10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________

FORM 10-Q

_______________________

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

For the quarterly period ended September 30, 2018

or

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

For the transition period from to

Commission File Number 001-35952

_______________________

ARATANA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

_______________________

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

11400 Tomahawk Creek Parkway

Suite 340

Leawood, KS 66211

(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 every Interactive Data File required to be submitted 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 such files).    Yes:  ☒     No:  ☐

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 October 29, 2018, there were 48,624,202 shares of common stock outstanding.

ARATANA THERAPEUTICS, INC.

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017	4
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2018 and 2017	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
SIGNATURES		37

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ARATANA THERAPEUTICS, INC.

Consolidated Balance Sheets (Unaudited)

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

	September 30, 2018		December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	54,285	$	66,868
Short-term investments		1,736		747
Accounts receivable, net		19,577		2,406
Inventories		13,732		13,576
Prepaid expenses and other current assets		1,738		1,642
Total current assets		91,068		85,239
Property and equipment, net		811		1,166
Goodwill		40,846		41,295
Intangible assets, net		6,228		6,616
Restricted cash		351		350
Other long-term assets		499		526
Total assets	$	139,803	$	135,192
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	657	$	7,451
Accrued expenses and other current liabilities		5,248		3,712
Licensing and collaboration commitment		200		7,000
Current portion – loans payable		22,583		17,333
Total current liabilities		28,688		35,496
Loans payable, net		2,660		19,492
Other long-term liabilities		60		70
Total liabilities		31,408		55,058
Commitments and contingencies (Notes 5 and 16)
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized at September 30, 2018 and December 31, 2017, and 47,981,034 and 42,532,725 issued and outstanding at September 30, 2018 and December 31, 2017, respectively		48		43
Treasury stock, at cost; 92,099 and 80,916 shares at September 30, 2018 and December 31, 2017, respectively		(1,162)		(1,107)
Additional paid-in capital		349,671		321,599
Accumulated deficit		(232,604)		(233,316)
Accumulated other comprehensive loss		(7,558)		(7,085)
Total stockholders’ equity		108,395		80,134
Total liabilities and stockholders’ equity	$	139,803	$	135,192

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				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Revenues
Licensing and collaboration revenue	$	18,385	$	2,192	$	21,982	$	3,899
Product sales		3,170		3,971		8,524		11,217
Total revenues		21,555		6,163		30,506		15,116
Costs and expenses
Cost of product sales		2,172		3,690		4,013		10,475
Royalty expense		1,346		441		3,067		1,117
Research and development		1,507		3,220		5,288		11,574
Selling, general and administrative		7,010		6,910		21,418		21,323
Amortization of intangible assets		129		85		388		235
In-process research and development		—		—		500		—
Total costs and expenses		12,164		14,346		34,674		44,724
Income (loss) from operations		9,391		(8,183)		(4,168)		(29,608)
Other income (expense)
Interest income		159		138		441		311
Interest expense		(716)		(870)		(2,357)		(2,601)
Other expense, net		(1)		(5)		(4)		(14)
Total other expense		(558)		(737)		(1,920)		(2,304)
Net income (loss)	$	8,833	$	(8,920)	$	(6,088)	$	(31,912)
Net income (loss) per share, basic and diluted	$	0.19	$	(0.21)	$	(0.13)	$	(0.80)
Weighted average shares outstanding, basic		47,310,408		42,445,553		46,128,197		39,820,573
Weighted average shares outstanding, diluted		47,485,384		42,445,553		46,128,197		39,820,573

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 Income (Loss) (Unaudited)

(Amounts in thousands)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Net income (loss)	$	8,833	$	(8,920)	$	(6,088)	$	(31,912)
Other comprehensive income (loss):
Foreign currency translation adjustment		—		801		(473)		2,522
Other comprehensive income (loss)		—		801		(473)		2,522
Comprehensive income (loss)	$	8,833	$	(8,119)	$	(6,561)	$	(29,390)

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)

