ARATANA THERAPEUTICS, INC. - FORM 10-Q

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

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2015


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

For the transition period from to

Commission File Number 001-35952

ARATANA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)



Delaware		38-3826477
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1901 Olathe Boulevard

Kansas City, KS 66103

(913) 353-1000

(Address of principal executive offices, zip code and telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: ☒ No: ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: ☐ No: ☒

As of August 3, 2015, there were 34,964,956 shares of common stock outstanding.

Table of Contents

ARATANA THERAPEUTICS, INC.

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014	3
	Consolidated Statements of Operations for the Three and Six Months ended June 30, 2015 and 2014	4
	Consolidated Statements of Comprehensive Loss for the Three and Six Months ended June 30, 2015 and 2014	5
	Consolidated Statements of Cash Flows for the Six Months ended June 30, 2015 and 2014	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.	Controls and Procedures	30
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	31
SIGNATURES		32

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ARATANA THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

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



	JUNE 30, 2015		DECEMBER 31, 2014
Assets
Current assets:
Cash and cash equivalents	$	12,591	$	9,823
Short-term investments		71,000		88,249
Accounts receivable		148		352
Inventories		882		427
Prepaid expenses and other current assets		927		900
Deferred tax asset		158		158
Total current assets		85,706		99,909
Property and equipment, net		1,616		620
Long-term marketable securities		—		2,452
Goodwill		40,165		41,398
Intangible assets, net		59,332		62,323
Other long-term assets		68		1,201
Total assets	$	186,887	$	207,903
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,732	$	1,532
Accrued expenses		3,743		3,229
Current portion – loan payable		14,976		—
Current portion – contingent consideration		—		4,248
Deferred tax liability		380		413
Other current liabilities		101		46
Total current liabilities		20,932		9,468
Loan payable		—		14,963
Deferred tax liability		855		1,610
Other long-term liabilities		10		30
Total liabilities		21,797		26,071
Commitments and contingencies (Notes 9 and 11)
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized at June 30, 2015 and December 31, 2014, 34,345,197 and 34,147,861 issued and outstanding at June 30, 2015, and December 31, 2014, respectively		34		34
Treasury stock		(1,081)		(1,081)
Additional paid-in capital		259,451		254,993
Accumulated deficit		(84,721)		(67,964)
Accumulated other comprehensive loss		(8,593)		(4,150)
Total stockholders’ equity		165,090		181,832
Total liabilities and stockholders’ equity	$	186,887	$	207,903

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

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ARATANA THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

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



	THREE MONTHS ENDED JUNE 30,				SIX MONTHS ENDED JUNE 30,
	2015		2014		2015		2014
Revenues
Licensing and collaboration revenue	$	—	$	300	$	—	$	476
Product sales		230		—		386		—
Total revenues		230		300		386		476
Costs and expenses
Cost of product sales		109		—		219		—
Royalty expense		23		17		43		35
Research and development		6,081		4,300		12,302		7,872
Selling, general and administrative		4,879		4,404		9,064		9,016
In-process research and development		—		500		—		1,157
Amortization of acquired intangible assets		483		582		966		1,121
Total costs and expenses		11,575		9,803		22,594		19,201
Loss from operations		(11,345)		(9,503)		(22,208)		(18,725)
Other income (expense)
Interest income		43		13		114		27
Interest expense		(217)		(218)		(435)		(546)
Other income (expense), net		3,176		95		5,141		(148)
Total other income (expense)		3,002		(110)		4,820		(667)
Loss before income taxes		(8,343)		(9,613)	$	(17,388)	$	(19,392)
Income tax benefit		360		335		631		962
Net loss	$	(7,983)	$	(9,278)	$	(16,757)	$	(18,430)
Net loss per share, basic and diluted	$	(0.23)	$	(0.32)	$	(0.49)	$	(0.66)
Weighted average shares outstanding, basic and diluted		34,278,105		28,761,326		34,236,282		27,768,959

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

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ARATANA THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

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




	THREE MONTHS ENDED JUNE 30,				SIX MONTHS ENDED JUNE 30,
	2015		2014		2015		2014
Net loss	$	(7,983)	$	(9,278)	$	(16,757)	$	(18,430)

Other comprehensive loss:
Foreign currency translation adjustment		(1,390)		(322)		(3,191)		(390)
Unrealized gain (loss) on available-for-sale securities		958		80		2,622		(352)
Net gain reclassified into income on sale of available-for-sale securities		(2,864)		—		(3,874)		—
Other comprehensive loss		(3,296)		(242)		(4,443)		(742)
Comprehensive loss	$	(11,279)	$	(9,520)	$	(21,200)	$	(19,172)

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

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ARATANA THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts in thousands)



	SIX MONTHS ENDED
	JUNE 30,
	2015		2014
Cash flows from operating activities
Net loss	$	(16,757)	$	(18,430)
Adjustments to reconcile net loss to net cash used in operating activities:
Acquired in-process research and development		—		1,157
Stock-based compensation expense		4,389		3,700
Depreciation and amortization expense		1,056		1,183
Gain on sale of marketable securities		(3,874)		—
Non-cash interest expense		20		20
Change in fair value of contingent consideration		(1,248)		(150)
Change in fair value of derivative instruments		(1,274)		219
Deferred tax benefit		(631)		(962)
Changes in operating assets and liabilities:
Accounts receivable		194		(116)
Inventories		(455)		(69)
Prepaid expenses		(57)		(466)
Other assets		15		(40)
Accounts payable		213		(1,676)
Accrued expenses and other liabilities		553		(250)
Deferred income		50		(64)
Net cash used in operating activities		(17,806)		(15,944)
Cash flows from investing activities
Purchases of property and equipment, net		(1,098)		(246)
Cash paid for acquisitions, net of cash received		—		(12,075)
Proceeds from sales of marketable securities		7,456		—
Purchase of investments		(905,000)		(1,200)
Proceeds from maturities of investments		922,249		2,217
Purchase of derivative instruments		—		(643)
Purchase of in-process research and development		—		(1,157)
Net cash provided by (used in) investing activities		23,607		(13,104)
Cash flows from financing activities
Repurchase of common stock		—		(1,074)
Proceeds from stock option exercises		47		45
Proceeds from public offering, net of commission		—		92,224
Payments of public offering costs		—		(1,731)
Cash paid for promissory notes		—		(18,067)
Cash paid for contingent consideration		(3,000)		(15,166)
Net cash (used in) provided by financing activities		(2,953)		56,231
Effect of exchange rate on cash		(80)		4
Net increase in cash and cash equivalents		2,768		27,187
Cash and cash equivalents, beginning of period		9,823		41,084
Cash and cash equivalents, end of period	$	12,591	$	68,271
Supplemental disclosure of cash flow information
Cash paid for interest	$	415	$	413
Non-cash exercise of warrant	$	750	$	—

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

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ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1. Summary of Significant Accounting Policies

Business Overview

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

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2014 and the notes thereto in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2015. In the opinion of management, all adjustments, consisting of a normal and recurring nature, considered necessary for a fair presentation, have been included.

The Company expects that its cash, cash equivalents, and short-term investments will fund operations through December 31, 2016.

Consolidation

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

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from those estimates.

Property and Equipment, net

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

Recently Issued and Adopted Accounting Pronouncements

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

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

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

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

Revenue from Contracts with Customers

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

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ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Inventory – Simplifying the Measurement of Inventory

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

2. Business Combinations

Acquisition of Okapi Sciences

On January 6, 2014, the Company acquired Okapi Sciences NV (“Okapi Sciences”), a Leuven, Belgium based company with a proprietary antiviral platform and three clinical/development stage product candidates. This acquisition further expanded the existing Company pipeline. The aggregate purchase price was approximately $44,439, which consisted of $14,139 in cash, a promissory note in the principal amount of $15,134 with a maturity date of December 31, 2014, and contingent consideration of up to $16,308 with an acquisition fair value of $15,166. The promissory note bore interest at a rate of 7% per annum, payable quarterly in arrears, and was subject to mandatory prepayment in the event of a specified equity financing by the Company. On February 4, 2014, the promissory note and accrued interest was paid in cash in the amount of $15,158. On March 17, 2014, the contingent consideration was settled in cash in the amount of $15,235.

