT-003 (bupivacaine liposome injectable suspension) for cats
In June 2017,
we filed the target animal safety technical section with CVM for review and in July
2017
, we completed an FDA-concurred pivotal field effectiveness study evaluating
bupivacaine liposome injectable suspension
for post-operative pain management in cats.
The multi-center, placebo-controlled, randomized and masked pivotal field effectiveness study evaluated approximately 200 client-owned cats undergoing an elective onychectomy. Results from the study showed bupivacaine liposome injectable suspension met protocol-defined efficacy success criteria
, which were statistically significant (
p<0.05). The therapeutic
candidate
was well-
tolerated. Data from the study will be used as part of the effectiveness technical section submission to CVM to support the intended NOCITA label expansion to include cats.
AT-016 (allogeneic adipose-derived stem cells) for dogs
VetStem BioPharma Inc., our exclusive license partner responsible for development of AT-016, an adipose-derived allogeneic stem cell therapeutic candidate for osteoarthritis pain in dogs, has on-going FDA-concurred target animal safety and target animal efficacy studies with results anticipated from both in 2017.
AT-014
(canine osteosarcoma vaccine
)
for dog
s
In the first quarter of 2017, we completed enrollment in the pivotal field safety study evaluating AT-014 for the treatment of canine osteosarcoma in dogs and in June
2017
, we submitted the safety data to the USDA. We continue to anticipate conditional licensure in the second half of 2017.
We are finalizing our plans with respect to commercializing AT-014, assuming conditional licensure, which may include making AT-014 available to a group of veterinary oncologists as we complete the additional work required by the USDA for full licensure.
In addition to U
nited
S
tates
regulatory and development activities, we also have regulatory and devel
opment efforts outside the United States
:
AT-001 (grapiprant) for dogs in Europe
Under the Collaboration Agreement, Elanco has exclusive rights to our products based on licensed grapiprant rights and technology, including GALLIPRANT (collectively, “Grapiprant Products”), globally outside the United States. We are responsible under the Collaboration Agreement for all development activities required to obtain the first
regulatory approval
for grapiprant for use in dogs in the European Union (“EU”) and Elanco is responsible for all other development activities.
In February 2016, we filed a marketing authorization application with the European Medicines Agency (“EMA”) for grapiprant in dogs in the EU. In cooperation with Elanco, we have generated additional data
and responses to questions
which we plan to submit to the EMA. We believe
that
the
filing and other interactions with the EMA
will support
a positive opinion in late-2017
and marketing authorization in
the first half of
2018.
Other therapeutics for dogs in Europe
We continue to make progress with regulatory authorities in Europe with respect to certain of our other therapeutic candidates.
Manufacturing and Supply Chain
We manage third-party manufacturers to supply active pharmaceutical ingredient (“API”), drug product and packaged product for the development and commercialization of our small molecule product candidates.
W
e have chosen to rely on
third-party
contract manufacturer organizations (“CMO”) rather than devote resources toward developing or acquiring internal manufacturing facilities.
GALLIPRANT
GALLIPRANT has been available to customers since January 2017, and as part of the Collaboration Agreement, we have agreed to provide
the
initial commercial supply of GALLIPRANT. On April 28, 2017, we and Elanco entered into an amendment (the “Amendment”) to the Collaboration Agreement. Under the Amendment, Elanco has agreed to submit binding purchase orders to us, within 15 days of the effective date of the Amendment, for certain finished Grapiprant Products to be produced from certain batches of API we have agreed to purchase from our third-party manufacturer (the “API Batches”). In addition, Elanco has agreed to pay us for the API Batches within 30 days after we provide Elanco with proof of payment to the manufacturer for such API Batches. The Amendment provides that, in the event Elanco provides notice of its intent to assume responsibility for manufacturing, Elanco would assume all of our responsibilities with respect to any undelivered API, including paying the third-party manufacturer for such undelivered API. In July
2017
, Elanco provided us with notice of its intent to assume responsibility for manufacturing of the Grapiprant Products and its intent to assume the
regulatory approvals
. We believe the transfers of manufacturing
responsibility
and
the regulatory approvals
in the U
nited States
to Elanco will be completed by December 31, 2017. The
c
ompanies are currently formulating a plan for the transfer of manufacturing responsibilities and the New Animal Drug Application (“NADA”).
GALLIPRANT is currently available in 20 mg and 60 mg tablets in a variety of packaging configurations, which we believe provide appropriate treatment options for the majority of dogs.
The 100 mg tablets of GALLIPRANT remain on backorder,
which we
a
nticipate resolving in the
coming quarters
.
