Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
1.
The Company and Basis of Presentation
The Company
Aratana Therapeutics, Inc., including its subsidiaries (the “Company,” or “Aratana”) was incorporated on
December 1, 2010
under the laws of the State of Delaware. The Company is a pet therapeutics company focused on the development and commercialization of innovative therapeutics for dogs and cats. The Company has
one
operating segment: pet therapeutics.
Since its inception, the Company has devoted substantially all of its efforts to research and development, recruiting management and technical staff, building an
infrastructure for commerci
a
lization of
its
ther
a
peutics and
therapeutic
candidates,
acquiring operating assets and raising capital.
The Company is subject to risks common to companies in the biotechnology and pharmaceutical industries. There can be no assurance that the Company’s licensing efforts will identify viable therapeutic candidates, that the Company’s research and development will be successfully completed, that adequate protection for the Company’s technology will be obtained, that any therapeutics developed will obtain necessary government regulatory approval or that any approved therapeutics will be commercially viable. The Company operates in an environment of substantial competition from other animal health companies. In addition, the Company is dependent upon the services of its employees and consultants, as the well as third-party contract research organizations and manufacturers and collaborators.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business.
The Company has incurred recurring losses and negative cash flows from operations and has an accumulated deficit of
$241,238
as of December 31, 2018. 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 at December 31, 2018,
will be sufficient to fund operations
for
at least
one
year from the issuance of these consolidated financial statements
.
The Company expects continued investment related to commercial activities, including procuring of inventories needed to supply the marketplace, investing to further support adoption and awareness of the Company’
s
marketed products and payment of milestones related to approval and commencement of commercial sales. As a result, if the Company cannot generate sufficient cash flow from operations in the future, the Company
will
seek to fund its operations through corporate collaborations and licensing arrangements, or other sources, such as public or private equity and further debt financings.
If the Company is not able to raise additional capital on terms acceptable to it, or at all, as and when needed, the Company would be forced to delay, reduce, or eliminate certain research and development programs, reduce or eliminate discretionary operating expenses or
grant rights to develop and market therapeutics or therapeutic candidates that it would otherwise prefer to develop and market itself, which could otherwise adversely affect its business prospects.
The Company’s failure
to raise capital, as and when needed, would have a negative impact on its financial condition and its ability to pursue its business strategies as this capital is necessary for it to perform the research and development and commercial activities required to generate future revenue streams.
2. Summary of Significant Accounting Policies
Consolidation
The Company’s consolidated financial statements include its financial statements, and those of its wholly-owned US subsidiary and a foreign
subsidiar
y
through
its dissolution date in December 2018, and in prior periods, they also include a consolidated variable interest entity through
the deconsolidation date in December 2016. Intercompany balances and transactions are eliminated in consolidation.
In December 2018,
the Company’s foreign subsidiary
was
dissolved, and the dissolution did not have a material impact on the consolidated financial statements.
To determine if
the Company
holds a controlling financial interest in an entity,
the Company
first evaluates if it is required to apply the variable interest entity (“VIE”) model to the entity. Where
the Company
holds current or potential rights that give it the
power
to direct the activities of a VIE that most significantly impact the VIE’s economic performance combined with a variable interest that gives it the right to receive potentially significant benefits or the obligation to absorb potentially significant losses,
the Company
is the primary beneficiary of that VIE. When changes occur to the design of an entity,
the Company
reconsiders whether it is subject to the VIE model.
The Company
continuously evaluates whether it is the primary beneficiary of a consolidated VIE 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.
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ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
In December 2016,
the Company
concluded that it was no longer the primary beneficiary of a previously consolidated VIE and no longer consolidates the entity.
The Company
recognized a gain of
$276
on deconsolidation of the VIE in other income (expense) in the quarter ended December 31, 2016.
The Company
’s remaining non-controlling investment in the VIE is not material.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company classifies all highly liquid investments with stated maturities of three months or less from the date of purchase as cash equivalents
. Cash equivalents consisted of certificates of deposit (“CDs”) at December 31, 2018 and 2017
.
Restricted Cash
T
he Company has posted collateral to Square 1 Bank N.A., a division of
the
Pacific Western Bank, to collateralize corporate credit card services. The Company classifies the collateral as restricted cash.
Short-term Investments
Short-term investments in 2018 and 2017 included
CDs with original maturities greater than three months but less than 12 months
.
Marketable
Securities
The Company classifies all highly liquid investments with stated maturities of greater than three months from the date of purchase as marketable securities. The Company determines the appropriate classification of investments in marketable securities at the time of purchase and re-evaluates such designation at each consolidated balance sheet date. The Company classifies and accounts for marketable securities as available-for-sale. The Company did not hold securities with stated maturities greater than 12 months as of December 31, 2018 or 2017. The Company reports available-for-sale investments at fair value as of each consolidated balance sheet date and records any unrealized gains and losses as a component of stockholders’ equity. The cost of securities sold is determined on a specific identification basis, and realized gains and losses are included in other income (expense) in the consolidated statements of operations. If any adjustment to fair value reflects a decline in the value of the investment, the Company considers available evidence to evaluate the extent to which the decline is “other than temporary” and recognizes the impairment by releasing other comprehensive income to the consolidated statement of operations. There were
no
such adjustments necessary during the years ended December 31, 2018 and 2017.
Accounts Receivable, Net
Accounts receivable are uncollateralized customer obligations due under normal trade terms generally requiring payment within 30 days of the invoice date.
The Company provides an allowance for doubtful accounts equal to the estimated losses that will be incurred in collection of accounts receivable. This estimate is based on the current review of existing receivables and historical experience in the industry. The allowance and associated accounts receivable are reduced when the receivables are determined to be uncollectible. To date, the Company’s historical reserves and write-offs have not been significant. The Company also provides an allowance for estimated returns which is established based on the Company’s analysis of industry standards and its own history of actual returns.
Inventories
The Company states inventories at the lower of cost and net realizable value and consist of raw materials, work-in-process and finished goods. Cost is determined by the average cost method for raw materials and standard cost for work-in-process and finished goods, which approximates actual cost.
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ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Pre-Launch Inventories
The Company may scale-up and make commercial quantities of certain of its product candidates prior to the date it anticipates that such products will receive final United States Food and Drug Administration (“FDA”)/United States Department of Agriculture (“USDA”) approval. The scale-up and commercial production of pre-launch inventories involves the risk that such products may not be approved for marketing by the FDA/USDA on a timely basis, or ever. Inventory costs associated with product candidates that have not yet received regulatory approval are capitalized if the Company believes there is probable future commercial use and future economic benefit. If the probability of future commercial use and future economic benefit cannot be reasonably determined, then pre-launch inventory costs associated with such product candidates are expensed as research and development expense during the period the costs are incurred. Specifically, the Company has determined that for FDA-regulated product candidates there is a probable future commercial use and future economic benefit upon the receipt of the three major technical section complete letters from the FDA’s Center for Veterinary Medicine (“CVM”). For USDA product candidates, the Company has determined there is a probable future commercial use and future economic benefit upon the receipt of a conditional license from the USDA’s Center for Veterinary Biologics. The Company makes at least quarterly reassessments of the probability of regulatory approval and useful life of the pre-launch inventory, and determines whether such inventory continues to have a probable future economic benefit.
Property and
Equipment, Net
The Company records property and equipment at historical cost less accumulated depreciation and amortization. Depreciation and amortization expense is recognized using the straight-line method over the following estimated useful lives:
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Laboratory and office equipment
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3
–
10
years
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Computer software and equipment
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3
–
5
years
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Furniture
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3
–
7
years
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Vehicles
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3
–
5
years
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Leasehold improvements
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3
–
10
years
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Leasehold improvements are amortized over the shorter of the life of the related asset or the term of the lease.
Expenditures for repairs and maintenance of assets are charged to expense as incurred. Costs of major additions and betterments are capitalized and depreciated on a straight-line basis over their useful lives. When property and equipment are disposed of, the cost and
respective accumulated depreciation and amortization are removed from the accounts. Any gain or loss on disposal is recorded in the consolidated statements of operations in other income (expense).
Depreciation expense and gains or losses on disposal of property and equipment are classified within the corresponding operating expense categories in the consolidated statements of operations.
Goodwill
Goodwill relates to amounts that arose in connection with the Company’s business combinations and represents the difference between the purchase price and the estimated fair value of the identifiable tangible and intangible net assets when accounted for using the acquisition method of accounting. Goodwill is not amortized, but is subject to periodic review for impairment.
T
he Company tests goodwill at the reporting unit level for impairment on an annual basis and between annual tests, if events and circumstances indicate impairment may exist. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, including a decline in market capitalization, a significant adverse change in legal factors, business climate or operational performance of the business and an adverse action or assessment by a regulator.
Intangible Assets
, Net
The Company’s intangible assets, net consist of intellectual property rights acquired for currently marketed products (amortized intangibles). All of the Company’s amortized intangibles were recorded in connection with the Company’s business combinations or approval/post-approval milestone payments made under the Company’s license agreements. The Company’s intangible assets are recorded at fair value at the time of their acquisition. The Company amortizes intangible assets over their estimated useful lives once the acquired technology is developed into a commercially viable product. The estimated useful lives of the individual categories of intangible assets are based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with finite lives is recognized over the time the intangible assets are estimated to contribute to future cash flows. The Company amortizes finite-lived intangible assets using the straight-line method as revenues cannot be reasonably estimated.
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Foreign Currency
Since
the acquisition of Okapi Sciences in 2014
and through the date of
dissolution
of the foreign subsidiary in December 2018
, the Company was exposed to effects of foreign currency from translation.
Prior to July 1, 2018, the functional currency of the Company’s foreign subsidiaries was the local currency of the country where the subsidiari
es were located.
Transactions in foreign currencies were translated into the relevant functional currency at the rate of exchange at the date of the transaction. Transaction gains and losses were recognized in other income (expense) in the consolidated statements of operations. The results of operations for subsidiaries were translated into the United States Dollar
, the Company’s reporting currency,
at the average rates of exchange during the period, with the subsidiaries’ balance sheets translated at the rates accumulated at the balance sheet date. The cumulative effect of these exchange rate adjustments
was
included in a separate component of other comprehensive income (loss) in the consolidated balance sheets. Gains and losses arising from intercompany foreign currency transactions were included in loss from operations unless the gains and losses ar
o
se from long-term investments in subsidiaries. Gains and losses from long-term investments in subsidiaries were included in a separate component of other comprehensive income (loss).
Effective July 1, 2018, as a result of s
ignificant changes in economic facts and circumstances
in the operations of the foreign subsidiary, the functional currency of the Company’s foreign subsidiary was changed from the local currency to the
United States Dollar
. Effective as of the date of the change, t
ranslation adjustments for prior periods were not removed from equity and the translated amounts for nonmonetary assets at the end of the prior period became the accounting basis for those assets in the period of the change and subsequent periods.
Subsequent gains or losses from the remeasurement of monetary assets and liabilities
of the foreign subsidiary
were recorded in earnings
through the date of
its
dissolution.