The acquisition-date fair value of the consideration transferred to the sellers of Okapi Sciences, less cash acquired, was $43,376, which consisted of the following:



Cash consideration	$	14,139
Fair value of promissory note		15,134
Fair value of contingent consideration		15,166
Fair value of total consideration		44,439
Less cash acquired		(1,063)
Total consideration transferred, net of cash acquired	$	43,376

Fair Value of Contingent Consideration: The Company agreed to pay up to $16,308 on or prior to April 7, 2014, subject to mandatory prepayment in cash in the event of a specified future equity financing, provided that if not paid in cash by April 7, 2014, payment was to be made in the form of shares of the Company’s common stock-based on the average closing price of the Company’s common stock during the 10-trading day period ending April 4, 2014, subject to a maximum of 1,060,740 shares and a minimum of 707,160 shares. This contingent consideration was recorded as a liability and measured at fair value using a probability-weighted model utilizing significant observable and unobservable inputs, including the volatility in the market price of the Company’s common stock, the expected probability of settling the contingent consideration in either cash or shares and an estimated discount rate commensurate with the risks of these outcomes. The analysis resulted in an estimated fair value of contingent consideration of $15,166. The contingent consideration was settled March 17, 2014, for $15,235 and the difference between the initial fair value amount and settlement amount was $69 which is reflected as a charge to selling, general and administrative expenses in the consolidated statements of operations.

The acquisition of Okapi Sciences was accounted for as a business combination under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded at fair value with the remaining purchase price recorded as goodwill. The assets acquired and the liabilities assumed from Okapi Sciences have been recorded at their fair values at the date of acquisition, being January 6, 2014. The Company’s consolidated financial statements and results of operations include the results of Okapi Sciences from January 6, 2014.

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

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ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company’s allocation of the purchase price to the assets acquired and liabilities assumed was as follows:



Cash	$	1,063
Accounts receivable		149
Other receivables		60
Prepaid expenses and other current assets		82
Property and equipment		217
Other long-term assets		18
Identifiable intangible assets		29,400
Accounts payable and accrued expenses		(586)
Deferred revenue		(83)
Deferred tax liabilities, net		(3,786)
Long-term debt		(4)
Total identifiable net assets		26,530
Goodwill		17,909
Total net assets acquired		44,439
Less:
Promissory note		15,134
Contingent consideration		15,166
Cash paid	$	14,139

The following are the intangible assets acquired by drug program and their estimated useful lives as of the date of the acquisition:



	FAIR VALUE		USEFUL LIFE
AT-006	$	3,400	13 years
AT-007		13,500	15 years
AT-008		5,300	13 years
AT-011		7,200	14 years
Total intangible assets	$	29,400

The identifiable intangible assets recognized by the Company as a result of the Okapi Sciences acquisition relate to Okapi Sciences technology, and consist primarily of its intellectual property related to Okapi Sciences AT-006, AT-007, AT-008 and AT-011 programs, and the estimated net present value of future cash flows from commercial agreements related to the AT-006 program.

All Okapi Sciences programs, which were considered in-process research and development (“IPR&D”) at the acquisition date, were valued using a multi-period excess earnings method, a form of the income approach, which incorporates the estimated future cash flows to be generated from this technology. Excess earnings are the earnings remaining after deducting the market rates of return on the estimated values of contributory assets, including debt-free net working capital, tangible, and intangible assets. The excess earnings are thereby calculated for each year of a multi-year projection period and discounted to present value. Accordingly, the primary components of this method consist of the determination of excess earnings and an appropriate rate of return.

The Company will not amortize the assets related to the Okapi Sciences programs until commercialization has been achieved.

The valuation analysis conducted by the Company determined that the aggregate fair value of identifiable assets acquired less the aggregate fair value of identifiable liabilities assumed by the Company is less than the purchase price. As the purchase price exceeds the fair value of assets and liabilities acquired or assumed, goodwill will be recognized. Goodwill is calculated as the difference between the Okapi Sciences acquisition date fair value of the consideration transferred and the fair values of the assets acquired and liabilities assumed. The goodwill is not expected to be deductible for income tax purposes. Goodwill is recorded as an indefinite-lived asset and is not amortized but tested for impairment on an annual basis or when indications of impairment exist.

The difference between the total consideration and the fair value of the net assets acquired of $17,909 was recorded as goodwill in the consolidated balance sheet. This goodwill represents the excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed, principally representing the tax attributes of the acquisition and certain operational and strategic synergies such as advancement toward becoming a commercial company and acquiring a proprietary antiviral platform.

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ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Pro Forma Financial Information

The following pro forma financial information summarizes the combined results of operations for the Company as though the acquisition of Okapi Sciences occurred on January 1, 2013. The unaudited pro forma financial information is as follows:



	SIX MONTHS ENDED
	JUNE 30,
	2014
	(Unaudited)
Revenue	$	476
Loss from operations		(18,431)
Loss before income taxes		(19,101)
Net loss per share before income taxes – basic and diluted	$	(0.69)

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



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

The pro forma financial information for all periods presented has been calculated after adjusting the results of the Company and Okapi Sciences to reflect the business combination accounting effects resulting from these acquisitions including the amortization expenses from acquired intangible assets, the depreciation expenses from acquired tangible assets, the stock-based compensation expense for unvested stock options and restricted stock units assumed and the related tax effects as though the acquisition occurred as of January 1, 2013 for Okapi Sciences. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the Company’s 2014 fiscal year.

3. Fair Value of Financial Assets and Liabilities

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

As of June 30, 2015 and December 31, 2014, the following financial assets and liabilities are measured at fair value on a recurring basis using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).



			FAIR VALUE MEASUREMENTS AS OF
	CARRYING		JUNE 30, 2015 USING:
	VALUE		LEVEL 1		LEVEL 2		LEVEL 3		TOTAL
Assets:
Cash equivalents:
Certificates of deposit	$	6,474	$	—	$	6,474	$	—	$	6,474
Money market fund		177		177		—		—		177
Short-term investments:
Reverse repurchase agreements		71,000		—		71,000		—		71,000
	$	77,651	$	177	$	77,474	$	—	$	77,651

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ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



			FAIR VALUE MEASUREMENTS AS OF
	CARRYING		DECEMBER 31, 2014 USING:
	VALUE		LEVEL 1		LEVEL 2		LEVEL 3		TOTAL
Assets:
Cash equivalents:
Certificates of deposit	$	6,972	$	—	$	6,972	$	—	$	6,972
Money market fund		45		—		45		—		45
Short-term investments:
Short-term marketable securities - certificate of deposit		249		—		249		—		249
Reverse repurchase agreements		88,000		—		88,000		—		88,000
Long-term marketable securities:
Common stock		2,452		2,452		—		—		2,452
Derivative financial instruments		1,108		—		1,108		—		1,108
	$	98,826	$	2,452	$	96,374	$	—	$	98,826
Liabilities:
Contingent consideration	$	4,248	$	—	$	—	$	4,248	$	4,248
	$	4,248	$	—	$	—	$	4,248	$	4,248

Certain estimates and judgments are required to develop the fair value amounts shown above. The fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.

The following methods and assumptions were used to estimate the fair value of each material class of financial instrument:

Cash equivalents – the fair value of the cash equivalents has been determined to be amortized cost or has been based on the quoted prices in active markets or exchanges for identical assets.

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

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

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

Derivative financial instruments – the fair value of the derivative instruments has been estimated using a modified Black-Scholes model. Inputs into the Black-Scholes model include interest rates, stock volatilities and dividends data.

Contingent consideration – the fair value of the contingent consideration payable has been estimated using the income approach using a probability weighted discounted cash flow method. Inputs into the discounted cash flow method include the probability of and period in which the relevant milestone event is expected to be achieved and the discount rate to be applied in calculating the present values of the relevant milestones.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

The change in the fair value of the Company’s contingent consideration payable, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3), is as follows:

Contingent consideration



	2015
As of January 1,	$	4,248
Cash settlement of contingent consideration earned		(3,000)
Derecognition of remaining contingent consideration recorded in the consolidated statement of operations (within selling, general and administrative)		(1,248)
As of the end of the period,	$	—

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ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

Certain estimates and judgments were required to develop the fair value amounts. The fair value amount shown above is not necessarily indicative of the amounts that the Company would realize upon disposition, nor does it indicate the Company’s intent or ability to dispose of the financial instrument.