ENTYCE
In late-June 2017, we re-submitted the PAS for the transfer and commercial scale-up of the API of ENTYCE to a different manufacturer from the manufacturer included in our NADA. As part of the PAS re-submission
, we
provided what we believe was the appropriate information related to a raw material and its vendor. However, the CVM may request additional information which could result in the need for us to amend our filing or make additional filings. If we are unable to resolve any questions from CVM, we may be required to switch commercial manufacturers, or our manufacturer may be required to source the raw material from a different vendor. We continue to anticipate that ENTYCE will be commercially available by the fall of 2017, depending on the timing of CVM’s approval, if any, of the PAS. Subsequent to the re-submission of the PAS, we resumed manufacturing additional commercial inventory of ENTYCE, including API from the manufacturer for which we are seeking approval from CVM.
Recent Developments
Effective as of
July 31, 2017
, we amended
our Loan Agreement.
See
“Financial Condition, Liquidity and Capital Resources
- Indebtedness
”
below for additional information.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenues, costs and expenses and related disclosures during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
T
here have been no material changes to our critical accounting policies through
June 30, 2017
,
from those discussed in our Annual Report on Form 10-K for the fiscal year ended December
31, 201
6
, filed with the SEC on March
14
, 201
7
.
Results of Operations
Comparison of the Three
and Six
Months
Ended
June 30, 2017
and 201
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing and collaboration revenue
|
|
$
|
804
|
|
$
|
38,000
|
|
(97.9)
|
%
|
|
$
|
1,707
|
|
$
|
38,151
|
|
(95.5)
|
%
|
Product sales
|
|
|
4,354
|
|
|
47
|
|
>100.0
|
%
|
|
|
7,246
|
|
|
68
|
|
>100.0
|
%
|
Total revenues
|
|
|
5,158
|
|
|
38,047
|
|
(86.4)
|
%
|
|
|
8,953
|
|
|
38,219
|
|
(76.6)
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
3,691
|
|
|
1,741
|
|
>100.0
|
%
|
|
|
6,785
|
|
|
1,760
|
|
>100.0
|
%
|
Royalty expense
|
|
|
353
|
|
|
20
|
|
>100.0
|
%
|
|
|
676
|
|
|
38
|
|
>100.0
|
%
|
Research and development
|
|
|
3,700
|
|
|
5,303
|
|
(30.2)
|
%
|
|
|
8,354
|
|
|
16,052
|
|
(48.0)
|
%
|
Selling, general and administrative
|
|
|
6,918
|
|
|
6,148
|
|
12.5
|
%
|
|
|
14,413
|
|
|
12,699
|
|
13.5
|
%
|
Amortization of intangible assets
|
|
|
86
|
|
|
95
|
|
(9.5)
|
%
|
|
|
150
|
|
|
190
|
|
(21.1)
|
%
|
Impairment of intangible assets
|
|
|
—
|
|
|
2,780
|
|
(100.0)
|
%
|
|
|
—
|
|
|
2,780
|
|
(100.0)
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
88
|
|
|
83
|
|
6.0
|
%
|
|
|
173
|
|
|
160
|
|
8.1
|
%
|
Interest expense
|
|
|
(871)
|
|
|
(846)
|
|
3.0
|
%
|
|
|
(1,731)
|
|
|
(1,695)
|
|
2.1
|
%
|
Other expense, net
|
|
|
(7)
|
|
|
(1)
|
|
>100.0
|
%
|
|
|
(9)
|
|
|
(36)
|
|
(75.0)
|
%
|
Revenue
s
During the three
and six
months ended
June 30, 2017
, total revenues
decreased by
$32.9
million and
$29.3
million,
respectively, as
compared to the corresponding
2016
period
s
. The
decreases in total revenues
during the three and six months ended June 30, 2017, were
due to
d
ecrease
s
of
$37.2
million
and
$36.4
million, respectively,
in
licensing and collaboration revenue from the Collaboration Agreement and the Co-Promotion Agreement with Elanco (collectively, the “Elanco GALLIPRANT Agreements”), partially offset by increase
s
of
$4.3
million and
$7.2
million in
net product sales primarily due to net sales of GALLIPRANT and
NOCITA.
Total revenues for
the
three and six months ended June 30, 2016, included $38.0
million
of licensing and collaboration revenue recognized
from the Elanco GALLIPRANT
Agreements.
During the three and six months ended June 30, 2017, product sales consisted of net sales of GALLIPRANT, NOCITA, BLONTRESS and TACTRESS.
GALLIPRANT
product sales during the three and six months ended
June 30, 2017
, consisted of net sales of finished goods to Elanco under the supply terms of the
Collaboration Agreement
. N
OCITA net sales were
$0.
6
million and $1.0 million during the three and six months ended
June 30, 2017
, respectively, as compared to $0 for the corresponding 2016 periods.
We believe that the growth in NOCITA product sales is primarily a result of continued growth of new accounts
,
as well as
strong re-order rates, which accounted for more than 75% of NOCITA revenue within the
three months
ended June 30, 2017.