	Nine Months Ended
	September 30,
	2018		2017
Cash flows from operating activities
Net loss	$	(6,088)	$	(31,912)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		3,835		5,457
Depreciation and amortization expense		743		928
Non-cash interest expense		418		369
Market value adjustments to inventories		1,218		394
Changes in operating assets and liabilities:
Accounts receivable, net		(17,171)		(9,349)
Inventories		(1,374)		1,695
Prepaid expenses and other current assets		(96)		185
Other assets		12		100
Accounts payable		(6,794)		(4,033)
Accrued expenses and other liabilities		1,529		(2,362)
Net cash used in operating activities		(23,768)		(38,528)
Cash flows from investing activities
Milestone payments for intangible assets		—		(3,000)
Purchases of property and equipment, net		—		(16)
Purchase of investments		(2,978)		(2,984)
Proceeds from maturities of investments		1,989		2,486
Net cash used in investing activities		(989)		(3,514)
Cash flows from financing activities
Taxes paid for awards vested under equity incentive plans		(55)		(11)
Proceeds from stock option exercises		12		157
Proceeds from issuance of common stock, net of commissions and underwriter fees		24,394		27,463
Payments for common stock issuance costs		(164)		(345)
Payments for debt issuance costs		—		(210)
Payments on loans payable		(12,000)		(3,500)
Net cash provided by financing activities		12,187		23,554
Effect of exchange rate on cash		(12)		30
Net decrease in cash, cash equivalents and restricted cash		(12,582)		(18,458)
Cash, cash equivalents and restricted cash, beginning of period		67,218		87,657
Cash, cash equivalents and restricted cash, end of period	$	54,636	$	69,199
Supplemental disclosure of cash flow information
Cash paid for interest	$	2,011	$	2,237

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”) was incorporated on December 1, 2010 under the laws of the State of Delaware. The Company is a pet therapeutics company focused on licensing, developing and commercializing innovative therapeutics for dogs and cats. The Company has one operating segment: pet therapeutics.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States 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, 2017 and the notes thereto in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 14, 2018 (“2017 Annual Report”). In the opinion of management, all adjustments, consisting of a normal and recurring nature, considered necessary for a fair presentation, have been included.

The Company has incurred recurring losses and negative cash flows from operations and has an accumulated deficit of $232,604 as of September 30, 2018. The Company expects to continue to generate operating losses for the foreseeable future. The Company believes that its cash, cash equivalents and short-term investments at September 30, 2018, will be sufficient to fund operations and debt obligations for at least one year from the issuance of these consolidated financial statements.

As disclosed in Note 8 to the consolidated financial statements, the Company has a term loan and a revolving credit facility with an aggregate principal balance of $24,500 as of September 30, 2018. The loan agreement requires that the Company maintain certain minimum liquidity at all times (the greater of cash equal to fifty percent (50%) of outstanding balance or remaining months’ liquidity, which is calculated on an average trailing three (3) month basis, equal to six (6) months or greater), which as of September 30, 2018, was approximately $12,250. If the minimum liquidity covenant is not met, the Company may be required to repay the loans prior to their scheduled maturity dates. At September 30, 2018, the Company was in compliance with all financial covenants.

The Company expects continued investment related to commercial activities, including procuring of inventories needed to supply the marketplace, investing to further support adoption and awareness of the Company’s marketed products and payment of milestones related to approval and commencement of commercial sales. This will impact the minimum liquidity that needs to be maintained under the loan agreement. As a result, if the Company cannot generate sufficient cash from operations in the future, the Company may seek to fund its operations through corporate collaborations and licensing arrangements, or other sources, such as public or private equity offerings and further debt (re)financings. If the Company is not able to raise additional capital on terms acceptable to it, or at all, as and when needed, the Company would be forced to delay, reduce, or eliminate certain research and development programs, reduce or eliminate discretionary operating expenses or grant rights to develop and market therapeutics or therapeutic candidates that it would otherwise prefer to develop and market itself, which could otherwise adversely affect its business prospects. The Company’s failure to raise capital, as and when needed, would have a negative impact on its financial condition and its ability to pursue its business strategies as this capital is necessary for it to perform the research and development and commercial activities required to generate future revenue streams.

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.

Prior to July 1, 2018, the functional currency of the Company’s foreign subsidiary was the local currency of the country where the subsidiary is located. Foreign currency denominated assets and liabilities of the foreign subsidiary were translated into U.S. dollars and translation gains and losses were included in accumulated other comprehensive income (loss) in the consolidated balance sheets. Significant changes in economic facts and circumstances in the operations of the foreign subsidiary had occurred resulting in a change in the functional currency of this subsidiary. Accordingly, effective July 1, 2018, the functional currency of the Company’s foreign subsidiary was changed from the local currency to the U.S. dollar, which is the Company’s reporting currency. Effective as of the date of the change, translation adjustments for prior periods were not removed from equity and the translated amounts for nonmonetary assets at the end of the prior period became the accounting basis for those assets in the period of the change and subsequent periods. Future gains or losses from the remeasurement of monetary assets and liabilities will be recorded in earnings.