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

4. Investments

Marketable Securities

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

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



	DECEMBER 31, 2014

			GROSS		GROSS
	COST		GAINS		LOSSES		VALUE
Short-term marketable securities:
Certificate of deposit	$	249	$	—	$	—	$	249
Long-term marketable securities:
Common stock		1,200		1,252		—		2,452
Total	$	1,449	$	1,252	$	—	$	2,701

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

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

Reverse Repurchase Agreements

The Company, as part of its cash management strategy, may invest excess cash in reverse repurchase agreements. All reverse repurchase agreements are tri-party and have maturities of three months or less at the time of investment. The underlying collateral is U.S. government securities including U.S. treasuries, agency debt and agency mortgage securities. The underlying collateral posted by

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ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

5. Derivative Financial Instruments

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

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



	FAIR VALUE OF DERIVATIVES NOT
	DESIGNATED AS HEDGING INSTRUMENT
	JUNE 30, 2015		DECEMBER 31, 2014
Derivative assets:
Warrant (Notes 3 and 11)	$	—	$	1,108

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



	GAIN RECOGNIZED IN				GAIN (LOSS) RECOGNIZED IN
	OTHER INCOME (EXPENSE)				OTHER INCOME (EXPENSE)
	THREE MONTHS ENDED				SIX MONTHS ENDED
	JUNE 30,				JUNE 30,
	2015		2014		2015		2014
Derivative assets:
Warrant	$	316	$	27	$	1,274	$	(219)

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

6. Inventories

Inventories are comprised of the following:



	JUNE 30,		DECEMBER 31,
	2015		2014
Raw materials	$	115		115
Work-in-process		514	$	206
Finished goods		253		106
	$	882	$	427

7. Goodwill

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

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ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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



	GROSS		IMPAIRMENT		NET
	CARRYING AMOUNT		LOSSES		CARRYING VALUE
Goodwill	$	40,165	$	—	$	40,165

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



	2015
As of January 1,	$	41,398
Effect of foreign currency exchange		(1,233)
As of the end of the period,	$	40,165

8. Intangible Assets, Net

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



	GROSS
	CARRYING
Unamortized intangible assets:	VALUE
Intellectual property rights acquired for IPR&D	$	23,834

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

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

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




	GROSS				NET
	CARRYING		ACCUMULATED		CARRYING		AVERAGE
Amortized intangible assets:	VALUE		AMORTIZATION		VALUE		USEFUL LIFE
Intellectual property rights for currently marketed products:
AT-004	$	28,572	$	2,440	$	26,132	20	Years
AT-005	$	10,080	$	714	$	9,366	20	Years

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



	2015
As of January 1,	$	62,323
Amortization expense		(966)
Effect of foreign currency exchange		(2,025)
As of the end of the period,	$	59,332

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ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The estimated useful lives of the individual categories of intangible assets were based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with finite lives is recognized over the shorter of the respective lives of the agreement or the period of time the intangible assets are expected to contribute to future cash flows. The Company amortizes finite-lived intangible assets using the straight-line method. The Company recognized amortization expense of $483 and $966 for the three and six months ended June 30, 2015, respectively, and $582 and $1,121 for the three and six months ended June 30, 2014, respectively. Indefinite-lived IPR&D intangible assets are not amortized until a product reaches its first conditional license or approval, then they are amortized over their estimated useful lives.

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

9. Debt

Converted Loans

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

10. Accrued Expenses

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



	JUNE 30,		DECEMBER 31,
	2015		2014
Accrued expenses:
Accrued payroll and related expenses	$	1,307	$	2,017
Accrued professional fees		315		429
Accrued royalty expense		44		72
Accrued interest expense		39		41
Accrued research and development costs		1,413		663
Accrued milestone		500		—
Accrued other		125		7
Total accrued expenses	$	3,743	$	3,229

11. Agreements

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

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

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

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ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Advaxis, Inc. (“Advaxis”)

On March 19, 2014, the Company entered into an Exclusive License Agreement with Advaxis (the “Advaxis Agreement”) that granted the Company global rights for development and commercialization of licensed animal health products for Advaxis’ ADXS-cHER2 for the treatment of osteosarcoma in dogs (“AT-014”) and three additional cancer immunotherapy products for the treatment of three other types of cancer. Under the terms of the Advaxis Agreement, the Company paid $2,500 in exchange for the license, 306,122 shares of common stock, and a warrant to purchase 153,061 shares of common stock. The consideration was allocated to the common stock and warrant based on their fair values on the date of issuance of $1,200 and $643, respectively. The remaining consideration of $657 was allocated to the licensed technology. On the date of acquisition, the licensed technology had not reached technological feasibility in animal health indications and had no alternative future use in the field of animal health. Accordingly, in-process research and development of $657 was expensed upon acquisition. The Company will be required to pay Advaxis milestone payments of up to an additional $6,000 in clinical and regulatory milestones for each of the four products, assuming approvals in both cats and dogs, in both the United States and the European Union. In addition, the Company agreed to pay up to $28,500 in commercial milestones, as well as tiered royalties ranging from mid-single digit to 10% on the Company’s product sales, if any.

The Company does not expect to achieve additional milestones related to the Advaxis Agreement within the next twelve months.

Under the terms of the subscription agreement for the Advaxis Agreement, the Company acquired 306,122 shares of common stock and a warrant to purchase another 153,061 shares of common stock for $1,843. The warrant is exercisable through March 19, 2024, at an exercise price of $4.90 per share, and is to be settled through physical share issuance or net share settlement where the total number of issued shares is based on the amount the market price of common stock exceeds the exercise price of $4.90 on date of exercise. Neither the common stock nor warrant have registration rights. The Company allocated the consideration of $1,843 to Advaxis common stock ($1,200) and the Advaxis warrant ($643) based on their respective fair values and recorded the purchase in marketable securities and other long-term assets, respectively. See Note 3 for subsequent fair value matters related to the Advaxis common stock and warrant.

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

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

12. Common Stock

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

13. Stock-Based Awards

The following table summarizes stock option activity under the 2010 Equity Incentive Plan (the “2010 Plan”) for the six months ended June 30, 2015:



				WEIGHTED
	SHARES	WEIGHTED		AVERAGE
	ISSUABLE	AVERAGE		REMAINING	AGGREGATE
	UNDER	EXERCISE		CONTRACTUAL	INTRINSIC
	OPTIONS	PRICE		TERM	VALUE
				(IN YEARS)

Outstanding as of December 31, 2014	170,466	$	1.71	8.05	$	2,746
Granted	—		—
Exercised	(56,149)		0.43
Forfeited	(26,324)		0.45
Expired	—		—
Outstanding as of June 30, 2015	87,993	$	2.90	7.59	$	1,075

For the six months ended June 30, 2015, the total intrinsic value of options exercised was $765 and the total received from stock option exercises was $24.

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ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

As of June 30, 2015, options for the purchase of 1,503,981 shares of the Company’s common stock (net of repurchased shares) have been exercised, of which 130,587 are unvested and subject to repurchase.

The table below summarizes activity under the 2010 Plan related to restricted stock for the six months ended June 30, 2015:



		WEIGHTED
		AVERAGE GRANT
	SHARES	DATE FAIR VALUE
Unvested restricted common stock as of December 31, 2014	91,334	$	0.94
Restricted common stock issued	—		—
Restricted common stock vested	(27,129)		0.37
Restricted common stock forfeited	—		—
Unvested restricted common stock as of June 30, 2015	64,205	$	0.37

The following table summarizes stock option activity under the 2013 Incentive Award Plan (the “2013 Plan”) for the six months ended June 30, 2015:


				WEIGHTED
	SHARES	WEIGHTED		AVERAGE
	ISSUABLE	AVERAGE		REMAINING	AGGREGATE
	UNDER	EXERCISE		CONTRACTUAL	INTRINSIC
	OPTIONS	PRICE		TERM	VALUE


Outstanding as of December 31, 2014	1,481,866	$	17.13	8.96	$	3,835
Granted	442,350		16.47
Exercised	(3,879)		6.00
Forfeited	(139,202)		20.98
Expired	—		—
Outstanding as of June 30, 2015	1,781,135	$	16.69	8.51	$	2,598

For the six months ended June 30, 2015, the weighted average grant date fair value of stock options granted was $10.32. For the six months ended June 30, 2015, the total intrinsic value of options exercised was $32. The Company received $23 during the three months ended June 30, 2015, from stock option exercises.

The table below summarizes activity under the 2013 Plan related to restricted stock for the six months ended June 30, 2015:



		WEIGHTED
		AVERAGE GRANT
	SHARES	DATE FAIR VALUE
Unvested restricted common stock as of December 31, 2014	277,844	$	16.92
Restricted common stock issued	218,150		17.08
Restricted common stock vested	(48,293)		17.87
Restricted common stock forfeited	(23,370)		13.93
Unvested restricted common stock as of June 30, 2015	424,331	$	17.06

For the six months ended June 30, 2015, the total fair value of restricted common stock vested was $834. The Company did not receive cash proceeds for any of the restricted common stock granted during the six months ended June 30, 2015.