Deferred Public Of
fering and At-the-Market Offering Costs
The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as other assets until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ equity as a reduction of additional paid-in capital generated as a result of the offering. Should it no longer be considered probable that the equity financing will be consummated, the deferred offering costs would be expensed immediately as a charge to operating expenses in the consolidated statements of operations. The Company
recorded
$0
and
$76
of
deferred equity offering costs as of December 31, 2018 and 2017, respectively.
Debt Issuance
Costs
, Net
Debt issuance costs, net represent legal and other direct costs related to the Company’s
Loan and Security Agreement
which was terminated in December 2018 upon full repayment of outstanding obligations (Note 10). These
costs
were
recorded as
an offset to the carrying value of loans payable in the consolidated balance sheet at the time they were incurred and were amortized to interest expense through the scheduled final principal payment date. Upon the Company’s repayment of its loans payable, all remaining debt issuance costs were recognized in interest expense in the consolidated statements of operations.
Revenue from Contracts with Customers
Effective January 1, 2018, the Company adopted the Accounting Standards Codification Topic (“ASC”) 606 “Revenue from Contracts with Customers” (“ASC 606”) using the modified retrospective transition method. Prior to January 1, 2018, the Company recognized revenue using the guidance of ASC 605 “Revenue Recognition” (“ASC 605”).
The Company recognizes revenue when its customer obtains control of the promised goods or services, in an amount that reflects the consideration which the Company expects to be entitled to in exchange for those goods or services.
The Company determines revenue recognition from contracts with customers as follows:
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identify the contract(s);
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identify the performance obligations in the contract(s);
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determine the transaction price;
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allocate the transaction price to the performance obligations in the contract; and
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recognize revenue wh
en (or as) the Company satisfies a performance obligation.
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Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
The Company’s principal revenue streams and their respective accounting treatments are discussed below and further in Note 3,
“Revenue”
:
The Company sells its products to its customers who could either be the end users (such as veterinarians, clinics, or animal hospitals) of the product or distributors who subsequently resell the Company’s products to end users.
Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, upon delivery to the customer. The Company’s delivery of its products to customers constitutes a single performance obligation as there are no other promises to deliver goods or services beyond what is specified in each accepted customer order.
Product sales are recorded net of applicable reserves for variable consideration, including
product returns, allowances, discounts, and rebates
.
Reserves for Variable Consideration
Revenues from product sales are recorded at the net sales price (transaction price) which includes estimates of variable consideration for which reserves are established. Components of variable consideration include product returns, allowances, discounts, and rebates. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable (generally, for credits that the Company issues for free goods provided by distributors to end customers in conjunction with promotional programs) or a current liability (generally, reserves for products that remained in the distribution channel inventories at each reporting period end that the Company expects the distributors will provide to end customers free of charge in conjunction with promotional programs). These estimates take into consideration a range of possible outcomes for the expected value (probability-weighted estimate) or relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.
The amount of variable consideration included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Product Returns
Consistent with the industry practice, the Company generally offers customers a limited right of return of damaged or
expired product that has been purchased from the Company or the Company’s distributors in exchange for an unexpired product
or credit, depending on contractual arrangements with distributors
and
terms and conditions of the sale of its products. Exchanges or credit due
to expiry are typically allowed for a period of six months after the product’s expiration date. The Company estimates the amount of its product sales that may be returned by its customers and records these estimates as a reduction of product revenues in the period in which the related product revenues are recognized, as well as within accrued expenses and other current liabilities in the consolidated balances sheets. The Company currently estimates product return liabilities using available industry data, its own sales data and data provided by the Company’s distributors such as the inventories remaining in the distribution channel. The Company has received an immaterial amount of returns to date and believes that returns of its products in future periods will be minimal. The Company does not record a return asset associated with the returned damaged or expired goods because such asset is deemed to be fully impaired at the time of product return.
Sales Discounts and Allowances
The Company compensates its distributors for sales order management, data and distribution and other services through sales discounts and allowances. However, such services are not distinct from the Company’s sale of products to distributors and, therefore, these discounts and allowances are recorded as a reduction of revenue in the consolidated statements of operations, as well as a reduction to accounts receivable, net in the consolidated balance sheets.
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(ii)
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Licensing and Collaboration Revenues
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Revenues derived from product out-licensing arrangements typically consist of an initial non-refundable, up-front payment at inception of the license, subsequent milestone payments contingent on the achievement of certain regulatory, development and commercial milestones, and royalties on the net sales of the Company’s products.
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Licenses of Intellectual Property
If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the contract, the Company recognizes revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company will evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.
Milestones
Revenues from achievement of milestones generally represent a form of variable consideration as the payments are likely to be contingent on the occurrence of future events. The Company estimates milestones probable to be achieved and includes in the transaction price based on either the expected value (probability-weighted estimate) method or most likely amount method. The most likely amount method is used by the Company for milestone payments with a binary outcome (i.e., the Company receives all or none of the milestone payment). Milestone payments that are not within the control of the Company or the customer, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The estimated milestone-related variable consideration is only recognized as revenue when the related performance obligation is satisfied and the Company determines that it is probable that there will not be a significant reversal of cumulative revenue recognized in future periods (i.e. variable consideration constraint). At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect licensing and collaboration revenues and earnings in the period of adjustment.
For milestones that are not able to overcome the variable consideration constraint, that are not considered probable or that are determined to be sales-based or usage royalties, as described later, the Company recognizes revenue when the milestones are achieved.
Sales-Based Royalty Revenues
The Company’s sales-based royalty revenues consist of sales-based milestones or a percentage of net sales royalties. The Company recognizes sales-based royalties related to the Company’s out-licensed intellectual property when (or as) the later of the following events occurs:
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the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied).
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Sales-based royalty revenues recorded by the Company are based on the licensee’s or sub-licensee’s sales that occurred during the relevant period. To the extent the licensee’s or sub-licensee’s actual sales are not known at the time the Company reports its financial results, the Company estimates the amount of royalty revenue earned during the relevant period. Differences between actual and estimated royalty revenues, if any, are adjusted in the period in which they become known. To date, royalty revenues reported by the Company have been based on actual sales information received by the Company, and no material adjustments have been made in subsequent periods.
Royalty revenue is included in licensing and collaboration revenue in the consolidated statements of operations.
The Company recognizes revenue from sales-based milestones when the milestones are achieved.
Research and
Development
Costs
Research and development costs are expensed as incurred. Included in research and development costs are wages, stock-based compensation and employee benefits, and other operational costs related to the Company’s research and development activities, including facility-related expenses, external costs of outside contractors engaged to conduct both preclinical and clinical studies and allocation of corporate costs. If IPR&D is acquired in an asset purchase, then the acquired IPR&D is expensed on its acquisition date. Future costs to develop these assets are recorded to research and development expense as they are incurred.
Patent Costs
All patent-related costs incurred in connection with filing and prosecuting patent applications are recorded as selling, general and administrative expenses as incurred, as recoverability of such expenditures is uncertain.
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ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Shipping
Shipping costs are included in cost of product sales.
Sales Tax
The Company collects and remits taxes assessed by various governmental authorities. These taxes may include sales, use and value added taxes. These taxes are recorded on a net basis and are excluded from revenues.
Accounting for Stock-Based Compensation
The Company’s stock-based compensation program grants awards that may consist of stock options and restricted stock awards. The fair values of stock option grants are determined as of the date of grant using the Black-Scholes option pricing method. This method incorporates the fair value of the Company’s common stock at the date of each grant and various assumptions such as the risk-free interest rate, expected volatility based on the
volatility of the Company’s common stock price
, expected dividend yield, and expected term of the options. The fair values of restricted stock awards are determined based on the fair value of the Company’s common stock. The fair values of the stock-based awards are then expensed over the requisite service period, which is generally the award’s vesting period. The Company classifies stock-based compensation expense in the consolidated statements of operations in the same manner in which the respective award recipient’s payroll costs are classified.
For stock-based awards granted to consultants and nonemployees, compensation expense is recognized over the period during which services are rendered by such consultants and nonemployees until completed. At the end of each financial reporting period prior to completion of the service, the value of these awards is re-measured using the then-current fair value of the Company’s common stock and updated assumption inputs in the Black-Scholes option pricing model.
Comprehensive Loss
In addition to the Company’s net loss, comprehensive loss for the years ended December 31, 2018, 2017 and 2016, includes foreign currency translation adjustments related to the translation of foreign subsidiaries’ balance sheets.
Net Loss Per Share
The Company follows the two-class method when computing net loss per share, as the Company has issued shares that meet the definition of participating securities. The two-class method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.
Restricted stock awards granted by the Company entitle the holder of such awards to dividends declared or paid by the Board of Directors, regardless of whether such awards are unvested, as if such shares were outstanding common shares at the time of the dividend. However, the unvested restricted stock awards are not entitled to share in the residual net assets (deficit) of the Company. Accordingly, in periods in which the Company reports a net loss or a net loss attributable to common stockholders resulting from preferred stock dividends, accretion or modifications, net losses are not allocated to participating securities. The Company reported a net loss in each of the years ended December 31, 2018,
2017
and 2016.
Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding for the period. Diluted net loss is computed by adjusting net loss to reallocate undistributed earnings based on the potential impact of dilutive securities, including outstanding stock options. Diluted net loss per share is computed by dividing the diluted net loss by the weighted average number of shares of common stock, including potential dilutive shares of common stock assuming the dilutive effect of potentially dilutive securities. For periods in which the Company has reported net losses, diluted net loss per share is the same as basic net loss per share, since their impact would be anti-dilutive to the calculation of net loss per share. Diluted net loss per share is the same as basic net loss per share for each of the years ended December 31, 2018,
2017
and 2016.
Concentration of
Credit
Risk and of Significant Suppliers and Customers
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. At December 31, 2018 and 2017, all of the Company’s fixed income marketable securities were invested in CDs insured by the Federal Deposit Insurance Corporation. The Company also generally maintains balances in various operating accounts in excess of federally insured limits at
two
accredited financial institutions. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
Concentrations of credit risk with respect to accounts receivable, which are typically unsecured, are somewhat mitigated due to the wide variety of customers (large animal health companies, distributors, and veterinarians) purchasing the Company’s products. All of the Company’s accounts
receivable arise from product sales sold by the Company in the United States and have standard payment terms which generally require payment within 30 days and licensing and collaboration revenue which require payment withi
n 60 days.
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ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
The Company monitors the financial health performance and credit worthiness of its customers so it can properly assess and respond to changes in their credit profile. The Company continues to monitor these conditions and assess their possible impact on it business.
As of December 31, 2018
and 2017
, accounts receivable from
Elanco Animal Health, Inc. (“Elanco”)
accounted
for
52%
and
64%
of the Company’s accounts receivable, net
, respectively
.
As of December 31, 2017, accounts receivable from
one
distributor accounted for
15%
of the Company’s accounts receivable, net.
Revenues from
one
customer, Elanco, accounted for all licensing and collaboration revenue
for the years ended December 31, 2018 and 2017,
and approximately
66%
and
23%
of total revenues for the year
s
ended
December 31, 2018 and 2017, respectively. During the year ended December 31, 2017, sales of finished goods to Elanco accounted for
79%
of the Company’s net product sales.