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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.

Revenue from Contracts with Customers

Effective January 1, 2018, the Company adopted the Accounting Standards Codification Topic (“ASC”) 606 “Revenue from Contracts with Customers” (“ASC 606”) using the modified retrospective transition method. Prior to January 1, 2018, the Company recognized revenue using the guidance of ASC 605 “Revenue Recognition” (“ASC 605”).

The Company recognizes revenue when its customer obtains control of the promised goods or services, in an amount that reflects the consideration which the Company expects to be entitled to in exchange for those goods or services.

The Company determines revenue recognition from contracts with customers as follows:

· identify the contract(s);

· identify the performance obligations in the contract(s);

· determine the transaction price;

· allocate the transaction price to the performance obligations in the contract; and

· recognize revenue when (or as) the Company satisfies a performance obligation.

The Company’s principal revenue streams and their respective accounting treatments are discussed below and further in Note 2, “Revenue”:

(i) Product Sales, Net

The Company sells its products to its customers who could either be the end users (such as veterinarians, clinics, or animal hospitals) of the product or distributors who subsequently resell the Company’s products to end users.

Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, upon delivery to the customer. The Company’s delivery of its products to customers constitutes a single performance obligation as there are no other promises to deliver goods or services beyond what is specified in each accepted customer order.

Product sales are recorded net of applicable reserves for variable consideration, including product returns, allowances, discounts, and rebates.

Reserves for Variable Consideration

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include product returns, allowances, discounts, and rebates. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable (generally, for credits that the Company issues for free goods provided by distributors to end customers in conjunction with promotional programs) or a current liability (generally, reserves for products that remained in the distribution channel inventories at each reporting period end that the Company expects the distributors will provide to end customers free of charge in conjunction with promotional programs). These estimates take into consideration a range of possible outcomes for the expected value (probability-weighted estimate) or relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.

The amount of variable consideration included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

8

Product Returns

Consistent with the industry practice, the Company generally offers customers a limited right of return of damaged or expired product that has been purchased from the Company or the Company’s distributors in exchange for an unexpired product. Exchanges due to expiry are typically allowed for a period of six months after the product’s expiration date. The Company estimates the amount of its product sales that may be returned by its customers and records these estimates as a reduction of product revenues in the period the related product revenues are recognized, as well as within accrued expenses and other current liabilities, net in the consolidated balances sheets. The Company currently estimates product return liabilities using available industry data, its own sales data and data provided by the Company’s distributors such as the inventories remaining in the distribution channel. The Company has received an immaterial amount of returns to date and believes that returns of its products in future periods will be minimal. The Company does not record a return asset associated with the returned damaged or expired goods because such asset is deemed to be fully impaired at the time of product return.

Sales Discounts and Allowances

The Company compensates its distributors for sales order management, data and distribution and other services through sales discounts and allowances. However, such services are not distinct from the Company’s sale of products to distributors and, therefore, these discounts and allowances are recorded as a reduction of revenue in the consolidated statements of operations, as well as a reduction to accounts receivable, net in the consolidated balance sheets.

(ii) Licensing and Collaboration Revenues

Revenues derived from product out-licensing arrangements typically consist of an initial non-refundable, up-front payment at inception of the license, subsequent milestone payments contingent on the achievement of certain regulatory, development and commercial milestones, and royalties on the net sales of the Company’s products.

Licenses of Intellectual Property

If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the contract, the Company recognizes revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company will evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Milestones

Revenues from achievement of milestones generally represent a form of variable consideration as the payments are likely to be contingent on the occurrence of future events. The Company estimates milestones probable to be achieved and includes in the transaction price based on either the expected value (probability-weighted estimate) or most likely amount approach. The most likely amount is used by the Company for milestone payments with a binary outcome (i.e., the Company receives all or none of the milestone payment). Milestone payments that are not within the control of the Company or the customer, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The estimated milestone-related variable consideration is only recognized as revenue when the related performance obligation is satisfied and the Company determines that it is probable that there will not be a significant reversal of cumulative revenue recognized in future periods (i.e. variable consideration constraint). At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect licensing and collaboration revenues and earnings in the period of adjustment.