Stock-Based Compensation

The Company recognizes compensation expense for only the portion of awards that are expected to vest. In developing a forfeiture rate estimate, the Company has considered its historical experience to estimate pre-vesting forfeitures for service-based awards. The impact of a forfeiture rate adjustment will be recognized in full in the period of adjustment, and if the actual forfeiture rate is materially different from the Company’s estimate, the Company may be required to record adjustments to stock-based compensation expense in future periods.

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ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company recorded stock-based compensation expense related to stock options and restricted stock for the three and six months ended June 30, 2015, and 2014, as follows:



	THREE MONTHS ENDED				SIX MONTHS ENDED
	JUNE 30,				JUNE 30,
	2015		2014		2015		2014
Cost of product sales	$	30	$	—	$	67	$	—
Research and development		394		378		999		782
Selling, general and administrative		1,605		1,089		3,323		2,918
	$	2,029	$	1,467	$	4,389	$	3,700

The Company had an aggregate of $13,144 and $6,120, of unrecognized stock-based compensation expense for options outstanding and restricted stock awards, respectively, as of June 30, 2015, which is expected to be recognized over a weighted average period of 2.49 years.

14. Net Loss Per Share

Basic and diluted net loss per share was calculated as follows for the three and six months ended June 30, 2015, and 2014:



	THREE MONTHS ENDED				SIX MONTHS ENDED
	JUNE 30,				JUNE 30,
	2015		2014		2015		2014
Basic and diluted net loss per share :
Numerator:
Loss before income taxes	$	(8,343)	$	(9,613)	$	(17,388)	$	(19,392)
Income tax benefit		360		335		631		962
Net loss	$	(7,983)	$	(9,278)	$	(16,757)	$	(18,430)
Denominator:
Weighted average shares outstanding – basic and diluted		34,278,105		28,761,326		34,236,282		27,768,959
Net loss per share – basic and diluted	$	(0.23)	$	(0.32)	$	(0.49)	$	(0.66)

Stock options for the purchase of 1,671,270 shares of common stock were excluded from the computation of diluted net loss per share attributable to common stockholders for the three and six months ended June 30, 2015, because those options had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the period.

Stock options for the purchase of 1,597,332 shares of common stock were excluded from the computation of diluted net loss per share attributable to common stockholders for both the three and six months ended June 30, 2014, because those options had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the period.

15. Income Taxes

The Company recorded income tax benefit of $360 and $631 during the three and six months ended June 30, 2015, respectively, compared to $335 and $962 during the three and six months ended June 30, 2014. The Company’s income tax benefit consists of deferred tax benefit for losses incurred that would reduce the amount of deferred tax liability related to intangible assets. The Company’s effective tax rate of 4.12% and 3.60% for the three and six months ended June 30, 2015, reflects the expected deferred tax benefit for losses incurred by Aratana Therapeutics NV (formerly Okapi Sciences, “Aratana NV”) that would reduce the amount of deferred tax liability related to intangible assets.

As of June 30, 2015, the Company had net deferred tax liability of $1,077 primarily related to the step-up of intangible assets for book purposes, net of foreign net operating loss carryforwards of Aratana NV.

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ARATANA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

16. Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss, net of their related tax effects, for the six months ended June 30, 2015:



			UNREALIZED
			HOLDING
	FOREIGN		GAIN/(LOSS) ON		ACCUMULATED
	CURRENCY		AVAILABLE FOR		OTHER
	TRANSLATION		SALE		COMPREHENSIVE
	ADJUSTMENT		SECURITIES		LOSS
Balance as of December 31, 2014	$	(5,402)	$	1,252	$	(4,150)
Foreign currency translation adjustments		(3,191)		—		(3,191)
Unrealized holding gain on available-for-sale securities		—		2,622		2,622
Net gain reclassified into income on sale of available-for-sale securities		—		(3,874)		(3,874)
As of June 30, 2015	$	(8,593)	$	—	$	(8,593)

The following table summarizes the amounts reclassified from accumulated other comprehensive loss:



		AMOUNTS RECLASSIFIED FROM				AMOUNTS RECLASSIFIED FROM
		ACCUMULATED OTHER				ACCUMULATED OTHER
		COMPREHENSIVE LOSS				COMPREHENSIVE LOSS
		THREE MONTHS ENDED				SIX MONTHS ENDED
		JUNE 30,				JUNE 30,
	Income Statement Location	2015		2014		2015		2014
Gain on sale of securities available-for-sale	Other income (expense)	$	2,864	$	—	$	3,874	$	—
		$	2,864	$	—	$	3,874	$	—

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. In this Quarterly Report on Form 10-Q, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” “estimates,” “plans,” “would,” “should,” “potential,” “continues” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. These forward-looking statements involve risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to: our history of operating losses and our expectation that we will continue to incur losses for the foreseeable future; failure to obtain sufficient capital to fund our operations; our substantial dependence upon the success of our product candidates; development of our biologic product candidates is dependent upon relatively novel technologies and uncertain regulatory pathways, and biologics may not be commercially viable; denial or delay of regulatory approval for our existing or future product candidates; failure of our product candidates that receive regulatory approval to obtain market approval or achieve commercial success; failure to realize anticipated benefits of our acquisitions and difficulties associated with integrating the acquired businesses; development of pet therapeutics is a lengthy and expensive process with an uncertain outcome; competition in the pet therapeutics market, including from generic alternatives to our product candidates, and failure to compete effectively; failure to identify, license or acquire, develop and commercialize additional product candidates; failure to attract and retain senior management and key scientific personnel; our reliance on third-party manufacturers, suppliers and partners; regulatory restrictions on the marketing of our product candidates; our small commercial sales organization, and any failure to create a sales force or partner with third-parties to commercialize our product candidates; difficulties in managing the growth of our company; significant costs of being a public company; risks related to the restatement of our financial statements for the year ended December 31, 2013, and the identification of a material weakness in our internal control over financial reporting; changes in distribution channels for pet therapeutics; consolidation of our veterinarian customers; limitations on our ability to use our net operating loss carryforwards; impacts of generic products; safety or efficacy concerns with respect to our product candidates; failure to obtain ownership of issued patents covering our product candidates or failure to prosecute or enforce licensed patents; failure to comply with our obligations under our license agreements; effects of patent or other intellectual property lawsuits; failure to protect our intellectual property; changing patent laws and regulations; non-compliance with any legal or regulatory requirements; litigation resulting from the misuse of our confidential information; the uncertainty of the regulatory approval process and the costs associated with government regulation of our product candidates; failure to obtain regulatory approvals in foreign jurisdictions; effects of legislative or regulatory reform with respect to pet therapeutics; the volatility of the price of our common stock; our status as an emerging growth company, which could make our common stock less attractive to investors; dilution of our common stock as a result of future financings; the influence of certain significant stockholders over our business; and provisions in our charter documents and under Delaware law could delay or prevent a change in control. These and other important factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2015, and the “Risk Factors” section of this Quarterly Report on Form 10-Q, could cause actual results to differ materially from those indicated by the forward-looking statements made in this Quarterly Report on Form 10- Q.

Overview

We are a pet therapeutics company focused on licensing, developing and commercializing innovative biopharmaceutical products for companion animals. We operate in one business segment which sits at the intersection of the more than $50 billion annual U.S. pet market, and the more than $20 billion annual worldwide animal health market. Our current product portfolio includes over 18 therapeutic candidates in development consisting of small molecule pharmaceuticals and large molecule biologics that target opportunities in serious medical conditions in pets.

We have incurred significant net losses since our inception. These losses have resulted principally from costs incurred in connection with in-licensing our product candidates, research and development activities and selling, general and administrative costs associated with our operations. As of June 30, 2015, we had a deficit accumulated since inception of $84.7 million and cash, cash equivalents and short-term investments of $83.6 million.

Recent Developments

We recently reported data from several of our advanced development programs and we believe that we may commence commercialization of up to six products in 2016.

On August 7, 2015, we received the Chemistry, Manufacturing and Controls (“CMC”) technical section complete letter for AT-001 (grapiprant, an EP4 prostaglandin receptor antagonist) to treat osteoarthritis pain and inflammation in dogs. We anticipate receiving

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the effectiveness technical section complete letter in the third quarter of 2015. We anticipate submitting an administrative New Animal Drug Application (“NADA”) for AT-001 in dogs in early 2016, which if approved would allow us to commence commercialization of the product in 2016. We are continuing our interactions with the European Medicines Agency and believe that our discussions and efforts will lead to the successful development of AT-001 outside the U.S.