The Company is dependent on a combination of national and regional distributors for its product sales of ENTYCE. The
Company’s product sales to
two
distributors
accounted for more than
10%
each and
26%
collectively of the Company’s net product sales for the year ended December 31, 2018.
The Company is
also
dependent on a small number of third-party manufacturers to supply active pharmaceutical
ingredients
(“API”) and formulated drugs for research and development activities in its programs and commercial supply, which would be adversely affected by a significant interruption in supply.
Fair Value Measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last is considered unobservable, is used to measure fair value:
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Level
1—Quoted prices in active markets for identical assets or liabilities.
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Level 2—Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or
liabilities
, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
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Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
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Segment
and Geographic Information
Segment Assets
The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company is a pet therapeutics company developing compounds to address unmet and under-served medical needs in companion animals. All assets were held in the
United States and Belgium as of December 31, 2018, 2017 and 2016. Total assets were
$106,436
,
$135,192
and
$151,406
at December 31, 2018, 2017 and
2016, respectively.
Revenues by Geographic Region
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
Revenues
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
35,412
|
|
$
|
25,573
|
|
$
|
38,318
|
Belgium
|
|
|
—
|
|
|
—
|
|
|
233
|
Total revenues
|
|
$
|
35,412
|
|
$
|
25,573
|
|
$
|
38,551
|
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Long-Lived Assets, Net by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
Long-lived assets, net
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
693
|
|
$
|
1,166
|
|
$
|
1,947
|
Belgium
|
|
|
—
|
|
|
—
|
|
|
1
|
Total long-lived assets, net
|
|
$
|
693
|
|
$
|
1,166
|
|
$
|
1,948
|
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 superseded the revenue recognition requirements in ASC 605 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. The Company
adopted this guidance on January 1, 2018. The impact of adoption is described further in Note 3
, “Revenue.”
Leases
In
February 2016, the FASB issued guidance which requires, for operating leases, a lessee to recognize a right-of-use (“ROU”) 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 on a modified retrospective transition. The Company adopted this guidance on January 1, 2019,
using a modified retrospective approach to be applied to leases ex
isting as of, or entered into after, January 1, 2019. The Company has
substantially
completed its review of its existing lease contracts and the impact of the new leasing standards on its consolidated financial statements.
Upon adoption of the new guidance, the Company expects to recognize a lease liability and a related ROU asset,
which may be material
to the consolidated balance sheets. The impact of adoption of the guidance is not expected to have a
material
impact on the consolidated statements of operations.
Compensation – Stock Compensation
:
Scope of Modification Accounting
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. The Company adopted this guidance on January 1, 2018, and the adoption did not have a material impact on its consolidated financial statements.
Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB issued guidance that largely aligns the accounting for share-based payment awards issued to employees and nonemployees. Under the new guidance, the existing employee guidance generally will apply to nonemployee share-based transactions, with the exception of specific guidance related to inputs to an option pricing model and the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. 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, including in interim periods, but no earlier than an entity’s adoption of ASC 606
.
The Company adopted this guidance on January 1, 2019, and the adoption did not have a material impact on its consolidated financial statements.
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Intangibles
–
Goodwill and Other
–
Internal-Use Software
In August 2018, the FASB issued guidance that largely aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance provides criteria for determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The capitalized implementation costs are required to be expensed over the term of the hosting arrangement. The guidance also clarifies the presentation requirements for reporting such costs in the entity’s financial statements. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.
Fair Value Measurements
In August 2018, the FASB issued guidance related to disclosure requirements for fair value measurements. This guidance eliminates, modifies and adds disclosure requirements for fair value measurements. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.
3
.
Revenue
Adoption of ASC 606
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605.
The Company recorded a net reduction of
$6,800
, net of
$0
tax, to the opening balance of accumulated deficit within stockholders’ equity, and a corresponding reduction to licensing and collaboration commitment as of January 1, 2018, due to the cumulative impact of adopting ASC 606, with the impact solely related to the Company’s variable consideration within its Collaboration Agreement (as defined below) with
Elanco
.
Under previous guidance of ASC 605, this commitment was fully deferred and recognized as a liability until such time as payments under the obligation were
made, or any unpaid portion would have been recognized as revenue when the commitment expired on December 31, 2018. Under ASC 606, this obligation is accounted for as variable
consideration. At the adoption date, the Company recorded a contract liability based on the amount of the obligation expected to be paid, which was
$200
. This amount was determined based on management estimates, which included consideration of Elanco’s development plan.
Since inception of the arrangement,
no
amounts had been paid out or submitted to the Company for reimbursement.
Had the Company still applied ASC 605 for the year ended December 31, 2018, revenues would have been
$6,800
higher as compared to
revenues recognized under
ASC 606.
Disaggregated Revenues
The following table presents the Company’s revenues disaggregated by revenue source. All product sales are derived from United States sources and sales taxes are excluded from revenues.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31,
|
|
|
2018
|
|
2017
(1)
|
|
2016
(1)
|
Revenues
|
|
|
|
|
|
|
|
|
|
Licensing and collaboration revenue
|
|
|
|
|
|
|
|
|
|
GALLIPRANT
|
|
$
|
23,326
|
|
$
|
5,433
|
|
$
|
38,000
|
Other
|
|
|
—
|
|
|
480
|
|
|
233
|
Total licensing and collaboration revenue
|
|
|
23,326
|
|
|
5,913
|
|
|
38,233
|
Product sales
|
|
|
|
|
|
|
|
|
|
NOCITA
|
|
$
|
7,511
|
|
$
|
2,782
|
|
$
|
148
|
ENTYCE
|
|
|
4,575
|
|
|
1,311
|
|
|
—
|
GALLIPRANT
|
|
|
—
|
|
|
15,526
|
|
|
—
|
Other
|
|
|
—
|
|
|
41
|
|
|
170
|
Total product sales
|
|
|
12,086
|
|
|
19,660
|
|
|
318
|
Total revenues
|
|
$
|
35,412
|
|
$
|
25,573
|
|
$
|
38,551
|
(1)
Prior period amounts have not been adjusted under the modified retrospective method of ASC 606 and are reported under ASC 605.
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Product Sales
The Company generates product sales revenues primarily by selling its marketed therapeutics directly to end users (such as veterinarians, clinics, or animal hospitals) and distributors. Direct to end user sales revenues consist primarily of NOCITA sales, and distributor product sales revenues consist primarily of ENTYCE sales.
As of December 31, 2018 and 2017, reserves for product returns related to NOCITA and ENTYCE
were
$222
and
$90
, respectively.
Licensing and Collaboration Revenue
The Company generates licensing and collaboration revenue solely from the Elanco Collaboration, License, Development and Commercialization Agreement (as amended, the “Collaboration Agreement”) and Co-Promotion Agreement (collectively, “the Elanco Agreements”) as follows:
|
·
|
|
sales-based royalties from the Elanco Agreements consisting of a percentage of net sales of GALLIPRANT by Elanco that are recognized as revenue as the underlying sales of GALLIPRANT are made by Elanco;
|
|
·
|
|
sales-based royalties from the Collaboration Agreement consisting of sales-based milestones of GALLIPRANT by Elanco that are recognized as revenue if and when the sales threshold is achieved by Elanco;
|
|
·
|
|
regulatory milestones from the Collaboration Agreement that are recognized as revenue if and when achieved; and
|
|
·
|
|
variable consideration related to the Collaboration Agreement licensing and collaboration commitment (contract liability) that is recognized as revenue when it is not subject to variable consideration constraint.
|
Reconciliation of Contract Balances
The change in contract liability balances for the year ended December 31, 2018, was as follows:
Licensing and Collaboration Commitment
|
|
|
|
|
|
|
2018
|
As of January 1,
|
|
$
|
7,000
|
ASC 606 adoption
|
|
|
(6,800)
|
Revenue recognized
|
|
|
(200)
|
Payments made
|
|
|
—
|
As of the end of period,
|
|
$
|
—
|
The Company
recorded a net reduction of $6,800, net of $0 tax, to the opening balance of accumulated deficit within stockholders' equity as of January 1, 2018, due to the cumulative impact of adopting ASC 606.
Unsatisfied Performance Obligations
As of the adoption date of ASC 606 and December 31, 2018, the Company had
no
unsatisfied performance obligations.
Significant Judgments
The
Company’s significant judgments relate to the updating of the transaction price and variable consideration of the Collaboration Agreement.
The Company used current facts and circumstances to calculate the updated transaction price using the expected value (probability
-
weighted estimate). Facts and circumstances considered included the
status of the
Elanco development plan for GALLIPRANT
as of December 31, 2018.
Practical Expedients and Exemptions
The Company has deemed that there is no significant financing component present in the agreements with the Company’s customers as trade payment terms with its customers do not exceed one year. The Company expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses.
4. Fair Value of Financial Assets and Liabilities
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying values and estimated fair values of the Company’s financial assets which are measured at fair value on a recurring basis was as follows:
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
|
|
|
Carrying
|
|
December 31, 2018 Using:
|
|
|
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
9,424
|
|
$
|
—
|
|
$
|
9,424
|
|
$
|
—
|
|
$
|
9,424
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term marketable securities - certificates of deposit
|
|
|
1,240
|
|
|
—
|
|
|
1,240
|
|
|
—
|
|
|
1,240
|
|
|
$
|
10,664
|
|
$
|
—
|
|
$
|
10,664
|
|
$
|
—
|
|
$
|
10,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
|
|
|
Carrying
|
|
December 31, 2017 Using:
|
|
|
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
8,964
|
|
$
|
—
|
|
$
|
8,964
|
|
$
|
—
|
|
$
|
8,964
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term marketable securities - certificates of deposit
|
|
|
747
|
|
|
—
|
|
|
747
|
|
|
—
|
|
|
747
|
|
|
$
|
9,711
|
|
$
|
—
|
|
$
|
9,711
|
|
$
|
—
|
|
$
|
9,711
|
The financial assets above are measured at fair value using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3). Certain estimates and judgments are required to develop the fair value amounts shown above. The fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.
The following methods and assumptions were used to estimate the fair value of each material class of financial instrument:
|
·
|
|
Cash equivalents – the fair value of the cash equivalents has been determined to be amortized cost given the short duration of the securities.
|
|
·
|
|
Marketable securities (short-term) – the fair value of marketable securities has been
determined to be amortized cost given the short duration of the securities.
|
The Company had
no
financial liabilities measured at fair value on a recurring basis as of December 31, 2018 and 2017.
Financial Assets and Liabilities that are not Measured at Fair Value on a Recurring Basis
The carrying values and estimated fair values of the Company’s financial liabilities which are not measured at fair value on a recurring basis was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Carrying Value
|
|
Fair Value
|
Liabilities:
|
|
|
|
|
|
|
Loans payable (Level 2)
|
|
$
|
36,825
|
|
$
|
36,973
|
The Company had no financial liabilities not measured at fair value on a recurring basis as of December 31, 2018.
The financial liabilities above were measured at fair value using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3). 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.
The Company had
no
financial assets not measured at fair value on a recurring basis as of December 31, 2018 and 2017.