We believe that product sales fo
r 2017 will be composed
primarily
of product sales of NOCITA,
GALLIPRANT
,
and ENTYCE, for which sales are
still
anticipated to begin
by the fall of 2017
,
depending on the timing of CVM’s approval, if any, of the PAS
.
We believe
NO
CITA future product sales in 2017 will be dependent on our continuing efforts to commercialize the product.
With respect to GALLIPRANT, i
n July 2017, Elanco gave us notice of
its
intent to assume all manufacturing responsibilities
for GALLIPRANT under the Collaboration Agreement, which we believe will be c
ompleted
by December 31, 2017. See “
Manufacturing and Supply Chain”
above for additional information. The amount of any future product sales under the supply terms of the Collaboration Agreement will depend on how long Elanco utilizes us to supply GALLIPRANT.
At this time, we believe customer demand does not justify manufacturing additional BLONTRESS or TACTRESS. Hence, we anticipate both therapeutics will no longer be commercially available when the current inventories are exhausted by late-2017
.
We believe a
ny
future licensing and collaboration revenue
in 2017
will be substantially dependent on Elanco’s ability to successfully commercialize GALLIPRA
NT in accordance with
the
Elanco GALLIPRANT Agreements
.
Cost of product sales
During the three
and six
months ended
June 30, 2017
, cost of product sales increased by
$2.0
million
and
$5.0
million
,
respectively,
as compared to the corresponding
2016
period
s
. The
se
increase
s were
primarily due to cost of product sales of
GALLIPRANT and NOCITA
.
Cost of product sales is anticipated to increase in
the second half of
2017
due to the anticipated full
period
sales of NOCITA and GALLIPRANT, and anticipated
second half year
sales of ENTYCE.
We believe the cost of product sales as a percent
age
of
overall product re
venues will improve as we move
GALLIPRANT, NOCITA and ENTYCE
to full commercial manufacturing scale over time.
Royalty expense
During the three and six months ended
June 30, 2017
, royalty expense increased by
$0.3
million and
$0.6
million, respectively,
as compared to
the
corresponding
201
6 periods. The increases were
primarily a result
of sales of GALLIPRANT and NOCITA
.
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracted development costs
|
|
$
|
2,808
|
|
$
|
2,735
|
|
2.7
|
%
|
|
$
|
6,440
|
|
$
|
6,788
|
|
(5.1)
|
%
|
Milestones
|
|
|
—
|
|
|
1,200
|
|
(100.0)
|
%
|
|
|
—
|
|
|
6,200
|
|
(100.0)
|
%
|
Personnel costs
|
|
|
781
|
|
|
1,181
|
|
(33.9)
|
%
|
|
|
1,692
|
|
|
2,677
|
|
(36.8)
|
%
|
Other costs
|
|
|
111
|
|
|
187
|
|
(40.6)
|
%
|
|
|
222
|
|
|
387
|
|
(42.6)
|
%
|
Total research and development
|
|
$
|
3,700
|
|
$
|
5,303
|
|
(30.2)
|
%
|
|
$
|
8,354
|
|
$
|
16,052
|
|
(48.0)
|
%
|
During the three
and six
m
onths ended
June 30, 2017
, research and development
expense decreased by
$1.6
million and
$
7.7
m
illion, respectively, as compared to the corresponding
2016
periods. The decrease during the three months ended June 30, 2017
,
was due primarily to a decrease of
$1.2
million in milestone payments
and
a decrease of
$0.4
million in personnel costs relate
d
to a lower headcount in 2017.
The decrease during the six months ended
June 30, 2017
, was due primarily to a decrease of
$6.2
million in
milestone payments,
a
decrease of
$0.3
million in
contracted development costs due to the prioritization of spending for ongoing programs,
a
$1.0
million
decrease in personnel costs related to a lower headcount in 2017, and
a
$0.2
million decrease in other costs.
We expect that
,
in 2017
,
our research and development expenses will be primarily related to expanding the label of our approved therapeutics for additional indications and/or species and advancing our AT-016 and AT-018 programs.
Selling, general and administrative
During the three
and six
months e
nded
June 30, 2017
, selling, general and
administrative expense increased by
$0.8
million and
$1.7
million, respectively, as compared to the corresponding
2016
periods. The increase during the three months ended June 30, 2017, was due to an increase of
$1.
1
million in personnel expenses primarily as a result of higher sales and marketing headcount, partially offset by a decrease of $0.
3
million in other expenses. The increase during the six months ended June 30, 2017, was due to an increase of
$2.
4
million in personnel expenses primarily as a result of higher sales and marketing headcount, partially offset by a decrease of
$0.
7
million
in other expenses.