During the second quarter of 2015, we completed the pivotal field effectiveness study of AT-002 (capromorelin, a ghrelin agonist) in client-owned dogs for appetite stimulation. The double-masked, randomized, placebo-controlled, multi-site, pivotal field study enrolled more than 200 client-owned dogs with reduced appetite (inappetence) from a variety of causes. Dogs were randomized 2:1 and treated with AT-002 at 3 mg/kg once daily and one group treated with placebo once daily for 4 ±1 days. Dogs were assessed for effectiveness on day 4 with an owner appetite assessment instrument. Secondary endpoints included an alternative owner appetite assessment questionnaire and body weight. Clinical success rates were approximately 70% for the once-daily dose of AT-002 group vs. approximately 45% for the placebo group which represents a statistically significant difference (p<0.05), thereby achieving the study’s primary endpoint as agreed under protocol concurrence with the FDA’s Center for Veterinary Medicine (“CVM”). The clinical success rates using the alternative owner appetite assessment were statistically significant (p<0.05) in favor of the AT-002 treatment group. Body weight assessed as a positive change from baseline was also statistically significant (p<0.05) in favor of the AT-002 treatment. We will first discuss and agree on the results with the CVM before final p-values can be calculated. AT-002 appeared to be palatable and well accepted, and none of the serious adverse events were considered to be related to AT-002 treatment.

We also reported the results of a separate placebo-controlled laboratory study in 24 beagle dogs who received AT-002 once daily at 3 mg/kg or placebo once daily for 4 days. Dogs who received AT-002 demonstrated an increase in mean food consumption of 61% versus placebo-treated dogs of -11% from Day 0 to Day 3, which was statistically significant (p<0.001). The 6% weight gain that was observed in AT-002 treated dogs from Day 0 to Day 3 was also statistically significant (p<0.001) compared to placebo-treated dogs whose weight was unchanged.

We anticipate submitting the pivotal field effectiveness study results to the CVM as the final piece of the Effectiveness Technical Section. In March 2015, we received the target animal safety technical section complete letter for AT-002 in dogs from the CVM. We anticipate the CMC technical section complete letter for AT-002 by early 2016. We anticipate submitting an NADA for AT-002 in dogs in 2016, which if approved, would allow us to commence commercialization of the product in mid-2016. We are continuing our interactions with the European Medicines Agency and believe that our discussions and efforts will lead to the successful development of AT-002 outside the U.S.

We recently completed an AT-002 multi-site field pilot study of approximately 40 cats diagnosed with chronic kidney disease and documented weight loss. The cats received a dose of 2 mg/kg administered orally once daily for 90±3 days. AT-002 treated cats had statistically significant increases in body weight compared to placebo after 90 days (p<0.01) with differences beginning on day 30 and was well tolerated. We believe that the results of this pilot study sufficiently inform us in designing and proceeding with the pivotal field effectiveness study which we anticipate commencing in mid-2016.

We recently completed the pivotal field effectiveness study to evaluate AT-003 (bupivacaine liposome injectable suspension) for post-operative pain management in dogs undergoing knee surgery. Dogs receiving up to 5.3 mg/kg in a single dose of extended-release bupivacaine by infiltration during knee surgery demonstrated statistically significant improvements in pain evaluation compared to placebo (p<0.05), thereby achieving the study’s primary endpoint as agreed under protocol concurrence with the CVM. Success criteria were based on pain evaluations at 24-hour intervals up to 72 hours after surgery, and AT-003 showed statistically significant higher success rates than placebo at each interval. We anticipate a response from the CVM on the CMC technical section for AT-003 filed earlier in 2015, and we anticipate to respond and complete the CMC technical section for AT-003 by mid-2016. We anticipate submitting an NADA for AT-003 in dogs in 2016, which if approved, would allow us to commence commercialization of the product in 2016. We are continuing our interactions with the European Medicines Agency and believe that our discussions and efforts will lead to the successful development of AT-003 outside the U.S.

We recently completed a placebo-controlled pilot field study for AT-003 in cats for post-surgical pain, which demonstrated improvements in pain evaluations compared to placebo that approached statistical significance. Success rates were 60%-70% for cats treated with AT-003 and 30-40% for cats treated with placebo. We believe that the results of this pilot study sufficiently inform us in designing and proceeding with the pivotal field effectiveness study which we anticipate commencing in 2016.

Two of our products, AT-004 and AT-005, are monoclonal antibodies for treating lymphoma in dogs. AT-004 received full licensure from the USDA in January 2015, and AT-005 has received conditional licensure from the USDA. Aratana continues to anticipate full licensure for AT-005 in 2015. While these products have already received marketing authorization from the USDA, we continue to conduct clinical studies to better elucidate how these products work in combination with chemotherapy-based therapy, which is the current standard of care.

During the second quarter of 2015 we completed enrollment in a multi-center, blinded, placebo-controlled, randomized study designed to assess adding AT-005 to a single-agent chemotherapy protocol for dogs with T-cell lymphoma or (“T-LAB”). T-LAB enrolled approximately 60 client-owned dogs with intermediate to high grade T-cell lymphoma. In January 2015, a prior study of AT-005, T-CHOMP, was fully enrolled with a total of approximately 50 client-owned dogs. Results from both studies are expected by mid-2016.

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We recently regained the commercialization and manufacturing rights for AT-004, and prior to July 2015, AT-004 had only been available in limited quantities for compassionate use. We initiated an approximately 60 client-owned dog study in July 2015, which we call Mini B-CHOMP to compare the effectiveness of two cycles of CHOP plus AT-004 against historical benchmarks for a standard of care CHOP protocol. Aratana expects to report the initial results of Mini B-CHOMP in mid-2016. We anticipate that results from Mini B-CHOMP will complement the three independent investigator initiated studies in other settings that have already been reported.

We continue to make AT-005 commercially available through a T-cell Clinical Experience Program or T-CEP. Practices participating in T-CEP receive a 30% discount on AT-005 in exchange for data associated with their lymphoma treatments and outcomes. At the end of June 2015, there were approximately 70 active sites and approximately two hundred lymphoma cases enrolled in T-CEP. After Mini B-CHOMP is fully-enrolled, we intend to make AT-004 available on a rolling regional basis as part of a B-cell Clinical Experiences Program or B-CEP. Similar to the T-CEP program, the B-CEP program will allow a discount on AT-004 in exchange for data associated with lymphoma treatments and outcomes.

We continue to expand the manufacturing capacity needed to supply the broader canine lymphoma market while we complete the scientific and post-marketing studies for AT-004 and AT-005. In connection with our facility expansion project, the USDA recently completed an inspection of our facility in San Diego, which today is the single source of AT-004 and AT-005. We are working with a third party USDA-licensed manufacturer to establish a second manufacturing site. However, due to current manufacturing constraints, we do not intend to expand the number of T-CEP sites until late-2016, and expect a limited commercialization through the T-CEP and B-CEP programs until late 2016, at which time a commercial launch of AT-004 and AT-005 is anticipated.

AT-014 is being developed as a therapeutic vaccine to treat canine osteosarcoma. During the second quarter of 2015 the USDA waived the requirement to perform a study that demonstrates that the vaccine organism remains stable in dogs. We are preparing to initiate a pivotal AT-014 field safety study in late 2015, or early 2016, and we continue to anticipate conditional licensure for AT-014 in 2016.

The following table identifies the most advanced molecules in our current therapeutic portfolio and their current status in development:


COMPOUND	SPECIES	INDICATION	PROGRAM STATUS
AT-001 (grapiprant)	Dog	Pain and inflammation associated with osteoarthritis	Major technical sections submitted to the CVM. Anticipate U.S. marketing approval in 2016.
	Cat	Pain and inflammation associated with degenerative joint disease	Pilot studies.
AT-002 (capromorelin)	Dog	Stimulation of appetite	Pivotal field effectiveness study. Anticipate U.S. marketing approval in mid-2016.
	Dog	Maintain or gain body weight in chronically diseased dogs.	Pilot studies.
	Cat	Maintain or gain body weight in chronically diseased cats	Pilot studies.
AT-003 (bupivacaine ER)	Dog	Post-operative pain management	Pivotal field effectiveness study. Anticipate U.S. marketing approval in 2016.
	Cat	Post-operative pain management	Pilot studies.
AT-004	Dog	B-cell lymphoma monoclonal antibody	Full license issued January 2015. Conducting additional effectiveness studies under practice conditions.
AT-005	Dog	T-cell lymphoma monoclonal antibody	Submitted pivotal field effectiveness study. Conducting additional effectiveness studies under practice conditions. Full license anticipated in 2015.