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
The carrying value of i
ntellectual property rights acquired for in-process research and development was
$0
as of December 31, 2018, and
no
impairment was recognized for the year ended December 31, 2018.
The
Company had
intangible assets
that were
written down to fair value during the years ended December 31, 2017 and 2016. Fair value was determined using
an
income approach, specifically, the multi-period excess earnings method, a form of a discounted cash flow method. The Company started with a forecast of all the expected net cash flows associated with the asset and then it applied an asset-specific discount rate to arrive at a net present value amount. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of competitive legal and/or regulatory forces on the product and the impact of technological risk associated with IPR&D intangible assets; the discount rate, which seeks to reflect the various risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.
5
. Investments
Marketable Securities
Marketable securities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Losses
|
|
Losses
|
|
Value
|
Short-term marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
1,240
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,240
|
Total
|
|
$
|
1,240
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Losses
|
|
Losses
|
|
Value
|
Short-term marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
747
|
|
$
|
—
|
|
$
|
—
|
|
$
|
747
|
Total
|
|
$
|
747
|
|
$
|
—
|
|
$
|
—
|
|
$
|
747
|
At
December 31, 2018
and
2017
, 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.
6. Inventories
Inventories are stated at the lower of cost and net realizable value and consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
Raw materials
|
|
$
|
242
|
|
$
|
1,132
|
Work-in-process
|
|
|
8,999
|
|
|
12,322
|
Finished goods
|
|
|
2,184
|
|
|
122
|
|
|
$
|
11,425
|
|
$
|
13,576
|
During the year ended December 31, 2018, the Company recognized inventory valuation adjustment losses in cost of product sales in the amount
of
$2,650
f
rom
the
application of the lower of cost
and net realizable value
. The losses primarily related t
o
ENTYC
E i
nventories that were written down
to net realizable value
.
Unfavorable outcomes of the Company’s ENTYCE commercialization efforts could result in additional inventory write downs in future periods.
As of December 31, 2018, ENTYCE inventories amounted to
$10,708
.
As of December 31, 2017, raw materials included
$777
of GALLIPRANT inventories. As part of the manufacturing transfer of GALLIPRANT (Note 12), the Company transferred these raw materials to Elanco
, and was reimbursed
for the raw materials
by Elanco during 2018
. During the year ended December 31, 2017, the Company recognized an inventory valuation loss related to these
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
raw materials in the amount of
$347
from the application of lower of cost and net realizable value in the research and development expenses. Additionally, during the year ended December 31, 2017, the Company recognized an inventory valuation loss in the amount of
$394
from
the
application of lower of cost and net realizable value in cost of product sales. The loss related to GALLIPRANT inventories that were written off.
During the year ended December 31, 2016, the Company recognized an inventory valuation loss in the amount of
$2,532
from
the
application of lower of cost and net realizable value in cost of product sales. The loss related to BLONTRESS and
TACTRESS
inventories that were written off and pre-launch GALLIPRANT inventories written down to market value due to terms agreed upon in the Elanco collaboration agreement (Note 12).
Additionally, the Company expensed
as research and development expenses
$2,639
of previously capitalized process validation batches of ENTYCE intended to be used as commercial launch inventories and
$1,983
of costs incurred related to manufacturing of ENTYCE under a
firm purchase commitment due to the Company concluding at that time that the future commercial use and future economic benefit could no longer be reasonably determined.
As of December 31, 2018, the Company had non-cancellable open orders for the purchase of inventories of
$1,974
,
which
are
expected to be
paid in the next
12
months
.
7
. Property and Equipment, Net
Property and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
Laboratory and office equipment
|
|
$
|
173
|
|
$
|
173
|
Computer equipment and software
|
|
|
2,046
|
|
|
2,046
|
Furniture
|
|
|
135
|
|
|
135
|
Total property and equipment
|
|
|
2,354
|
|
|
2,354
|
Less: Accumulated depreciation and amortization
|
|
|
(1,661)
|
|
|
(1,188)
|
Property and equipment, net
|
|
$
|
693
|
|
$
|
1,166
|
Depreciation and amortization expense
was
$473
,
$
812
and
$
609
for the years ended
December 31, 2018
,
2017
and 2016
, respectively. During the year ended
December 31, 201
7
,
the Company
recognized impairment charges of
$317
related to equipment previously used in its former San Diego, California, property in cost of products sales.
No
significant gains/losses on disposal of property and equipment
were
recognized during the years ended
December 31, 2018
,
2017
and
2016
.
8. 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 completed its annual goodwill impairment testing during the third quarter of 2018. The Company elected to bypass the qualitative assessment. The Company determined as of the testing date that it consisted of
one
operating segment which is comprised of
one
reporting unit.
In performing the quantitative goodwill impairment test
, the Company determined that its fair value, determined to be its market capitalization, was greater than its carrying value, determined to be stockholders’ equity. Based on this result, the Company determined there was
no
impairment of goodwill as of the annual testing date.
Goodwill as of December 31, 2018, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Impairment
|
|
Net
|
|
|
Carrying Value
|
|
Losses
|
|
Carrying Value
|
Goodwill
|
|
$
|
40,846
|
|
$
|
—
|
|
$
|
40,846
|
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
The change in the net book value of goodwill for the years ended December 31, 2018 and 2017, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
As of January 1,
|
|
$
|
41,295
|
|
$
|
39,382
|
Effect of foreign currency exchange
|
|
|
(449)
|
|
|
1,913
|
As of the end of the period,
|
|
$
|
40,846
|
|
$
|
41,295
|
9
. Intangible Assets, Net
The change in the net book value of intangible assets for the years ended
December 31, 2018
and 201
7
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
As of January 1,
|
|
$
|
6,616
|
|
$
|
7,639
|
Additions
(Note 12)
|
|
|
—
|
|
|
6,000
|
Amortization expense
|
|
|
(517)
|
|
|
(350)
|
Effect of foreign currency exchange
|
|
|
—
|
|
|
775
|
Impairment
|
|
|
—
|
|
|
(7,448)
|
As of the end of the period,
|
|
$
|
6,099
|
|
$
|
6,616
|
The Company
recognized amortization expense of
$517
,
$3
50
and
$
379
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Amortization expense of intangible assets for each of the five succeeding years as of
December 31, 2018
, was as follows:
|
|
|
|
Year Ending December 31,
|
|
|
|
2019
|
|
$
|
516
|
2020
|
|
|
516
|
2021
|
|
|
516
|
2022
|
|
|
516
|
2023
|
|
$
|
516
|
Unamortized Intangible Assets
As of both December 31, 2018 and 2017, the net carrying value of the Company’s unamortized intangible assets was
$0
, which includes asset impairment charges of
$24,213
.
Impairment of Unamortized Intangible Assets
AT-006 (
eprociclovir
) and AT-008 (
rabacfosadine
)
During the fourth quarter of 2017,
the Company
determined that events and changes in circumstances indicated that the IPR&D intangible assets might be impaired. During
the Company
’s development program prioritization review, which included the consideration of a number of factors, including
the Company
’s inability to raise additional capital in November 2017,
the Company
decided to further delay the development of AT-006 and AT-008. Due to this delay
the Company
revisited all assumptions used in
measuring the fair values of AT-006 and AT-008. This interim review resulted in fair values of these intangibles being less than their carrying values which resulted in an impairment charge of
$7,448
, which was recorded during the fourth quarter of 2017, reducing the carrying values of both AT-006 and AT-008 to
$0
.
AT-007
(Feline immunodeficiency virus)
T
he Company
had been considering out-licensing or internally advancing the AT-007 program for feline immunodeficiency virus since an impairment expense of
$8,717
was recorded in 2015. Due to the return of the AT-006 global rights from Elanco in May 2016 (Note 12) and ensuing development program portfolio prioritization, including consideration of
the Company
’s focus on commercial launch activities to support its recently approved products,
the Company
decided to discontinue the development of AT-007 during the second quarter of 2016. This resulted in an impairment charge of
$2,229
, which was recorded during the second quarter of 2016, reducing the carrying value of AT-007 to
$0
.
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Amortized Intangible Assets
Amortized intangible assets as of
December 31, 2018
,
were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
Net
|
|
Weighted
|
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Average
|
|
|
Value
|
|
Amortization
|
|
Value
|
|
Useful Life
|
Intellectual property rights for currently marketed products
|
|
$
|
7,000
|
|
$
|
901
|
|
$
|
6,099
|
|
14.1
|
Years
|
Amortized intangible assets as of
December 31, 2017
,
were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
Net
|
|
Weighted
|
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Average
|
|
|
Value
|
|
Amortization
|
|
Value
|
|
Useful Life
|
Intellectual property rights for currently marketed products
|
|
$
|
7,000
|
|
$
|
384
|
|
$
|
6,616
|
|
14.1
|
Years
|
Intellectual property rights for formerly marketed products
|
|
|
38,652
|
|
|
38,652
|
|
|
—
|
|
N/A
|
|
|
|
$
|
45,652
|
|
$
|
39,036
|
|
$
|
6,616
|
|
|
|
Accumulated amortization includes both amortization expense and asset impairment charges. Asset
impairment charges
through December 31, 2018 and 2017 were
$25,390
and
$9,185
for BLONTRESS and TACTRESS, respectively.
Unfavorable estimates of the Company’s therapeutics’ market opportunities or u
nfavorable outcomes of the Company’s development activities
, expected future cash flows and estimated useful lives could result in impairment charges in future periods.
Intellectual Property Rights for Currently Marketed Products
As of
December 31, 2018
and 2017
,
intellectual property rights for currently marketed products
relate to intangible assets capitalized for NOCITA, GALLIPRANT and ENTYCE in conjunction with approval/post-approval milestone payments made under
the Company
's licensing agreements.
Impairment of Amortized Intangible Assets
Since the acquisition of Vet Therapeutics, Inc. (October 2013),
the Company
performed various scientific and clinical activities to gain further knowledge around the science and efficacy of BLONTRESS and TACTRESS.
BLONTRESS
In the third quarter of 2015,
the Company
noted that scientific studies suggested that BLONTRESS was not as specific to the target as previously expected.
The Company
’s market research and interactions with veterinary oncologists indicated that high specificity, including binding and depletion, will likely be necessary to drive wide adoption of monoclonal antibody therapy given that canine B-cell is generally chemotherapy sensitive. Furthermore,
the Company
was aware of other emerging therapies that would compete in the B-cell lymphoma market, and believed that products with break-through benefit will dominate the market. Given those scientific results and competitive assessment,
the Company
recorded an impairment expense of
$20,228
in 2015. In the fourth quarter of 2016,
the Company
received final data from the Mini B-CHOMP study, which evaluated an abbreviated chemotherapy (CHOP) protocol in dogs with B-cell lymphoma. The results confirmed that BLONTRESS did not seem to be adding significant progression-free survival in canine B-cell lymphoma.
While BLONTRESS remained commercially available,
the Company
deemed the results of Mini B-CHOMP study and the updated commercial expectations as a result of the Mini B-CHOMP study results, as indicators of potential impairment of its finite-lived intangible asset BLONTRESS during the fourth quarter of 2016.