We expect
that,
in 2017
,
our selling, general and admin
istrative expense will remain
relatively
constant
as we have substantially completed the build out of our sales organization and corporate infrastructure in the support of the continued
commerc
ialization of NOCITA and GALLIPR
ANT and expected commercialization of ENTYCE
.
Impairment of intangible assets
During both the three and six months ended June 30, 2017, impairment of intangible assets decreased by $2.8 million, as compared to the corresponding 2016 periods as there were no intangible asset impairment charges recognized during the three and six months ended June 30, 2017. The impairment of intangible assets in 2016 was related to impairment charges of TACTRESS ($0.6 million) and AT-007 ($2.2 million).
Financial Condition, Liquidity
and Capital Resources
Our financial condition is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Change %
|
|
|
(Dollars in thousands)
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
78,823
|
|
$
|
87,307
|
|
(9.7)
|
%
|
Marketable securities - short-term
|
|
|
1,494
|
|
|
996
|
|
50.0
|
%
|
Total cash, cash equivalents and marketable securities
|
|
$
|
80,317
|
|
$
|
88,303
|
|
(9.0)
|
%
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
Loans payable, net
|
|
$
|
38,093
|
|
$
|
40,188
|
|
(5.2)
|
%
|
Working capital:
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
98,776
|
|
$
|
101,542
|
|
(2.7)
|
%
|
Current liabilities
|
|
|
23,301
|
|
|
34,688
|
|
(32.8)
|
%
|
Total working capital
|
|
$
|
75,475
|
|
$
|
66,854
|
|
12.9
|
%
|
We have incurred significant net losses since our inception. These losses have resulted principally from costs incurred in connection with in-licensing
of
our
therapeutic
candidates, research and development act
ivities and selling, general
and administrative costs associated with our operations. As of
June 30, 2017
, we had an accumulated def
icit of $
208.8
million
and cash, cash equivalents and short-term investments o
f $
80.3
mill
ion.
We expect to continue to incur operating losses for the next several years as we work to develop and commercialize our
therapeutics and therapeutic
candidates
. If we cannot generate sufficient cash from operations in the future, we may seek to fund our operations through collaborations and licensing arrangements, as well as public or private equity offerings or further debt (re)financings. If we are not able to raise additional capital on terms acceptable to us, or at all, as and when needed, we may be required to curtail our operations
which could include delaying the commercial launch of our therapeutics, discontinuing therapeutic development programs, or granting rights to develop and market therapeutics or therapeutic candidates that we would otherwise prefer to develop and market ourselves.
As disclosed in
Note 7 to our consolidated financial statements, we have a term loan and a revolving credit facility with an aggregate principal balance of
$37.7
million
as of
June 30, 2017
. The terms of the loan agreement require us to maintain certain minimum liquidity at all times
(the greater of cash equal to fifty percent (50%) of outstanding balance or remaining months’ liquidity, which is calculated on an
average trailing three (3) month basis, equal to six (6) months or greater)
, which as of
June 30, 2017
, was
approximately
$22.5
million.
If the minimum liquidity is not met, we may be required to repay the loans prior to their scheduled maturity dates. At
June 30, 2017
, we were in compliance with all financial covenants. As of the date of the filing of this Quarterly Report on Form 10-Q, we believe that our existing cash, cash equivalents and short-term investments of
$80.3
million as of
June 30, 2017
,
will allow us to fund our operations and our debt obligations for at least one year from the issuance of our consolidated financial statements.
Based on our current operating plan, which contemplates the launch of ENTYCE by the fall of 2017, we believe that our cash, cash equivalents and short-term investments will be sufficient to fund our operations and debt obligations t
hrough
at least
2018. Our current operating plan also contemplates continued growth in sales of GALLIPRANT, which we believe will result in the achievement of certain milestones under the Collaboration Agreement.
Cash, Cash Equivalents and Investments
Until required for another use in our business, we typically invest our cash reserves in bank deposits, certificates of deposit, and other interest bearing debt instruments in accordance with our investment policy. It is our policy to mitigate credit risk in our cash reserves and investments by maintaining a well-diversified portfolio that limits the amount of exposure as to institution, maturity, and investment type. The value of our investments, however, may be adversely affected by increases in interest rates, instability in the global financial markets that reduces the liquidity of securities included in our portfolio, and by other factors which may result in declines in the value of the investments. Each of these events may cause us to record charges to reduce the carrying value of our investment portfolio if the declines are other-than-temporary or sell investments for less than our acquisition cost which could adversely impact our financial position and our overall liquidity.