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AT-014

Dog

Osteosarcoma immunotherapy

Filed for USDA product license.

Pivotal field effectiveness study.

Conditional license anticipated in 2016.

We are also developing other products that are at the pilot study stage or proof of concept stage.

Based on the completed pilot study results in Europe for AT-007, we determined additional pilot studies were needed before advancing to a pivotal program. During the third quarter of 2015, we intend to have several discussions with key opinion leaders to review the pilot study results and determine relevant treatment population and acceptable protocols for treatment for this potential indication (feline immunodeficiency virus). We have also been conducting early pre-development studies, including lead selection and proof of concept on several of our programs including AT-011 canine parvovirus and AT-012 feline calicivirus.

AT-016 is an adipose-derived allogeneic stem cell product for the treatment of osteoarthritis pain in dogs. Recently, a double-blinded, multi-site, placebo-controlled dose confirmation study in approximately 90 client-owned dogs with osteoarthritis was completed. The dogs who received a single intra-articular injection of AT-016 demonstrated a statistically significant improvement in treatment versus placebo (p<0.05). The primary endpoint was treatment success based on the Client Specific Outcome Measurement or (“CSOM”) on day 60. The final study report is being prepared for CVM submission and agreement on the pivotal field effectiveness study design. If approved by the CVM, AT-016 could be commercially available in late-2017 or 2018.

AT-018 is being developed as an oral CRTH2 antagonist for the treatment of atopic dermatitis, focusing initially on developing the product for dogs. During the second quarter of 2015, we initiated a multi-center, masked, placebo-controlled, randomized pilot field study in client owned dogs with atopic dermatitis. The study targets enrollment of over 50 dogs into multiple treatment groups. Results from this study are expected in early 2016.

The following table identifies these other molecules in our current therapeutic portfolio and their current status in development:


COMPOUND	SPECIES	INDICATION	PROGRAM STATUS
AT-006	Cat	Herpesvirus	Designing pivotal study with license partner.
AT-007	Cat	Immunodeficiency virus	Pilot studies.
AT-008	Dog	Lymphoma	Planning for pivotal studies in Europe.
AT-009	Dog	Mast cell tumor	Lead selection.
AT-010	Dog	Atopic dermatitis	Lead selection.
AT-011	Dog	Parvovirus	Lead selection.
AT-012	Cat	Calicivirus	Lead selection.
AT-015	Cat	Lymphoma	Proof of concept.
AT-016	Dog	Osteoarthritis	Pilot studies.
AT-017	Dog	Lymphoma	Lead selection.
AT-018	Dog	Atopic dermatitis	Pilot studies.

In addition to the above listed therapeutic candidates, as part of our product selection and development effort, we enter into option agreements with human biopharmaceutical companies to access certain product candidates. These agreements are for a predetermined period of time and enable us to perform additional due diligence and further evaluate the product candidate prior to entering into a license. We negotiate the terms of the license at the time of the option agreement and those terms become effective only if we exercise the option. We refer to these product candidates as being part of our Exclusive Option Program. In addition to exploring external product candidates in our Exclusive Option Program, we occasionally secure rights to additional product candidates in conjunction with licensing deals and we explore internal product candidates as part of our discovery effort. We typically designate such external and internal product candidate opportunities with a letter from the Greek alphabet. For example, from external sources, we designated AT-Alpha and AT-Beta (both now terminated), AT-gamma (now AT-018), AT-Delta (now AT-017), AT-Epsilon for melanoma, AT-Zeta for hemangiosarcoma, and AT-Iota for periodontal disease in dogs. From internal efforts, we have AT-Eta and AT-Theta as monoclonal antibodies against undisclosed targets.

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We aim to submit drug applications for U.S. approval for the majority of these potential products and to make similar regulatory filings for European approval. Furthermore, where appropriate, we attempt to develop and submit regulatory filings for therapeutic indications in both cats and dogs, which will be separate products and require separate approvals.

We expect to use the time between now and full commercialization of our product candidates to build veterinarian and pet owner awareness of our company and our products. We believe that our product candidates, if approved, will enable veterinarians to deliver a higher level of medical care to pets while providing an important revenue stream to the veterinarian’s practice.

Given that we anticipate to commence commercialization of several of our products in 2016, we have been preparing for the launches and we will continue to accelerate the building of our commercial operations over the next 12 to 18 months. Our sales strategy includes a small specialty sales force and a somewhat larger primary care sales force. We anticipate hiring additional sales management in 2015, and sales representatives beginning in 2016. Over the course of 2016, we anticipate staffing approximately two dozen sales territories. We will hire distribution managers that will be work with veterinary distributors to expand our sales and marketing efforts. Corporate account managers will support the needs of the large corporate practices. Our veterinary services force consists of medical science liaisons, who are veterinarians that support the commercial organization.

In the six months ended June 30, 2015, Elanco Animal Health, Inc. (“Elanco”) paid the full approval milestone and all amounts due with respect to product manufactured for Elanco in 2014, totaling $3.2 million. Related to the February termination of our license with Elanco, we agreed to pay Elanco $2.5 million to reacquire all rights to AT-004, plus a milestone of $0.5 million due after we complete our first commercial sale of the product, expected in the second half of 2015.

During January and April 2015, we sold an aggregate of 306,122 shares of Advaxis, Inc. (“Advaxis”) common stock for net proceeds of $4.7 million. The shares were acquired as part of the exclusive license agreement with Advaxis executed in March 2014.

During May 2015, we exercised 153,061 warrants in Advaxis common stock for a net share settlement of 116,411 shares ($0.8 million) of Advaxis common stock. Subsequently, we sold all 116,411 shares of Advaxis common stock for net proceeds of $2.7 million.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenues, costs and expenses and related disclosures during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no material changes to our critical accounting policies through June 30, 2015, from those discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on March 16, 2015.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2015, and 2014



	THREE MONTHS ENDED						SIX MONTHS ENDED
	JUNE 30,						JUNE 30,
	2015		2014		% CHANGE		2015		2014		% CHANGE
	(Dollars in thousands)						(Dollars in thousands)
Revenues:
Licensing and collaboration revenue	$	—	$	300	NA		$	—	$	476	NA
Product sales		230		—	NA			386		—	NA
Total revenues		230		300	(23.3)	%		386		476	(18.9)	%
Costs and expenses:
Cost of product sales		109		—	NA			219		—	NA
Royalty expense		23		17	35.3	%		43		35	22.9	%
Research and development		6,081		4,300	41.4	%		12,302		7,872	56.3	%
Selling, general and administrative		4,879		4,404	10.8	%		9,064		9,016	0.5	%
In-process research and development		—		500	NA			—		1,157	NA	%

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Amortization of acquired intangible assets	483	582	(17.0)	%	966	1,121	(13.8)	%
Other income (expense)
Interest income	43	13	230.8	%	114	27	322.2	%
Interest expense	(217)	(218)	(0.5)	%	(435)	(546)	(20.3)	%
Other income/(expense), net	3,176	95	3,243.2	%	5,141	(148)	(3,573.6)	%
Income tax benefit	360	335	7.5	%	631	962	(34.4)	%

Revenues

During the three and six months ended June 30, 2015, we recorded $0.2 million and $0.4 million, respectively, in product sales of AT-005, which was granted conditional approval in early 2014. In the first quarter of 2015, we received a $3.0 million payment from Elanco relating to the milestone achieved when AT-004 received a full license from the USDA. This was offset by $3.0 million in consideration we paid in the first quarter of 2015 for the return of the commercial and manufacturing license of AT-004 previously granted to Elanco. These amounts were netted resulting in zero licensing and collaboration revenue in the six months ended June 30, 2015. For the three and six months ended June 30, 2014, the revenue reported was primarily from research and development services we provide for the ongoing development of AT-006, our partnered program for the treatment of ocular herpes infection. Revenues from the performance of research and development services are recorded as licensing and collaboration revenue in the consolidated statements of operations and are recognized on a proportional basis as costs are incurred.