The Company
performed impairment testing for the intangible asset BLONTRESS as of
December 31,
2016
, and recorded an impairment expense of
$5,162
during the fourth quarter of 2016, resulting in a net carrying value of
$0
for BLONTRESS.
TACTRESS
In the third quarter of 2015,
the Company
’s interim analysis of the clinical results indicated that TACTRESS did not seem to be adding significant progression free survival in canine T-cell lymphoma; those results
were
confirmed in the final study results in July 2016. In addition, scientific studies suggested that TACTRESS was not as specific to the target as expected. Given those clinical and scientific results,
the Company
no longer believed that TACTRESS would capture the desired T-cell lymphoma market opportunity and recorded an impairment expense of
$8,634
in 2015.
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
While TACTRESS remained commercially available, the use by oncologists had been more limited than
the Company
anticipated, resulting in sales during the second quarter of 2016, being significantly
lower
than forecasted.
The Company
deemed the events and market projections described above to be indicators of potential impairment of its finite-lived intangible asset TACTRESS during the second quarter of 2016.
The Company
performed impairment testing for the intangible asset TACTRESS as of June 30, 2016, and recorded an impairment expense of
$551
during the second quarter of 2016, resulting in a net carrying value of
$0
for TACTRESS
.
10. 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 (“Loan Agreement”), with
the
Pacific
Wes
tern Bank, as a collateral agent and Oxford Finance, LLC, (the “Lenders”), pursuant to which the Lenders agreed to make available to
the Company
term loan in an aggregate principal amount up to
$35,000
and a revolving credit facility in an aggregate principal amount up to
$5,000
subject to certain conditions to funding.
The term loan and the revolving credit facility b
ore
interest per annum at the greater of (i)
6.91%
or (ii)
3.66%
plus the prime rate.
Effective as of July 31, 2017, the Borro
wers
and
the
Lenders entered into a second amendment to the Loan Agreement (the “Second Amendment”). The terms of the Second Amendment, among other things, extend
ed
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
d
a
six
-month interest only period for the term loans, starting on the date 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 was
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
was due upon the original revolving maturity date,
October 16, 2017
, and was paid on October 17, 2017.
The Company wa
s obligated to pay a final payment fee equal to
3.30%
of the principal amount of the
term loan
upon repayment.
On December 21, 2018, the
Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under its Loan Agreement between the Borrowers and the Lenders.
The Company’s payment to the Lenders under the Loan Agreement
, which included outs
t
anding principal and interest balances as well
as the final
payment fee and
t
he
t
ermination fee,
was
$20
,610
,
and
satisfie
d
all of the Company’s debt obligations.
The Company did not incur any early termination penalties as a result of the repayment
of indebtedness or termination of the Loan Agreement
. In connection with the repayment of outstanding indebtedness by
the Company
, the Borro
wers were
automatically and permanently released from all security interests, mortgages, liens and encumbrances under the Loan Agreement.
During the years ended
December 31, 2018
,
201
7
and 2016
,
the Company
recognized interest expense of
$3,391
,
$3,481
a
nd
$3,396
, respectively.
Amortization of debt issuance costs
and accretion of final payment and termination fees, recognized as interest expense,
w
ere
$
994
,
$
513
and
$
477
for the years ended December 31, 2018,
201
7
and 201
6
, respectively.
11. Accrued
Expenses
and Other Current Liabilities
Accrued expenses
and other current liabilities
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
Payroll and related expenses
|
|
$
|
2,587
|
|
$
|
2,314
|
Professional fees
|
|
|
353
|
|
|
208
|
Royalty expense
|
|
|
812
|
|
|
718
|
Interest expense
|
|
|
—
|
|
|
249
|
Research and development costs
|
|
|
73
|
|
|
5
|
Accrued loss on a firm purchase commitment
|
|
|
72
|
|
|
—
|
Other
|
|
|
749
|
|
|
218
|
Total
|
|
$
|
4,646
|
|
$
|
3,712
|
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
12. 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 to
$4,000
and
$3,000
, respectively, upon the Company’s achievement of certain development, regulatory and commercial milestones, as the well as mid-single digit royalties on the Company’s or the Company’s sublicensee’s product sales.
The Company achieved milestones totaling
$0
,
$6,000
and
$5,500
during the years ended December 31, 2018, 2017, and 2016, respectively. Milestones achieved in 2017 were capitalized as intangible assets and milestones achieved in 2016 were expensed within research and development expenses. As of December 31, 2018, the Company had paid
$11,500
in milestone payments since execution of the RaQualia Agreements, and
no
milestone payments were accrued. It is possible that a milestone related to the RaQualia Agreements will be achieved within the next the twelve months totaling
$2,000
.
Pacira Pharmaceuticals, Inc. (“Pacira”)
On December 5, 2012, the Company entered into an Exclusive License, Development, and Commercialization Agreement with Pacira (the “Pacira License Agreement”) that granted the Company global rights for development and commercialization of licensed animal health products for NOCITA (also known as AT-003).
On the same date, the Company also entered into a supply agreement with Pacira (the “Pacira Supply Agreement”, and together with the Pacira License Agreement, the “Pacira Agreements”).
On July 5, 2018 (the “Effective Date”), the Company and Pacira entered into an amendment and restatement of the Pacira License Agreement (“A&R License Agreement”) and an amendment and restatement of the Pacira Supply Agreement (the “A&R Supply Agreement”).
Under the A&R Supply Agreement, Pacira has agreed to manufacture and supply the licensed product in a 10 mL vial size in addition to the 20 mL vial size that is currently supplied to the Company. The supply price for the 10 mL vial size will remain fixed until December 31, 2021. Prior to December 31, 2021, the Company and Pacira have agreed to negotiate in good faith the applicable terms related to the 10 mL vial, including the price, for after December 31, 2021. If the Company and Pacira are unable to reach agreement, then as of January 1, 2022, and on each anniversary thereafter during the term of the A&R Supply Agreement, the price for the 10 mL vial will be automatically increased by a low single-digit percentage.
The A&R License Agreement amended various sections of the Pacira License Agreement, including milestone payments and royalties, to incorporate the introduction of the 10 mL vial size. Prior to December 31, 2021, the Company will not be obligated to pay any royalty payments to Pacira on the sales of the 10 mL vial and thereafter, the Company and Pacira have agreed to negotiate in good faith the applicable terms relating to the 10 mL vial in accordance with the A&R Supply Agreement. The tiered royalties on the Company’s product sales of 20 mL vials remain unchanged. In addition, the A&R License Agreement reduces the annual net sales thresholds for achieving each of the potential commercial milestone payments owed to Pacira. The remaining
$40,000
of commercial milestones per the A&R License Agreement begin to be triggered once NOCITA annual net sales reach
$50,000
with the final tier being owed to Pacira once NOCITA annual net sales reach
$250,000
. Further, the A&R License Agreement lowered the minimum annual revenue payment to be provided to Pacira by the Company and delayed by
one
year the first period in which this minimum annual revenue payment requirement would be triggered such that the period is now expected to commence on January 1, 2023. The definition of a competing product was specified and narrowed to those injectable analgesic products preventing pain for at least
forty-eight
to
seventy-two
hours post-surgery as an active pharmaceutical ingredient (“API”) labeled for the control of post-operative pain for surgical veterinary use. The term of the A&R License Agreement was extended with the initial term commencing as of the new Effective Date.
The Company achieved milestones totaling
$0
,
$0
and
$2,000
during the years ended December 31, 2018, 2017 and 2016, respectively. Of the $2,000 in achieved milestones in 2016,
$1,000
was capitalized as intangible assets and the other
$1,000
was expensed within research and development expenses. As of December 31, 2018, the Company had paid
$2,500
in milestone payments since execution of the Pacira Agreements, and
no
milestone payments were accrued. The Company does not expect to achieve
any
milestones related to the A&R Agreement in the next the twelve months.
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Elanco
BLONTRESS
On December 6, 2012, Vet Therapeutics entered into an Exclusive Commercial License Agreement with Elanco (formerly Novartis Animal Health, Inc.) (the “Elanco BLONTRESS Agreement”) under which Vet Therapeutics granted a commercial license to Elanco for BLONTRESS for the United States and Canada.
On January 2, 2015, the Company was granted a full product license from the USDA for BLONTRESS. The approval resulted in a
$3,000
milestone payment being earned and due to the Company per the terms of the Elanco BLONTRESS Agreement. During the first quarter of 2015, the Company recognized
$3,000
of licensing revenue related to the milestone payment.
On February 24, 2015, the Company and Elanco agreed to terminate the Elanco BLONTRESS Agreement. In consideration for the return of the commercial license granted to Elanco, the Company paid Elanco
$2,500
in March 2015, and was to be required to pay an additional
$500
upon the first commercial sale by the Company. At that time the Company determined that it was probable that the $500 payment will be paid, and recorded the
$500
as a current liability in the first quarter of 2015. The first commercial sale occurred in March 2016. The Company recorded the
$3,000
owed to Elanco as a reduction in revenues received from Elanco as the payment was to re-acquire rights that the Company had previously licensed to Elanco.
On February 25, 2016, the Company and Elanco agreed to amend the terms related to the $500 payment due upon the first commercial sale by the Company. Under the amended terms, upon the first commercial sale in March 2016, the Company was required to pay quarterly a royalty per vial sold until
$500
in royalties were paid or the end of
two
years. After two years, the Company would have been required to pay Elanco
$500
plus
10%
interest, compounded annually against any unpaid balance, less any royalties paid during the two years. If during the two years following the first commercial sale the Company withdrew BLONTRESS from the market and ceased all commercialization, the remaining royalty and related interest would no longer be payable.
On November 13, 2017, the Company withdrew BLONTRESS from the market and ceased all commercialization making the remaining royalty and interest no longer payable. During the year ended December 31, 2017, the Company recognized
$480
in licensing and collaboration revenue due to the derecognition of the remaining balance of the liability.
GALLIPRANT
On April 22, 2016, the Company entered into a Collaboration Agreement pursuant to which the Company granted Elanco rights to develop, manufacture, market and commercialize the Company’s products based on licensed grapiprant rights and technology, including GALLIPRANT (collectively, “Grapiprant Products”). Pursuant to the Collaboration Agreement, Elanco will have exclusive rights globally outside the United States and co-promotion 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, another
$4,000
payment upon achievement of a development milestone related to the manufacturing of a Grapiprant Product from an alternate supply source, and payments up to
$75,000
upon the achievement of certain sales milestones, of which $15,000 was achieved in 2018. 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 was responsible for 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 Registration”) and the United States, and Elanco was responsible for all other development activities.
First registration for a Grapiprant Product in the United States was achieved before the completion of the Collaboration Agreement and EU Product Registration was achieved in January 2018.
In addition, the Company and Elanco 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 Grapiprant Products,
provided that the Company’s contribution to such development fees and expenses was capped at
$7,000
(“R&D Cap”), which was recorded as licensing and collaboration commitment
liability
in the consolidated balance sheets at December 31,
2017.