For milestones that are not able to overcome the variable consideration constraint, that are not considered probable or that are determined to be sales-based or usage royalties, as described later, the Company recognizes revenue when the milestones are achieved.

Sales-Based Royalty Revenue

The Company’s sales-based royalty revenue could consist of sales-based milestones or a percentage of net sales royalties. The Company recognizes sales-based royalties related to the Company’s out-licensed intellectual property when (or as) the later of the following events occurs:

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· the sale occurs; or

· the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied).

Sales-based royalties revenues recorded by the Company are based on the licensee’s or sub-licensee’s sales that occurred during the relevant period. Differences between actual and estimated royalty revenues are adjusted in the period in which they become known, typically in the following quarter. If the Company is unable to reasonably estimate royalty revenue or does not have access to the information, then the Company records royalty revenue when the information needed for a reliable estimate becomes available. Royalty revenue is included in licensing and collaboration revenue in the consolidated statements of operations.

The Company recognizes revenue from sales-based milestones when the milestones are achieved.

Property and Equipment, Net

Property and equipment is recorded at historical cost, net of accumulated depreciation and amortization of $1,545 and $1,188, as of September 30, 2018 and December 31, 2017, respectively.

New Accounting Standards

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on recognizing revenue in contracts with customers. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This guidance superseded the revenue recognition requirements in ASC 605 and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this guidance on January 1, 2018. The impact of adoption is described further in Note 2, “Revenue.”

Leases

In February 2016, the FASB issued guidance that requires, for operating leases, a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted and is to be applied on a modified retrospective transition. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements. The Company currently expects that its operating lease commitments will be subject to the new guidance which will result in recognition of operating lease liabilities and right-of-use assets in the consolidated balance sheets upon the adoption of the new guidance. However, the Company’s assessment of the impact of adoption, which may be material, is still ongoing.

Compensation – Stock Compensation:Scope of Modification Accounting

In May 2017, the FASB issued guidance on determining which changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2018, and the adoption did not have a material impact on its consolidated financial statements.

Compensation – Stock Compensation:  Improvements to Nonemployee Share-Based Payment Accounting

In June 2018, the FASB issued guidance that largely aligns the accounting for share-based payment awards issued to employees and nonemployees. Under the new guidance, the existing employee guidance generally will apply to nonemployee share-based transactions, with the exception of specific guidance related to inputs to an option pricing model and the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including in interim periods, but no earlier than an entity’s adoption of ASC 606. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.

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Intangibles – Goodwill and Other – Internal-Use Software

In August 2018, the FASB issued guidance that largely aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance provides criteria for determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The capitalized implementation costs are required to be expensed over the term of the hosting arrangement. The guidance also clarifies the presentation requirements for reporting such costs in the entity’s financial statements. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.

Fair Value Measurements

In August 2018, the FASB issued guidance related to disclosure requirements for fair value measurements. This guidance eliminates, modifies and adds disclosure requirements for fair value measurements. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.

2.  Revenue

Adoption of ASC 606

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605.

The Company recorded a net reduction of $6,800, net of $0 tax, to the opening balance of accumulated deficit within stockholders’ equity, and a corresponding reduction to licensing and collaboration commitment as of January 1, 2018, due to the cumulative impact of adopting ASC 606, with the impact solely related to the Company’s variable consideration within its Collaboration Agreement (as defined below) with Elanco Animal Health, Inc. (“Elanco”).  Under previous guidance of ASC 605, this commitment was fully deferred and recognized as a liability until such time as payments under the obligation were made, or any unpaid portion would have been recognized as revenue when the commitment expired on December 31, 2018. Under ASC 606, this obligation is accounted for as variable consideration. At the adoption date, the Company recorded a contract liability based on the amount of the obligation expected to be paid, which was $200. This amount was determined based on management estimates, which included consideration of Elanco’s development plan. Since inception of the arrangement, no amounts had been paid out or submitted to the Company for reimbursement.

Had the Company still applied ASC 605 for the three and nine months ended September 30, 2018, revenues would have been the same as compared to ASC 606.