Due to current manufacturing constraints, we do not intend to expand the number of T-CEP sites for AT-005 until late-2016 and expect a limited commercialization of AT-005 through the T-CEP program and AT-004 through the B-CEP program until late 2016 at which time a commercial launch of AT-004 and AT-005 is anticipated.

Research and development




	THREE MONTHS ENDED						SIX MONTHS ENDED
	JUNE 30,						JUNE 30,				% CHANGE
	2015		2014		% CHANGE		2015		2014
	(Dollars in thousands)						(Dollars in thousands)

Contracted development costs	$	3,940	$	2,285	72.4	%	$	8,102	$	3,778	114.4	%
Personnel costs		1,704		1,154	47.7	%		3,416		2,529	35.1	%
Other costs		437		861	(49.2)	%		784		1,565	(49.9)	%
Total research and development	$	6,081	$	4,300	41.4	%	$	12,302	$	7,872	56.3	%

During the three and six months ended June 30, 2015, research and development expense increased by $1.8 million and $4.4 million, respectively, from $4.3 million and $7.9 million, respectively, for the three and six months ended June 30, 2014. The increase in research and development expense for both periods is due primarily to advancing the development of ongoing programs, an increase in headcount, and an increase in the number of products in development as well as additional licensing and option programs. During the second quarter, we incurred license payments associated with licensing additional technology, a success milestone of $0.1 million for the AT-016 program, and $0.3 million for entering into the AT-Iota option program for periodontal disease in dogs.

We expect research and development expense will increase for the foreseeable future as we continue to increase our staffing, conduct pilot field studies and pivotal field effectiveness studies and further develop our compounds. At this time, due to the inherently unpredictable nature of our development, we cannot reasonably estimate or predict the nature, specific timing or estimated costs of the efforts that will be necessary to complete the development of our product candidates.

Also, based on our development plans as of June 30, 2015, we have committed to make potential future milestone payments to third parties of up to approximately $118.5 million as part of our various collaborations, including licensing and development programs. Payments under these agreements generally become due and payable only upon achievement of certain development, regulatory or commercial milestones. Of the $118.5 million, $78.6 million are commercial milestones. Of the $78.6 million, we anticipate paying $0.6 million in the next year, up to an additional $10 million in the next five years as a series of first commercial sales milestones for AT-001 and AT-002 if those products are launched in the U.S. and Europe, and the remainder if certain net revenue thresholds are achieved thereafter. Of the remaining $39.9 million, we anticipate that we may pay approximately $1.8 million and $5.5 million of milestone payments during the remainder of 2015, and during the next 12 months, respectively, provided various development and regulatory milestones are achieved. The $39.9 million in milestones is spread across AT-001, AT-002, AT-003, AT-014, AT-016, AT-017, AT-018 and other pre-development candidates. Amounts related to contingent milestone payments are not considered contractual obligations as they are contingent on the successful achievement of certain development, regulatory approval and commercial milestones.

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We expect to fund our research and development expenses from our cash, cash equivalents, and short-term investments and any future collaboration or financing arrangements. We cannot forecast with any degree of certainty which product candidates may be subject to future collaborations or contracts, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

Selling, general and administrative

During the three months ended June 30, 2015, selling, general and administrative expense increased by $0.5 million and during the six months ended June 30, 2015, selling, general and administrative expense remained unchanged, as compared to the corresponding periods in 2014.

The increase is primarily due to commercial activities associated with AT-005, as well as preparations to commercialize five additional products by the end of 2016 and $0.5 million as a result of increased stock-based compensation. This increase is partially off-set by a credit of $1.2 million to reduce the fair value of the contingent consideration to zero as a result of the agreement with the Vet Therapeutics shareholders. We continue to establish a commercial infrastructure to prepare for commercial introduction of our later stage products, including personnel, systems, and other costs associated with awareness and data. Our current veterinary services force consists of medical science liaisons who are themselves veterinarians. We currently have two commercial-stage products in our portfolio. AT-004 has a full license and AT-005 has a conditional license from the USDA.

Our sales strategy includes a small specialty sales force and a somewhat larger primary care sales force. We anticipate hiring our first sales managers in late 2015 and sales representatives or territory managers over the course of 2016.

We expect selling, general and administrative expense to continue to increase as we continue to build our corporate infrastructure in the support of continued development and commercialization of our lymphoma franchise, AT-001, AT-002, AT-003, AT-014 and other development programs.

In-process research and development

In-process research and development expense decreased by $0.5 million and $1.2 million for the three and six months ended June 30, 2015, respectively, as we did not enter into exclusive license agreements. During the six months ended June 30, 2014, we entered into exclusive license agreements with Advaxis (March 2014) and VetStem Biopharma (June 2014).

Amortization of acquired intangible assets

Amortization expense was $0.5 million and $1.0 million for the three and six months ended June 30, 2015, respectively, as compared to $0.5 million and $1.1 million for the three and six months ended June 30, 2014, respectively. The amortization expense is related to the amortization of intangible assets associated with AT-004 and AT-005, amortized over their respective 20 year estimated useful lives.

Interest expense

Interest expense remained unchanged for the three months ended June 30, 2015, and decreased by $0.1 million for the six months ended June 30, 2015, as compared to the three and six months ended June 30, 2014. This decrease in the six month period is due to interest paid during the three months ended March 31, 2014, related to notes payable associated with the acquisitions of Vet Therapeutics and Okapi Sciences, which were paid in full during the three months ended March 31, 2014.

Other income (expense)

Other income (expense) increased by $3.1 million and $5.3 million during the three and six months ended June 30, 2015, as compared to the three and six months ended June 30, 2014. The increase during the three months ended June 30, 2015, is primarily related to the $2.5 million gain on the sale of Advaxis stock and $0.6 million gain related to the increase in fair value of the Advaxis warrant and subsequent sale of Advaxis common stock. The increase during the six months ended June 30, 2015, is primarily related to a $3.5 million gain on the sale of Advaxis stock, a $1.3 million increase in the fair value of the Advaxis warrant, and a $0.3 million gain on the sale of shares received from the exercise of the Advaxis warrant.

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

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

Income tax benefit

Income tax benefit was $0.4 million and $0.6 million for the three and six months ended June 30, 2015, respectively.

Financial Condition, Liquidity and Capital Resources

Our financial condition is summarized as follows:




	JUNE 30, 2015		DECEMBER 31, 2014		CHANGE %
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	12,591	$	9,823	28.2	%
Marketable securities - short-term		—		249	NA
Reverse repurchase agreements		71,000		88,000	(19.3)	%
Marketable securities - long-term		—		2,452	NA
Derivative financial instruments		—		1,108	NA
Total cash, cash equivalents, marketable securities and short-term investments	$	83,591	$	101,632	(17.8)	%
Borrowings:
Loan payable	$	14,976	$	14,963	0.1	%
Working capital:
Current assets	$	85,706	$	99,909	(14.2)	%
Current liabilities		20,932		9,468	121.1	%
Total working capital	$	64,774	$	90,441	(28.4)	%

We have incurred losses and negative cash flows from operations and have not generated significant revenue.

As of June 30, 2015, we had an accumulated deficit of $84.7 million and cash, cash equivalents, and short-term investments of $83.6 million.

We believe that our existing cash, cash equivalents, and short-term investments will allow us to fund our operations through December 31, 2016. We anticipate that we will continue to incur losses for at least the next several years. We expect an increase in investment related to our research and development and commercial activities and, as a result, we may need additional capital to fund our operations, which we may obtain from public or private equity, debt financings or other sources, such as corporate collaborations and licensing arrangements.

Cash, Cash Equivalents and Investments

Until required for another use in our business, we typically invest our cash reserves in bank deposits, certificates of deposit, and other interest bearing debt instruments in accordance with our investment policy. It is our policy to mitigate credit risk in our cash reserves and investments by maintaining a well-diversified portfolio that limits the amount of exposure as to institution, maturity, and investment type. The value of our investments, however, may be adversely affected by increases in interest rates, instability in the global financial markets that reduces the liquidity of securities included in our portfolio, and by other factors which may result in declines in the value of the investments. Each of these events may cause us to record charges to reduce the carrying value of our investment portfolio if the declines are other-than-temporary or sell investments for less than our acquisition cost which could adversely impact our financial position and our overall liquidity.

Indebtedness

Under our loan security agreement, we have $15.0 million in aggregate principal amount of 5.50% non-revolving loans due June 13, 2016. We have an option to amortize the principal amount equally over 24 months if we remain compliant with all the conditions under the loan security agreement through June 13, 2016 and mutually agree with the bank to any further financial covenants. We continue to evaluate new loan security agreement options or possibly other forms of indebtedness with several parties.