Upon adoption of ASC 606 (Note 3), the Company relieved
$6,800
of its licensing and collaboration commitment liability.
The licensing and collaboration commitment liability balance was update
d
at each reporting date to reflect current facts and circumstances. The remaining bal
a
nce of
$200
was recognized as licensing and collaboration
revenue in the consolidated statements of operations
in the fourth quarter
of
2018
.
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Commencing on the effective date of the Collaboration Agreement, the Company was responsible for the manufacture and supply of all of Elanco’s reasonable requirements of API and/or finished Grapiprant Products under the supply terms agreed upon pursuant to the Collaboration Agreement. However, Elanco retained 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 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 had agreed to purchase from its third-party manufacturer (the “API Batches”). In addition, Elanco 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 provided 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. In September 2017, the Company and Elanco finalized the transfer of the applicable regulatory approvals in the United States and the responsibility for manufacturing of Grapiprant Products to Elanco. In connection with this assumption of manufacturing
responsibility, Elanco compensated the Company
$10,832
for certain Grapiprant Product inventories and manufacturing considerations. During the year ended December 31, 2017, the Company recognized
$1,000
of licensing and collaboration revenues and
$6,099
of product sales
related to the assumption of manufacturing responsibility by Elanco.
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, and (ii) a mid-single digit percentage of net sales of Grapiprant Product in the
United States after December 31, 2018 through
2028
(unless extended by mutual agreement).
The Company concluded that the Collaboration Agreement and Co-Promotion Agreement represent a multiple-element arrangement, and evaluated if deliverables in the arrangement represent separate units of accounting. The Company identified the following deliverables under the agreement: (i) a royalty-bearing, sub-licensable, development, manufacturing and commercialization license; (ii) manufacturing and supply services; (iii) participation in a joint manufacturing subcommittee; and (iv) services associated with obtaining the EU Product Registration. The Company performed an assessment and concluded that the license had stand-alone value from the other undelivered elements in the arrangement. The Company’s best estimate of the selling price for the manufacturing subcommittee and the EU Product Registration services were immaterial and, therefore, no consideration was allocated to these deliverables. Under the manufacturing and supply services terms, Elanco was obligated to pay for
any future orders at a price per unit representative of market value, and, therefore, no upfront consideration was allocated to this deliverable.
Under the ASC 605 guidance, t
he Company allocated
$38,000
of the $45,000 upfront payment to the license, and recognized
$38,000
of licensing and collaboration revenue during the quarter ended June 30, 2016. The Company allocated $7,000 of upfront consideration to the R&D Cap, which was recorded as licensing and collaboration commitment liability in the consolidated balance sheet as a current liability at December 31, 2017.
T
he
Company
earned sales milestones totaling
$15,000
,
$0
and
$0
during the years ended December 31, 2018, 2017, and 2016, respectively. As of December 31, 2018, the Company had been paid
$15,000
in milestone payments since the effective date of the Collaboration Agreement, and
no
milestone payments were
accrued. The Company will recognize revenue from any additional milestones if and when they are achieved by Elanco.
Advaxis Inc. (“Advaxis”)
On March 19, 2014, the Company entered into an Exclusive License Agreement with Advaxis (the “Advaxis Agreement”) that granted the Company global rights for development and commercialization of licensed animal health products for Advaxis’ ADXS-cHER2 for the treatment of osteosarcoma in dogs (“AT-014”) and
three
additional cancer immunotherapy products for the treatment of
three
other types of cancer. The Company will be required to pay Advaxis remaining milestone payments of up to an additional
$6,000
in clinical and regulatory milestones for each of the
four
products, assuming approvals in both cats and dogs, in both the United States and the European Union. In addition, the Company agreed to pay up to
$28,500
in commercial milestones, as the well as tiered royalties ranging from mid-single digit to
10%
on the Company’s product sales, if any. As of December 31, 2018, the Company had not
accrued
or
paid
any milestone payments since execution of the Advaxis Agreement. T
he Company does not expect to achieve any milestones related to the Advaxis Agreement in the next the twelve months.
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
VetStem BioPharma, Inc. (“VetStem”)
On June 12, 2014, the Company entered into an Exclusive License Agreement with VetStem (as amended, the “VetStem Agreement”) that granted the Company the exclusive United States rights for commercialization and development of VetStem’s allogeneic stem cells being developed for the treatment of pain and inflammation of canine osteoarthritis.
The Company achieved milestones totaling
$0
,
$250
and
$450
during the years ended December 31, 2018, 2017 and 2016, respectively, which were expensed within
research and development expenses.
In January 2018, the Company exercised its ri
ght to terminate the VetStem Agreement, and on April 19, 2018, the termination became effective. During the year ended December 31, 2018, the Company did not incur
any
development expenses or milestones. As a result of the termination of the VetStem Agreement, the Company does not anticipate having to reimburse any further development expenses or make milestone payments to VetStem.
Though the date of the termination of the VetStem Agreement
, the Company had paid
$1,000
in milestone payments and
no
royalty payments since execution of the VetStem Agreement and
no
milestone payments
or
royalties
were accrued.
Atopix Therapeutics Ltd. (“Atopix”)
On October 10, 2014, the Company entered into an Exclusive License Agreement with Atopix (the “Atopix Agreement”) that granted the Company an exclusive global license for development and commercialization of animal health products containing the API included in Atopix’s CRTH2 antagonist product for the treatment of atopic dermatitis. Under the terms of the Atopix Agreement, the Company paid an initial license fee of
$1,000
. On the date of acquisition, the licensed technology had not reached technological feasibility in animal health indications and had no alternative future use in the field of animal health. Accordingly, in-process research and development of
$1,000
was expensed upon acquisition. The Company will be required to pay Atopix remaining milestone payments of up to an additional
$4,000
in clinical and regulatory milestones, assuming approvals in both cats and dogs, in both the United States and the European Union, as the well as tiered royalties in the mid-single digits on the Company’s product sales, if any.
The Company achieved
no
milestones during the years ended December 31, 2018, 2017 and 2016. As of December 31, 2018, the Company had paid
$500
in milestone payments and
no
royalty payments since execution of the Atopix Agreement and
no
milestone payments or
royalties
were accrued.
The Company does not expect to achieve any milestones related to the Atopix Agreement in the next the twelve months.
AskAt Inc. (“AskAt”)
AT-019
On February 28, 2018, the Company entered into an Exclusive License Agreement with AskAt (the “AskAt Agreement”) that granted the Company an exclusive global license for development and commercialization of compound AT-019 in the field of animal health. Under the terms of the AskAt Agreement,
the Company paid an initial upfront license fee of
$500
in the second quarter of 2018. The AskAt Agreement was accounted for as an asset acquisition. On the date of acquisition, the licensed technology had not reached technological feasibility in animal health indications and had no alternative future use in the field of animal health. Accordingly, in-process research and development expense of
$500
was recorded upon acquisition in the first quarter of 2018 and paid in the second quarter of 2018.
The Company will be required to pay remaining milestone payments of up to
$15,500
upon the Company’s achievement of milestones, including
$3,000
of development/regulatory milestones and
$12,500
of commercial milestones as the well as tiered single digit royalties on the Company’s product sales, if any. The commercial milestones owed to AskAt under the AskAt Agreement begin to be triggered upon the first commercial sale with the final tier being owed to AskAt once annual net sales reach
$100,000
. Milestones, at the discretion of the Company, can be paid
50%
in cash and
50%
in a number of the Company’s shares as determined per the terms of the AskAt Agreement.
The Company achieve
d
no
milestones during the year
ended December 31, 2018
. As of December 31, 2018, the Company had not
accrued
or
paid
any milestone or
royalty
payments since execution of the AskAt Agreement. The Company does not expect to achieve
any
milestones related to the AskAt Agreement in the next twelve months.
Collaboration and Option Agreement
On February 28, 2018, in connection with the AskAt Agreement, the Company entered into Collaboration and Option Agreement (the “COA”) with AskAt
for animal health research, including an option agreement for multiple therapeutic candidates with potential in pain, allergy
and cancer. D
uring the first quarter of 2018, the Company paid an initial upfront option fee of
$500
under the terms of the COA, which was recognized as research and development expense in the consolidated statements of operations.
In December 2018, the Company exercised its right to terminate the COA, and on February 18, 2019, the termination became effective. As a result of the termination of the COA, the Company does not anticipate make any further COA
-
related payments to AskAt.
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Government and Other Incentive Programs
The Company has received payments from various government and other incentive programs. Generally, under these programs the Company could be obligated to repay any payments received if certain criteria are not met or certain actions are taken by the Company. The Company could be required to repay up to
$854
under these incentive programs as of December 31, 2018. The Company has determined these contingencies to be within its control and will only account for repayment(s) if it becomes probable that the Company will be obligated to repay as result of its actions.
13. Common Stock
Authorized Common Stock
As of
December 31, 2018
and 2017
, the authorized number shares of common stock was
100,000,000
, par value
$0.001
per share.
Common Stock Outstanding
As of
December 31, 2018
and
2017
, there
were
48,048,914
and
42,532,725
shares of
the Company
’s common stock outstanding respectively, net of
535,599
and
4
91,
861
shares of unvested restricted common stock, respectively.
Treasury Stock
As of
December 31, 2018
and
2017
, there
were
94,107
and
80,916
shares of
the Company
’s common stock held as treasury stock at a cost of
$1,1
75
and
$1,107
, respectively. During the years ended
December 31, 2018
,
2017
and
2016
,
13,191
,
2,690
and
0
shares of restricted stock at a
cost of
$
5
.
17
,
$6.88
and
$
0
per share,
respectively,
were
withheld to satisfy employee tax withholding obligations arising in conjunction with the vesting of restricted stock pursuant to
the Company
’s 2013 Incentive Award Plan
(the “2013 Plan”)
.
Voting Rights
Each share of common stock entitles the holder to
one
vote on all matters submitted to a vote of
the Company
’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the Board of Directors, if any. As of
December 31, 2018
and
2017
, the Board of Directors had not declared
any
dividends in any period.
Stock-Based Awards
During the years ended
December 31, 2018
and
2017
,
the Company
issued common stock pursuant to the 2013
Plan
(Note 14). During the years ended
December 31, 2018
and
2017
,
the Company
did not reacquire any unvested shares of common stock from its terminated employees that had been issued upon the exercise of a stock option prior to its vesting.
Shelf Registration Statement
On August 4, 2017,
the Company
filed a shelf registration statement on Form S-3 (Reg. No. 333-219681) (the “Shelf Registration Statement”) with the SEC. The Shelf Registration Statement was declared effective by the SEC on August 16, 2017.
The Shelf Registration Statement allows
the Company
to offer and sell, from time to time, up to
$100,000
of common stock, preferred stock, debt securities, warrants, units or any combination of the foregoing in one or more future public offerings. The terms of any future offering would be determined at the time of the offering and would be subject to market conditions and approval by
the Company
’s Board of Directors. Any offering of securities covered by the Shelf Registration Statement will be made only by means of a written prospectus and prospectus supplement authorized and filed by
the Company
.