At-the-Market Offering
On October 16, 2015,
we
entered into
the
Sales Agreement with Barclays
Capital, Inc. (“Barclays”),
pursuant to which we
could
sell from time to time, at
our
option, up to an aggregate of
$52
.0 million
of shares of its common stock (the “Shares”) through Barclays, as sales agent
(“ATM Program”)
. Sales of the Shares
were
made under
our
previously filed and
then
effective
r
egistration
s
tatement on Form S-3 (Reg. No. 333-197414
), by means of ordinary brokers’ transactions on the NASDAQ Global Market or otherwise. Additionally, under the terms of the Sales Agreement, the Shares could be sold at market prices, at negotiated prices or at prices related to the prevailing market price. We paid Barclays a commission of 2.75% of the gross proceeds from the sale of the Shares.
During the three and six months ended
June 30, 2017, we sold 305,372 and 546,926 Shares for aggregate net proceeds of $1.6 million and $2.8 million, respectively.
On April 28, 2017, we terminated our Sales Agreement. Prior to termination, we sold approximately $18.0 million of the $52.0 million available to be sold under the Sales Agreement. We terminated the Sales Agreement because we
did
not intend to raise additional ca
pital through the ATM Program, and no additional shares of our common stock
were
sold pursuant to the Sales Agreement. We
did
not
incur any termination penalties as a result of our termination of the Sales Agreement.
Registered Direct Offering
On May 3, 2017, we entered into a Placement Agency Agreement (“PAA”) with Barclays, pursuant to which Barclays agreed to serve as placement agent for an offering of shares of common stock. In conjunction with the PAA, on May 3, 2017, we also entered into a Securities Purchase Agreement with certain investors for the sale by us of 5,000,000 shares of common stock at a purchase price of $5.25 per share (the “Offering”). The shares of common stock were offered and sold pursuant to
our previously filed and then
effective registration statement on Form S-3 (File No. 333-197414) and a related prospectus supplement. We agreed to pay Barclays an aggregate fee equal to 6.0% of the gross proceeds received by us from the Offering. The Offering closed on May 9, 2017. We
received
aggregate
net proceeds
from the Offering of
approximately
$24.4
million, after deducting placement agent fees of $1.6 million and estimated offering expenses of
$0.3
million.
Indebtedness
On October 16, 2015, we and Vet Therapeutics (together the “Borrowers”) entered into a Loan and Security Agreement, as amended on February 24, 2017 (the “Loan Agreement”) with Pacific Western Bank (“Pacific Western”) as collateral agent (“Collateral Agent”) and a lender and Oxford Finance LLC as a lender (“Oxford” and together with Pacific Western, the “Lenders”), pursuant to which the Lenders agreed to make available to the Borrowers, a term loan in an aggregate principal amount up to $35.0 million (the “
Term Loan”), and a revolving credit facility in an aggregate principal amount up to $5.0 million (the “Revolving Line”), subject to certain conditions to funding.
The Borrowers were required to make interest-only payments on the Term Loan for 18 months, and beginning on May 1, 2017, began to make payments of principal and accrued interest on the Term Loan in equal monthly installments over a term of 30 months.
The Term Loan and the Revolving Line bear interest per annum at the greater of (i) 6.91% or (ii) 3.66% plus the prime rate, which is customarily defined.
Under the Loan Agreement,
all
principal and accrued interest on the Term Loan
were
due on October 16, 2019 (the “Term Loan Maturity Date”), and all principal and accrued interest on the Revolving Line
were
due on October 16, 2017 (the “Revolving Maturity Date”).
As security for their obligations under
the Loan Agreement, the Borrowers granted a security interest in substantially all of their existing and after-acquired assets except for their intellectual property and certain other customary exclusions. Subject to customary exceptions, the Borrowers are not permitted to encumber their intellectual property.
Upon execution of the Loan Agreement, the Borrowers were obligated to pay a facility fee to the Lenders of $0.2 million and an agency fee to the Collateral Agent of $0.1 million. In addition, the Borrowers are or will be obligated to pay a final payment fee equal to 3.30% of such Term Loan being prepaid or repaid with respect to the Term Loan upon the earliest to occur of the Term Loan Maturity Date, the acceleration of any Term Loan or the prepayment of a Term Loan. The Borrowers will also be obligated to pay a termination fee equal to 3.30% of the highest outstanding amount of the Revolving Line with respect to the Revolving Line upon the earliest to occur of the
Prior
Revolving Maturity Date, the acceleration of the Revolving Line or the termination of the Revolving Line. The Borrowers will also be obligated to pay an unused-line fee equal to 0.25% per annum of the average unused portion of the Revolving Line.
The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, limits or restrictions on the Borrowers’ ability to incur liens, incur indebtedness, make certain restricted payments, make certain investments, merge, consolidate, make an acquisition, enter into certain licensing arrangements and dispose of certain assets. In addition, the Loan Agreement contains customary events of default that entitle the Lenders to cause the Borrowers’ indebtedness under the Loan Agreement to become immediately due and payable. The events of default, some of which are subject to cure periods, include, among others, a non-payment default, a covenant default, the occurrence of a material adverse change, the occurrence of an insolvency, a material judgment default, defaults regarding other indebtedness and certain actions by governmental authorities. Upon the occurrence and for the duration of an event of default, an additional default interest rate equal to 4% per annum will apply to all obligations owed under the Loan Agreement.