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Working Capital

We define working capital as current assets less current liabilities. The decrease in working capital from December 31, 2014, reflects a decrease in total current assets of $14.2 million and an increase in current liabilities of $11.5 million. The decrease in total current assets was primarily driven by a decrease in cash and cash equivalents and short-term investments. The increase in total current liabilities is primarily a result of a note payable due within one year of June 30, 2015.

Cash Flows

The following table shows a summary of our cash flows for the six months ended June 30, 2015:


	SIX MONTHS ENDED
	JUNE 30,
	2015		2014
	(Dollars in thousands)
Net cash used in operating activities	$	(17,806)	$	(15,944)
Net cash provided by (used in) investing activities	$	23,607	$	(13,104)
Net cash (used in) provided by financing activities	$	(2,953)	$	56,231

Net cash used in operating activities

During the six months ended June 30, 2015, net cash used in operating activities was $17.8 million. We had a pretax loss of $17.4 million which includes a gain on sale of marketable securities of $3.9 million, an adjustment of a non-cash expense for stock-based compensation of $4.4 million, a non-cash depreciation and amortization expense of $1.1 million, off-set by, a non-cash change in fair value of contingent consideration of $1.2 million, a non-cash change in fair value of derivative instruments of $1.3 million, and a non-cash deferred income tax benefit of $0.6 million. Our net losses were primarily attributed to research and development activities related to our programs and our selling, general and administrative expenses. Net cash provided by changes in our working capital consisted primarily of an increase in accounts payable, accrued expenses and other liabilities of $0.8 million, and decrease in accounts receivable of $0.2 million, partially offset by an increase in inventories of $0.4 million. The increase in accounts payable primarily related to the timing of payments made for our outsourced research and development activities.

During the six months ended June 30, 2014, net cash used in operating activities was $15.9 million. We had a pretax loss of $18.4 million, which included a non-cash expense related to stock-based compensation of $3.7 million and a non-cash deferred income tax benefit of $0.9 million and a change in working capital of $2.7 million. Our net losses were primarily attributed to research and development activities related to our programs and our general and administrative expenses. Net cash used by changes in our working capital consisted primarily of a decrease of $1.7 million in accounts payable, an increase of $0.5 million in prepaid expenses and a decrease of $0.2 million in accrued expenses. The increase in prepaid expenses relates primarily to research and development agreements. The decrease in accrued expenses primarily related to the timing of payments made for our contracted research and development activities.

Net cash provided by (used in) investing activities

During the six months ended June 30, 2015, net cash provided by investing activities was $23.6 million, which related to the proceeds from the maturities and sales of marketable securities of $929.7 million, partially offset by the purchases of investments of $905 million. This is partially offset by $1.1 million for purchases of property and equipment.

During the six months ended June 30, 2014, net cash used in investing activities was $13.1 million, which related to the acquisition and related expenses for Okapi Sciences of $13.1 million, purchase of warrants of $0.6 million, purchase of marketable securities of $1.2 million, partially offset by the sale of $2.2 million of short-term marketable securities.

Net cash (used in) provided by financing activities

During the six months ended June 30, 2015, net cash used in financing activities was $3.0 million. Net cash used in financing activities primarily resulted from cash paid for contingent consideration of $3.0 million to the former shareholders of Vet Therapeutics.

During the six months ended June 30, 2014, net cash provided by financing activities was $56.2 million. Net cash provided by financing activities primarily resulted from public offering net proceeds of $92.2 million, net of commissions. This was partially offset by payments of $15.2 million related to promissory note and $15.0 million related to the contingent consideration for the Okapi

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Sciences acquisition, and $1.7 million related to our public offering and a payment of $3.0 million for the Vet Therapeutics promissory note.

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations

Our contractual obligations primarily consist of our obligations under our loan payable, non-cancellable operating leases, minimum royalties and other purchase obligations, excluding amounts related to other funding commitments, contingent development, regulatory and commercial milestone payments, contingent consideration related to business combinations and off-balance sheet arrangements as described below. There have been no material changes in our contractual obligations since December 31, 2014.

Other Funding Commitments

As of June 30, 2015, we have several on-going development programs in various stages in the regulatory process. Our most significant expenditures are to clinical research and contract manufacturing organizations. The contracts are generally cancellable, with notice, at our option.

Contingent Development, Regulatory and Commercial Milestone Payments

Based on our development plans as of June 30, 2015, we have committed to make potential future milestone payments to third parties of up to approximately $118.5 million, which $78.6 million are commercial milestones, as part of our various collaborations, including licensing and development programs. Payments under these agreements generally become due and payable only upon achievement of certain development, regulatory or commercial milestones. Because the achievement of these milestones had not occurred or were not considered probable as of June 30, 2015, such contingencies have not been recorded in our financial statements, except for $0.5 million due after we complete our first commercial sale of AT-004, expected in the second half of 2015.

We anticipate that we may pay approximately $1.8 million and $5.5 million of milestone payments during the remainder of 2015, and the next 12 months respectively, provided various development, regulatory or commercial milestones are achieved. Amounts related to contingent milestone payments are not considered contractual obligations as they are contingent on the successful achievement of certain development, regulatory approval and commercial milestones. These milestones may not be achieved.

Contingent Consideration related to Business Combinations

During the three months ended March 31, 2015, we settled the remaining contingent consideration related to our October 2013, acquisition of Vet Therapeutics, Inc. in the amount of $3.0 million. With the settlement of this contingent consideration we no longer have any contingent consideration related to business combinations.

Off-Balance Sheet Arrangements

We have not engaged in the use of any off-balance sheet arrangements, such as structured finance entities, special purpose entities or variable interest entities.

Recently Issued and Adopted Accounting Pronouncements

For a discussion of new accounting standards please read Note 1, Summary of Significant Accounting Policies - Recently Issued and Adopted Accounting Pronouncements to our consolidated financial statements included within this report

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our market risks, and the ways we manage them are summarized in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on March 16, 2015. There have been no material changes to our market risks or management of such risks since that date.

Item 4. Controls and Procedures

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2015.

Remediation of Material Weakness

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, in the first quarter of 2015, our management identified a material weakness in our internal control over financial reporting relating to accounting for business combinations. Specifically, management did not have effective controls to identify erroneous inputs and assumptions used to value intangible assets acquired in a business combination. This material weakness resulted in the restatement of our consolidated financial statements for the year ended December 31, 2013 as described in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2014.

To remediate the material weakness described above and enhance our internal control over financial reporting, management conducted a thorough review of its internal controls over its accounting for business combinations. Following this review, management developed a remediation plan, and implemented controls to specifically address completeness and accuracy of significant inputs and assumptions used in valuing acquired assets. Management has taken the following actions and implemented the following controls as part of its remediation plan:

Provided training to key individuals involved in the business combination process intended to inform them of the required activities and the manner in which the enhanced key controls are expected to operate in future business combinations

Implemented additional internal controls over business combinations, including:

The review by qualified personnel of the contract listing prepared during financial diligence to ensure all contracts and contractual provisions that should be considered in determining the fair value of acquired assets and liabilities are complete and accurate.

A subsequent review of the contract listing by qualified personnel after the close of an acquisition to ensure no new information has arisen that would impact the valuation of acquired assets.

Enhanced procedures over the review of the valuation of assets and liabilities by qualified personnel to ensure inputs are complete and accurate and that the valuation is reasonable.

As a result of the above measures, management has determined that the business combination control weakness has been remediated.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), other than the remediation measures described above, identified in connection with the evaluation of our internal control performed during the fiscal quarter ended June 30, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently a party to any material legal proceedings.

Item 1A. Risk Factors

Our business faces significant risks and uncertainties, which may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them.

There have been no material changes in the six months ended June 30, 2015, to the risk factors described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no share repurchases during the three months ended June 30, 2015.

Unregistered Sales of Equity Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

A list of exhibits is set forth on the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	ARATANA THERAPEUTICS, INC.

Date: August 7, 2015	By:	/s/ Steven St. Peter
		Steven St. Peter, M.D.
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: August 7, 2015	By:	/s/ Craig Tooman
		Craig Tooman
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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Exhibit Index


		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed/ Furnished Herewith
3.1	Restated Certificate of Incorporation	8-K	001-35952	3.1	7/3/13
3.2	Amended and Restated Bylaws	8-K	001-35952	3.2	7/3/13
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					*
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					*
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					**
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					**
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

* Filed herewith.

** Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company