At-the-Market Offerings
Cowen
and Company, LLC
On December 18, 2017,
the Company
entered into a Sales Agreement (“
Cowen
Sales Agreement”) with
Cowen
and Company, LLC (“
Cowen
”) pursuant to which
the Company
may sell from time to time, at its option, up to an aggregate of
$50,000
of shares of its common stock through
Cowen
, as sales agent.
Any s
ales of the shares of common stock
would
be made under
the Company
’s effective Registration Statement on Form S-3 (Reg. No. 333-219681), by means of ordinary brokers’ transactions on the Nasdaq Global Market or otherwise. Additionally, under the terms of the
Cowen
Sales Agreement, the shares of common stock may be sold at market prices, at negotiated prices or at prices related to the prevailing market price.
T
he Company
has agreed to pay
Cowen
a commission of
3%
of the gross proceeds from the sale of such shares of common stock.
During the
year
ended December 31, 2018,
the Company
sold
5,144,244
shares of common stock for aggregate net proceeds of
$24,2
23
, after deducting commission fees of
$754
and issuance costs of
$1
71
.
As of the date of this filing, approximately
$24,852
of shares of common stock remained available for sale under the
Cowen
Sales Agreement.
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Barclays Capital Inc.
(“Barclays”)
On October 16, 2015,
the Company
entered into a sales agreement with 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 through Barclays, as sales agent. Sales of the shares of common stock
were
made under
the Company
’s then effective registration statement 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 Barclays sales agreement, the shares of common stock 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 of common stock.
On April 28, 2017,
the Company
terminated its Barclays sales agreement. As of that date,
the Company
sold an aggregate of approximately
$18,000
of the $52,000 available to be sold under the Barclays 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
, and
the Company
received aggregate net proceeds from the Offering of approximately
$24,400
, after deducting placement agent fees of
$1,575
and offering expenses of
$273
.
14. Stock-Based Awards
2010 Equity Incentive Plan
In 2010,
the Company
’s Board of Directors adopted the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan provided for
the Company
to sell or issue common stock or restricted common stock and to grant incentive stock options or nonqualified stock options for the purchase of common stock with a maximum term of
ten
years to employees, members of the Board of Directors and consultants of
the Company
. With the adoption and approval of the
2013 Plan,
no
further awards will be granted from the 2010 plan.
Stock Options
Activity related to stock options for the year ended
December 31, 2018
, 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, 2017
|
|
57,394
|
|
$
|
4.22
|
|
5.11
|
|
$
|
73
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
Expired
|
|
(4,011)
|
|
|
5.57
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
53,383
|
|
$
|
4.12
|
|
4.10
|
|
$
|
107
|
Options vested and expected to vest as of December 31, 2018
|
|
53,383
|
|
$
|
4.12
|
|
4.10
|
|
$
|
107
|
Options exercisable as of December 31, 2018
|
|
53,383
|
|
$
|
4.12
|
|
4.10
|
|
$
|
107
|
For the years ended
December 31, 2018
,
2017
, and
201
6
, the total intrinsic value of options exercised was
$0
,
$
53
and
$
180
, respectively. For the years ended
December 31, 2018
,
2017
and
201
6
, the total fair value of awards vested during the period was
$0
,
$
8
and
$
209
, respectively.
The Company
received cash proceeds of
$0
,
$
3
and
$
9
from the exercise of stock options for the years ended
December 31, 2018
,
2017
and
2016
, respectively, none of which
were
from the early exercise of stock options.
2013 Incentive Award Plan
In 2013,
the Company
’s Board of Directors adopted and stockholders approved the 2013 Plan which became effective upon the day prior to the effective date of
the Company
’s initial public offering. The 2013 Plan as of
December 31, 2018
allows for the issuance of up to
6,832,405
shares of common stock, plus any additional shares represented by the 2010 Plan that are forfeited or lapse unexercised. The number of shares of common stock that may be issued under the plan is also subject to an annual increase on
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
January 1
st
of each calendar year beginning in
2014 and ending in 2023, equal to the lesser of (i)
1,203,369
shares, (ii)
4%
of the shares of common stock outstanding on the final day of the immediately preceding calendar year and (iii) an amount determined by the Board of Directors. As of
December 31, 2018
, there
were
1,829,915
shares available for future grant under the 2013 Plan. On January 1, 201
9
, the annual increase was determined to be
1,203,369
.
The 2013 Plan is administered by the Compensation Committee of the Board of Directors, which selects the individuals eligible to receive awards, determines or modifies the terms and condition of the awards granted, accelerates the vesting schedule of any award and generally administers and interprets the 2013 Plan. The 2013 Plan permits the granting of incentive and nonqualified stock options, with terms of up to
ten
years and the granting of restricted stock, restricted stock units, performance stock awards, dividend equivalent rights, stock payments (i.e. unrestricted stock), cash bonuses and stock appreciation rights to employees, consultants, and non-employee directors.
Stock Options
During the year ended
December 31, 2018
,
the Company
granted under the 2013 Plan stock options for the
purchase of
798,000
shares
of common stock to certain employees and non-employee directors. The vesting conditions for most of these awards are time-based, and the awards typically vest
25%
after
one
year and monthly thereafter for the next
36
months. Awards typically expire after
10
years.
Activity related to stock options for the year ended
December 31, 2018
, was as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Shares
|
|
Weighted
|
|
Average
|
|
|
|
|
|
Issuable
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
Under
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Options
|
|
Price
|
|
Term
|
|
Value
|
|
|
|
|
|
|
|
(in Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
|
2,557,143
|
|
$
|
11.45
|
|
7.41
|
|
$
|
794
|
Granted
|
|
798,000
|
|
|
4.84
|
|
|
|
|
|
Exercised
|
|
(4,709)
|
|
|
3.14
|
|
|
|
|
|
Forfeited
|
|
(151,603)
|
|
|
6.24
|
|
|
|
|
|
Expired
|
|
(84,430)
|
|
|
17.18
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
3,114,401
|
|
$
|
9.86
|
|
6.85
|
|
$
|
2,047
|
Options vested and expected to vest as of December 31, 2018
|
|
3,114,401
|
|
$
|
9.86
|
|
6.85
|
|
$
|
2,047
|
Options exercisable as of December 31, 2018
|
|
1,961,944
|
|
$
|
12.40
|
|
5.82
|
|
$
|
755
|
For the years ended
December 31, 2018
,
2017
and
2016
, the
weight
ed average grant date fair value of stock options granted was
$3.16
,
$
5.1
3
and
$
2.99
, respectively. For the years ended
December 31, 2018
,
2017
and
2016
, the total intrinsic value of options exercised was
$9
,
$
185
and
$38
, respectively. For the years ended
December 31, 2018
,
2017
and
2016
, the total fair value of awards vested during the period was
$3,178
, $
4,424
and $
5,380
, respectively.
The Company
received cash proceeds of
$15
,
$
244
and
$
129
from the exercise of stock options for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Restricted Common Stock
The Company
’s 2013 Plan provides for the award of restricted common stock.
The Company
has granted restricted common stock typically with time-based vesting conditions, having terms of
between
several months and
three
years
.
Since 2016, t
he awards
granted to executives
typically vest in
12
quarterly installments of
8.33%
per quarter for
three
years
. The awards granted to
non-executives typically vest in
three
annual installments of
33.3%
each year for
three
years.
Awards granted to consultants typically vest in accordance with the expected length of the consulting arrangement. Unvested shares of rest
ricted common stock may not be sold or transferred by the holder. These restrictions lapse according to the time-based vesting.
Activity related to restricted stock for the year ended
December 31, 2018
, was as follows:
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|
|
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|
|
Weighted
|
|
|
|
|
Average Grant
|
|
|
Shares
|
|
Date Fair Value
|
Unvested restricted common stock as of December 31, 2017
|
|
491,861
|
|
$
|
7.59
|
Issued
|
|
486,000
|
|
|
4.83
|
Vested
|
|
(380,427)
|
|
|
7.34
|
Forfeited
|
|
(61,835)
|
|
|
5.59
|
Unvested restricted common stock as of December 31, 2018
|
|
535,599
|
|
$
|
5.50
|
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
For the years ended
December 31, 2018
,
2017
and
2016
, the
weight
ed average grant date fair value of restricted common stock granted was
$4.83
,
$
7.85
and
$
3.95
, respectively. For the years ended
December 31, 2018
,
2017
and
2016
, the total fair value of restricted common stock vested was
$1,897
,
$
2,065
and
$
1,559
, respectively.
The Company
received
no
proceeds for any of the restricted common stock granted during the years ended
December 31, 2018
,
2017
and
2016
.
Stock-Based Compensation
The fair value of each stock option award is estimated using the Black-Scholes option-pricing model. The expected volatility of
the Company
’s common stock is estimated based on historical volatility of
the Company
’s common stock. The expected term of
the Company
’s stock options has been determined utilizing the “simplified” method as
the Company
has insufficient historical experience for option grants overall, rendering existing historical experience irrelevant to expectations for current grants. The risk-free interest rate is determined by reference to the United States Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that
the Company
has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
The relevant data used to determine the value of the stock option grants, presented on a
weight
ed average basis, was as follows:
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|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Risk-free interest rate
|
2.53
|
%
|
|
1.99
|
%
|
|
1.52
|
%
|
Expected term (in years)
|
6.0
|
|
|
6.0
|
|
|
6.2
|
|
Expected volatility
|
72
|
%
|
|
75
|
%
|
|
77
|
%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Compensation expense related to restricted stock granted to employees and non-employee directors is equal to the fair value of
the Company
’s common stock on date of grant, multiplied by the number of shares of restricted common stock issued. Compensation expense related to restricted stock granted to non-employees is equal to the excess, if any, of the fair value of
the Company
’s common stock on date of vesting over the original purchase price per share, multiplied by the number of shares of restricted common stock vesting.
The Company
recorded stock-based compensation expense related to stock options and restricted stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Research and development
|
|
$
|
655
|
|
$
|
916
|
|
$
|
1,069
|
Cost of product sales and inventories
|
|
|
115
|
|
|
153
|
|
|
116
|
Selling, general and administrative
|
|
|
4,143
|
|
|
6,049
|
|
|
7,291
|
|
|
$
|
4,913
|
|
$
|
7,118
|
|
$
|
8,476
|
As of
December 31, 2018
,
the Company
had an aggregate of
$3,562
and
$2,308
of unrecognized stock-based compensation expense for options outstanding and restricted stock awards, respectively, which is expected to be recognized over
2.36
years and
1.65
years, respectively.
15. Net Loss Per Share
Basic and diluted net loss per share was calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,722)
|
|
$
|
(47,510)
|
|
$
|
(33,575)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
46,606,855
|
|
|
40,494,301
|
|
|
35,273,228
|
Net loss per share, basic and diluted
|
|
$
|
(0.32)
|
|
$
|
(1.17)
|
|
$
|
(0.95)
|
Stock options for the
purchase of
3,167,784
,
2,614,537
and
2,317,449
shares of common stock
and
535,599
,
491,861
and
461
,463
of
unvested restricted stock awards
were
excluded from the computation of diluted net loss per share for the years ended
December 31,
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
2018
,
2017
and
2016
, respectively, because
these stock-based awards
had an anti-dilutive impact due to the net loss incurred for the period.