The Loan Agreement requires that we maintain certain minimum liquidity at all times, which as of
June 30, 2017
, was approximat
ely
$22.5
m
illio
n.
If the minimum liquidity requirement is not met, the Borrowers may be required to repay the loans prior to their
scheduled maturity dates.
At
June 30, 2017
, the Borrowers were in compliance with all financial covena
nts, including the minimum liquidity covenant.
Effective as
of
July 31, 2017
, we amended
the Loan Agreement (“Second Amendment”). The terms of the Second Amendment, among other things, extend the maturity of the Revolving Line to October 16, 2019 (the “Revolving Line Maturity Date”), with amortized equal repayments of the principal outstanding under the Revolving Line beginning November 1, 2018, and provide a six (6) month interest only period for the Term Loan, starting on the date of the Second Amendment.
We are not subject to any new financial covenants as a result of the Second Amendment. At the closing of the Second Amendment, we paid the Lenders an amendment fee of $0.2 million and a facility fee of $0.1 million. We are obligated to pay a new termination fee equal to $0.2 million upon the earliest to occur of the Revolving Line Maturity Date, the acceleration of the Revolving Line or the termination of the Revolving Line. The existing termination fee of $0.2 million will continue to be payable upon the earliest to occur of the original revolving maturity date (October 16, 2017), the acceleration of the Revolving Line or the termination of the Revolving Line.
Working Capital
We define working capital as current assets less current liabilities. The
increase
in working capital
at
June 30, 2017
,
from December 31, 2016, reflects a decrease in total current assets of
$2.8
million and a decrease in total current liabilities of
$11.4
million. The decrease in total current assets was primarily driven by a decrease in cash and cash equivalents due to payments for
our research and development activities related to our programs, payments for inventories, milestones and selling, general and administrative expenses
. The decrease in total current liabilities was primarily a result of payments for
GALLIPRANT inventories
and a decrease in the current portion of loans payable due to
amending
payment terms under our Loan Agreement
on
July 31
, 2017
.
Cash Flows
A s
ummary of our cash flows for the
six
months ended
June 30, 2017
and
2016
, is as follows
:
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
Net cash provided by (used in) operating activities
|
|
$
|
(29,922)
|
|
$
|
23,287
|
Net cash provided by (used in) investing activities
|
|
$
|
(3,509)
|
|
$
|
58,681
|
Net cash provided by financing activities
|
|
$
|
24,926
|
|
$
|
1
|
Net cash
provided by (used in)
operating activities
During the
six
months
ended
June 30, 2017
, net cash
used in
operating activities was
$29.9
million. We had a
net loss of
$23.0
million wh
ich includes a
non-cash expense for stock-based compensation of
$3.7
million, a non-cash depreciation and amo
rtization expense of
$0.6
million and a non-cash interest expense of
$0.2
million. Our net loss was primarily attributed to our research and development activities related to our programs and our selling, general and administrative expenses, partially offset by licensing and collaboration revenues
of
$1.7
million
from the Collaboration Agreement and product sales of
$7.2
million. Net cash used in
operating assets and liabilities was
primarily
due to
a decrease in accounts payable of
$5.5
million, a decrease in accrued expenses and other liabilities of
$0.7
million, an increase in account receivable, net of
$4.8
million,
an increase in prepaid expenses and other current assets of
$4.6
million and a decrease in inventories of
$4.2
million. The decrease in accounts payable was primarily related to payments for GALLIPRANT inventories and trade payables. T
he increase in accounts receivable, net and
decrease in inventories we
re primarily related to GALLIPRANT sales. Also, accounts receivable, net increased due to receivables
from the Elanco GALLIPRANT Agreements.
During the six months ended June 30, 2016, net cash provided by operating activities was $23.3 million. We had a net income of $3.1 million which includes a non-cash expense for stock-based compensation of $4.5 million, a non-cash depreciation and amortization expense of $0.5 million, a non-cash impairment of acquired intangible assets expense of $2.8 million, and a lower of cost or market adjustment to inventories of $1.6 million. Our net income was primarily attributed to licensing and collaboration revenues of $38.0 million from the Collaboration Agreement, research and development activities related to our programs and our selling, general and administrative expenses. Net cash provided by
operating assets and liabilities
consisted primarily of an increase in accounts payable of $5.9 million, an increase of $7.0 million in licensing and collaboration commitment under the Collaboration Agreement and an increase in accrued expenses and other
liabilities of $0.6 million, partially offset by an increase in prepaid expenses of $0.1 million and an increase in inventories of $2.8 million. The increase in inventories was primarily related to GALLIPRANT pre-launch inventories. The increase in accounts payable was primarily related to the achieved milestones relating to GALLIPRANT, ENTYCE and NOCITA. The increase in accrued expenses and other current liabilities was primarily due to the licensing and collaboration commitment related to the Collaboration Agreement.