16. Commitments and Contingencies
Operating Leases
Future minimum lease payments for operating leases as of
December 31, 2018
,
were
as follows:
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
2019
|
|
$
|
441
|
2020
|
|
|
450
|
2021
|
|
|
75
|
2022
|
|
|
—
|
2023
|
|
|
—
|
Thereafter
|
|
|
—
|
Total
|
|
$
|
966
|
The Company
leases facilities and certain operating equipment under operating leases expiring through
2021
.
The Company
incurred rent
expense of
$4
45
,
$72
5
and
$
726
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Litigation
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.
T
he 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.
Indemnification Agreements
In the ordinary course of business,
the Company
may provide indemnifications of varying scope and terms to customers, vendors, lessors, business
partners, and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements, from services to be provided by
the Company
, or from intellectual property infringement claims made by third parties. In addition,
the Company
has entered into
indemnification agreements with
all
of
its
executive
officers and members of its Board of Directors.
These agreements, among other things, require the Company or will require the Company to indemnify each director (
and in certain potential scenarios, their applicable venture capital funds
) and executive officer to the fullest extent permitted by Delaware law, including indemnification of expenses such as attorneys’ fees, judgments
, fines and settlement amounts incurred by the director or executive officer in any action or proceeding, including any action or proceeding by or in right of the Company, arising out of the person’s services as a director or executive officer.
The maximum potential amount of future payments
the Company
could be required to make under these indemnification agreements is, in many
cases, not readily quantifiable. To date,
the Company
has not incurred any material costs as a result of such indemnifications.
The Company
does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued
any
liabilities related to such obligations in its consolidated financial statements as of
December 31, 2018
or
2017
.
17. Income Taxes
The components of loss from continuing operations before income tax
expense or benefit
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
United States
|
|
$
|
(14,398)
|
|
$
|
(38,920)
|
|
$
|
(29,959)
|
Non-United States
|
|
|
(324)
|
|
|
(8,590)
|
|
|
(3,616)
|
Loss from continuing operations
|
|
$
|
(14,722)
|
|
$
|
(47,510)
|
|
$
|
(33,575)
|
The Company recorded
no
income tax expense or benefit during years ended December 31, 2018, 2017 and 2016.
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
A reconciliation of the United States federal statutory income tax rate to the Company’s effective income tax rate was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Federal statutory income tax rate
|
|
|
21.0
|
%
|
|
34.0
|
%
|
|
34.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
2.4
|
|
|
6.9
|
|
|
3.2
|
|
Non-deductible expenses
|
|
|
(1.1)
|
|
|
(0.1)
|
|
|
0.2
|
|
Stock-based compensation
|
|
|
(3.9)
|
|
|
(1.8)
|
|
|
(1.5)
|
|
Research credits
|
|
|
3.1
|
|
|
1.3
|
|
|
5.0
|
|
TCJA
|
|
|
—
|
|
|
(42.8)
|
|
|
—
|
|
Other
|
|
|
0.1
|
|
|
(5.0)
|
|
|
—
|
|
Change in valuation allowance
|
|
|
(21.6)
|
|
|
7.5
|
|
|
(40.9)
|
|
Total
|
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Net deferred tax assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Net operating loss carry forwards
|
|
$
|
25,811
|
|
$
|
31,061
|
|
$
|
27,244
|
Capitalized start-up costs
|
|
|
4,181
|
|
|
5,052
|
|
|
5,990
|
Tax credit carry forwards
|
|
|
4,019
|
|
|
3,737
|
|
|
2,996
|
Intangibles, net
|
|
|
2,633
|
|
|
2,915
|
|
|
2,072
|
Capitalized research and development, net
|
|
|
4,359
|
|
|
6,083
|
|
|
10,005
|
Other temporary differences
|
|
|
4,512
|
|
|
5,922
|
|
|
7,940
|
Total deferred tax assets
|
|
|
45,515
|
|
|
54,770
|
|
|
56,247
|
Valuation allowance
|
|
|
(45,386)
|
|
|
(54,636)
|
|
|
(56,116)
|
Net deferred tax assets
|
|
|
129
|
|
|
134
|
|
|
131
|
Depreciation
|
|
|
(129)
|
|
|
(134)
|
|
|
(131)
|
Total deferred tax liabilities
|
|
|
(129)
|
|
|
(134)
|
|
|
(131)
|
Net deferred tax liability
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
As of
December 31, 2018, the Company had net operating loss carryforwards for federal and state income tax purposes of
$106,846
and
$104,241
, respectively, which begin to expire in fiscal year
2031
and
2020
, respectively.
$13,852
of federal net operating loss carryforward was generated in 2018
and
may be carried forward indefinitely.
As of December 31, 2018, the Company had federal and state research and development tax credit carryforwards of
$3,206
and
$1,029
, respectively, which begin to expire in fiscal year
2031
and until utilized, respectively.
Management of the Co
mpany has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards and research and development credits. Under the applicable accounting standards, management has considered the Company’s history of losses and concluded that it is more likely than not that the Company will not recognize the benefits of its deferred tax assets. Accordingly, a full valuation allowance of the net deferred tax asset had been established at December 31, 2018 and 2017.
Utilization of the net operating loss and research and development credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively.
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2018, 2017 and 2016, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Valuation allowance as of beginning of year
|
|
$
|
54,636
|
|
$
|
56,116
|
|
$
|
46,885
|
Changes due to operations, TCJA and other tax rates
|
|
|
(9,250)
|
|
|
(1,480)
|
|
|
9,231
|
Valuation allowance as of end of year
|
|
$
|
45,386
|
|
$
|
54,636
|
|
$
|
56,116
|
The Company has
not
recorded any amounts for unrecognized tax benefits as of December 31, 2018 and 2017. The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company’s major taxing jurisdiction i
s
the United States (federal and states). In the normal course of business, the Company is subject to examination by federal
and
state jurisdictions, where applicable. The Company’s tax years are still open under statute from 2015 to present, although prior tax years are subject to examination and adjustments to the extent utilized in future years. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax expense in the consolidated statements of operations.
The TCJA was enacted on December 22, 2017, a tax reform bill which, amount other items, reduces the current corporate federal tax rate to
21%
from
35%
. The rate reduction is effective January 1, 2018. ASC Topic 740, Accounting for Income Taxes (“ASC 740”), requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2018, or in the case of certain other provisions of the law, January 1, 2018. Accordingly, the Company remeasured its United States deferred tax assets and liabilities as of December 31, 201
7
, to reflect the reduced rate that is expected to apply
in future periods when these deferred taxes will reverse, resulting in an estimated reduction of the Company’s net deferred tax assets by approximately
$20.3
million
, which was offset by a corresponding change in the valuation allowance. The TCJA includes numerous provisions, such as limitation of deduction for executive compensation, that could impact the Company’s United States deferred tax assets, which are subject to a full valuation allowance.
The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 22, 2017. SAB 118 measurement period from a registrant’s reporting period that includes the TCJA’s enactment date to allow the registrant sufficient time to obtain, prepare and analyze information to complete the accounting required under ASC 740
. The Company had completed its accounting for the TCJA in the fourth quarter of 2018, which did not result in a material adjustment to its deferred tax assets and the related valuation allowance.
18. Selected Quarterly Financial Data (unaudited)
Selected unaudited quarterly financial data for each of the quarters in the years ended December 31, 2018 and 2017 (in thousands, except share and per share data), was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Net revenues
|
|
$
|
4,043
|
|
$
|
4,908
|
|
$
|
21,555
|
(1)
|
$
|
4,906
|
|
Gross profit
(2)
|
|
|
3,507
|
|
|
3,603
|
|
|
19,383
|
|
|
2,136
|
|
Net income (loss)
(2)
|
|
|
(8,548)
|
|
|
(6,373)
|
|
|
8,833
|
|
|
(8,634)
|
|
Weighted average shares outstanding, basic
|
|
|
44,788,068
|
|
|
46,258,395
|
|
|
47,310,408
|
|
|
48,027,220
|
|
Weighted average shares outstanding, diluted
|
|
|
44,788,068
|
|
|
46,258,395
|
|
|
47,485,384
|
|
|
48,027,220
|
|
Net income (loss) per share, basic and diluted
|
|
$
|
(0.19)
|
|
$
|
(0.14)
|
|
$
|
0.19
|
|
$
|
(0.18)
|
|
__________________
|
(1)
|
|
Net revenues in the third quarter
or 2018 reflect the impact of $15,000 of licensing
and collaboration
revenue related to GALLIPRANT sales milestone earned from Elanco, as further described in Note 12 to the consolidated financial statements included elsewhere in this 2018 Annual Report.
|
|
(2)
|
|
Net loss in the second and fourth quarter of 2018 and net income in the third quarter of 2018
and gross profit in the second, third and fourth quarter of 2018
reflect the impact
of
inventory valuation adjustment losses in cost of product sales in the amounts of
$335
,
$883
and
$1,432
, respectively
,
as further described in Note 6 to the consolidated financial statements included elsewhere in this 2018 Annual Report.
|
Table of Contents
ARATANA THERAPEUTICS, INC.
N
otes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
_
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Net revenues
(1)
|
|
$
|
3,795
|
|
$
|
5,158
|
|
$
|
6,163
|
(2)
|
$
|
10,457
|
(3)
|
Gross profit
|
|
|
701
|
|
|
1,467
|
|
|
2,473
|
|
|
4,545
|
|
Net loss
|
|
|
(12,612)
|
|
|
(10,380)
|
|
|
(8,920)
|
|
|
(15,598)
|
(4)
|
Weighted average shares outstanding, basic and diluted
|
|
|
36,711,601
|
|
|
40,206,042
|
|
|
42,445,553
|
|
|
42,493,514
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.34)
|
|
$
|
(0.26)
|
|
$
|
(0.21)
|
|
$
|
(0.37)
|
|
_________________
|
(1)
|
|
Net revenues reflect the impact of the product launch of GALLIPRANT which commercial sales began in the first quarter of 2017 and which sales of finished goods in the amount of
$15,526
to Elanco ended in the fourth quarter of 2017.
|
|
(2)
|
|
Net revenues in the third quarter or 2017 reflect the impact of
$1,000
of licensing and collaboration revenue related to the assumption of manufacturing responsibility by Elanco
as further described in Note 12 to the consolidated financial statements included elsewhere in this 2018 Annual Report
.
|
|
(3)
|
|
Net revenues in the fourth quarter of 2017 reflect the impact of revenues recognized related to the withdrawal of BLONTRESS from the market and the related derecognition of the remaining balance of the liability of
$480
as further described in Note 12 to the consolidated financial statements included elsewhere in this 2018 Annual Report
, and the impact of commercial sales of ENTYCE which began in the fourth quarter of 2017.
|
|
(4)
|
|
Net loss in the fourth quarter of 2017 reflects the impact of
an intangible asset impairment charge of
$7,448
related to AT-006 and AT-008 as further described in Note 9 to the consolidated financial statements included elsewhere in this 2018 Annual Report.
|