Net cash
provided by
(used in)
investing activities
During the
six
months ended
June 30, 2017
, net cash
used in
investing activities was
$3.5
million,
which primarily consisted of
a
$3.0 million milestone payment for intangible assets for currently marketed products and the purchases of investments of
$2.0
million,
partially offset by proceeds from the maturities and sales of investments of
$1.5
million
.
During the six months ended June 30, 2016, net cash provided by investing activities was $58.7 million, which primarily consisted of the proceeds from the maturities and sales of marketable securities of $286.0 million, partially offset by the purchases of investments of $227.3 million.
Net cash
provided by
financing activities
During the
six
months ended
June 30, 2017
,
net cash provided by financing activities
was
$24.9
million. Net cash provided by financing activities consisted
of
the net
proceeds from
the issuance of common stock of
$27.5
million, partially offset by
$2.3
million
of
payments on loans payable and
$0.3
million of payments for stock issuance costs
.
During the six months ended June 30, 2016, net cash provided by financing activities consisted solely of proceeds from stock option
exercises of $1,000.
Contractual Obligations and
Off-Balance Sheet Arrangements
Contractual Obligations
Our contractual obligations primarily consist of our obligations under our loan
s
payable, non-cancellable operating leases, minimum royalties and other purchase obligations, excluding amounts related to other funding commitments, contingent development, regulatory and commercial milestone payments,
contract manufacturer commitments
and off-balance sheet arrangements as described below.
As of
June 30, 2017
, t
here
were no material changes in our contractual obligations since December 31, 2016
, e
xcept for the contract manufacturer commitments described below.
Other Funding Commitments
As of
June 30, 2017
, we have several ongoing development programs in various stages
of
the regulatory process. Our most significant expenditures are
to clinical research and contract manufacturing organizations
. The contracts are generally cancellable, with notice, at our option.
Contingent Development, Regulatory an
d Commercial Milestone Payments
Based on our development p
lans as of
June 30, 2017
, we have committed to make potential future milestone payments to third parties of up to approximately
$108.6
million, of which $
77.4
million are for commercial milestones, as part of our various collaborations, including licensing and development programs. Approximately
$68.9
millio
n of the commercial milestones relate to the achievement of various sales thre
sholds.
Payments under these agreements generally become due and payable only upon achie
vement of certain development, regulatory or commercial milestones. Because the achievement of these milestones had not occurred or was not considered probable as of
June 30, 2017
, such contingencies have not been recorded in our consolidated financial statements, except for
$0.5
million due to our former commercial licensee of BLONTRESS.
We anticipate that we may pay
approximately
$0.6
million and
$
4
.
0
million of milestone payments during the remainder of 2017, and the next 12 months, respectively, provided various development, regulatory or commercial milestones are achieved. Amounts related to contingent milestone payments are not considered contractual obligations as they are contingent on the successful achievement of certai
n development, regulatory approval and commercial milestones that may not be achieved.
Contract Manufacturer Commitments
Our independent
CMOs manufacture
our products
and product components
based on our
forecasts. These forecasts are based on estimates of future demand for our products, which are in turn based on
available
historical
trends and an analysis from
sales and product marketing organizations, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate supply, we may issue forecasts and orders for components and products that ar
e non-cancelable. As of
June 30, 2017
and
December 31, 2016
, we had non-cancellable open o
rders for the purchase of
inventories of $27
.
7 million and
$
17.8 million
, respectively.
Off-Balance Sheet Arrangements
We have not engaged in the use of any off-balance sheet arrangements, such as structured finance entities
or
special purpose entities
.
Recently Issued and Adopted Accounting Pronouncements
For a discussion of new accounting standards please read Note 1,
“
Summary of Significant Accounting Policies
–
New Accounting Standards”
to our consolidated financial statements included within this report
.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk
Our market risks, and the ways we manage them are summarized in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended December 31,
2016
, filed with the SEC on March
14
,
2017
. As of
June 30, 2017
, there were no material changes to our market risks or management of such risks since December 31,
2016
.
Item 4. Controls
and Procedures
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of
June 30, 2017
.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended
) identified in connection with the evaluation of our internal control performed during the fiscal quarter ended
June 30, 2017
, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHE
R INFORMATION
Item 1. Leg
al Proceedings
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Except as described below, we are not presently a party to any litigation that we believe to be material and we are not aware of any pending or threatened litigation against us that we believe could have a material adverse effect on our business, operating results, financial condition or cash flows.
In February 2017, two purported class action lawsuits were filed in the United States District Court for the Southern District of New York against the Company and two of its current officers. Those cases have been consolidated into one purported class action lawsuit under the caption, In re Aratana Therapeutics, Inc. Securities Litigation, Case No. 1:17-cv-00880. The consolidated lawsuit asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and is premised on allegedly false and/or misleading statements, and alleged non-disclosure of material facts, regarding the Company’s business, operations, prospects and performance during the proposed class period of March 16, 2015 to February 3, 2017. The Company intends to vigorously defend all claims asserted. Given the early stage of the litigation, at this time a loss is not probable or reasonably estimable.
Item 1A. Ri
sk Factors
Our
business
faces significant risks and uncertainties, which may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them.
T
here have been no material
changes
in the
six
months
ended
June 30, 2017
,
to the ri
sk factors described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2016
.
Item 2. Unregi
stered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Repurchases of Common Stock
None.
Item 3. Defa
ults Upon Senior Securities
None.
Item 4. M
ine Safety Disclosures
Not applicable.
Item 5. O
ther Information
On
July 31, 2017
, we
and Vet Therapeutics, Inc. (“the Borrowers”) entered into a Second Amendment (the “Second Amendment
”) to
the Loan and Security Agreement dated as of October 16, 2015, as previously amended (the “Loan Agreement”) with Pacific Western Bank, in its capacity as collateral agent (in such capacity, “Collateral Agent”), and the Lenders party thereto.
The terms of the Second Amendment, among other things, extend the maturity of the existing revolving credit facility (the “Revolving Line”) to October 16, 2019 (the “Revolving Line Maturity Date”), with amortized equal repayments of the principal outstanding under the revolving credit facility beginning November 1, 2018, and provide a six (6) month interest only period for the term loans, starting on the date of the Second Amendment.
We are not subject to any new financial covenants as a result of the Second Amendment. At the closing of the Second Amendment,
we
paid the Lende
r
s an amendment fee of $150,000 and a facility fee of $60,000.
We
will also be obligated to pay a new termination fee equal to $165,000 upon the earliest to occur of the Revolving Line Maturity Date, the acceleration of the revolving credit facility or the termination of the revolving credit facility. The existing termination fee of $165,000 will continue to be payable upon the earliest to occur of the original revolving maturity date (October 16, 2017), the acceleration of the revolving credit facility or the termination of the revolving credit facility.
The foregoing description of the Second Amendment is a summary, and is qualified in its entirety by reference to the Second Amendment, which is filed herewith as Exhibit 10.4, and is incorporated herein by reference.
Item 6. E
xhibits
A list of exhibits is set forth on the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.
SIGNAT
URES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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ARATANA THERAPEUTICS, INC.
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Date
:
August 4
,
2017
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By:
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/s/ Steven St. Peter
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Steven St. Peter, M.D.
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President and Chief Executive Officer
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(Principal Executive Officer)
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Date:
August 4
,
2017
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By:
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/s/ Craig Tooman
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Craig Tooman
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Chief Financial Officer
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(Principal Financial and Accounting Officer)
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Exhibit Index
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Incorporated by Reference
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Exhibit Number
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Exhibit Description
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Form
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File No.
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Exhibit
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Filing Date
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Filed/ Furnished Herewith
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3.1
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Restated Certificate of Incorporation
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8-K
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001-35952
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3.1
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7/3/13
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3.2
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Amended and Restated Bylaws
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8-K
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001-35952
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3.2
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7/3/13
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10.1
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Securities Purchase Agreement, dated May 3, 2017, by and among Aratana Therapeutics, Inc. and the investors party thereto
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8-K
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001-35952
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10.1
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5/4/17
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10.2
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Placement Agency Agreement, dated May 3, 2017, by and between the Company and Barclays Capital, Inc.
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8-K
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001-35952
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10.2
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5/4/17
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10.3+
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Amendment, effective as of April 28, 2017, to the Collaboration, License, Development and Commercialization Agreement, dated April 22, 2016, by and between the Company and Eli Lilly and Company, operating on behalf of its Elanco Animal Health Division
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*
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10.4
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Second Amendment to Loan and Security Agreement, dated as
of
July 31, 2017
,
by and among Pacific Western Bank, in its capacity as collateral agent and the Lenders party thereto.
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*
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31.1
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Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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*
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31.2
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Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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*
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32.1
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Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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**
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32.2
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Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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**
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema Document
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase
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101.LAB
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XBRL Taxonomy Extension Label Linkbase
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase
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* Filed herewith.
** Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
+ Confidential treatment has been requested with respect to certain portions of this exhibit, which portions have been filed separately with the Securities and Exchange Commission.