Disaggregated Revenues

The following table presents the Company’s revenues disaggregated by revenue source. All product sales are derived from United States sources and sales taxes are excluded from revenues.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017 (1)		2018		2017 (1)
Revenues
Licensing and collaboration revenue
GALLIPRANT	$	18,385	$	2,192	$	21,982	$	3,899
Total licensing and collaboration revenue		18,385		2,192		21,982		3,899
Product sales
NOCITA	$	1,916	$	717	$	5,219	$	1,681
ENTYCE		1,254		—		3,305		—
GALLIPRANT		—		3,248		—		9,494
Other		—		6		—		42
Total product sales		3,170		3,971		8,524		11,217
Total revenues	$	21,555	$	6,163	$	30,506	$	15,116

(1)Prior period amounts have not been adjusted under the modified retrospective method.

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Product Sales

The Company generates product sales revenues primarily by selling its marketed therapeutics directly to end users (such as veterinarians, clinics, or animal hospitals) and distributors. Direct to end user sales revenues consist primarily of NOCITA sales, and distributor product sales revenues consist primarily of ENTYCE sales.

As of September 30, 2018 and December 31, 2017, reserves for product returns related to NOCITA and ENTYCE were $265 and $90, respectively.

Licensing and Collaboration Revenue

The Company generates licensing and collaboration revenue solely from the Elanco Collaboration, License, Development and Commercialization Agreement (as amended, the “Collaboration Agreement”) and Co-Promotion Agreement (collectively, “the Elanco Agreements”) as follows:

· sales-based royalties from the Elanco Agreements consisting of a percentage of net sales of GALLIPRANT by Elanco that are recognized as revenue as the underlying sales of GALLIPRANT are made by Elanco;

· sales-based royalties from the Collaboration Agreement consisting of sales-based milestones of GALLIPRANT by Elanco that are recognized as revenue if and when the sales threshold is achieved by Elanco;

· regulatory milestones from the Collaboration Agreement that are recognized as revenue if and when achieved; and

· variable consideration related to the Collaboration Agreement licensing and collaboration commitment (contract liability) that is recognized as revenue when it is not subject to variable consideration constraint.

Reconciliation of Contract Balances

The change in contract liability balances for the nine months ended September 30, 2018, was as follows:

Licensing and Collaboration Commitment

		2018
As of January 1,	$	7,000
ASC 606 adoption		(6,800)
Revenue recognized		—
Payments made		—
As of the end of period,	$	200

The Company recorded a net reduction of $6,800, net of $0 tax, to the opening balance of accumulated deficit within stockholders' equity as of January 1, 2018, due to the cumulative impact of adopting ASC 606.

The Company reviewed the current facts and circumstances and concluded that no changes to the previously estimated transaction price for the Collaboration Agreement at September 30, 2018, are required, and therefore, no change in variable consideration was recognized as revenue for the three and nine months ended September 30, 2018.

Unsatisfied Performance Obligations

As of the adoption date of ASC 606 and September 30, 2018, the Company had no unsatisfied performance obligations.

Significant Judgements

The Company’s significant judgements relate to the updating of the transaction price and variable consideration of the Collaboration Agreement. The Company used current facts and circumstances to calculate the updated transaction price using the expected value (probability weighted estimate). Facts and circumstances considered included the current Elanco development plan for GALLIPRANT.

Practical Expedients and Exemptions

The Company has deemed that there is no significant financing component present in the agreements with the Company’s customers as trade payment terms with its customers do not exceed one year. The Company expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses.

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3. Fair Value of Financial Assets and Liabilities

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

The carrying values and estimated fair values of the Company’s financial assets which are measured at fair value on a recurring basis were as follows:

			Fair Value Measurements as of
	Carrying		September 30, 2018 Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Certificates of deposit	$	8,680	$	—	$	8,680	$	—	$	8,680
Short-term investments:
Short-term marketable securities - certificates of deposit		1,736		—		1,736		—		1,736
	$	10,416	$	—	$	10,416	$	—	$	10,416

			Fair Value Measurements as of
	Carrying		December 31, 2017 Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Certificates of deposit	$	8,964	$	—	$	8,964	$	—	$	8,964
Short-term investments:
Short-term marketable securities - certificates of deposit		747		—		747		—		747
	$	9,711	$	—	$	9,711	$	—	$	9,711

The financial assets above are measured at fair value using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3). Certain estimates and judgments are required to develop the fair value amounts shown above. The fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.

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

· Cash equivalents – the fair value of the cash equivalents has been determined to be amortized cost given the short duration of the securities.

· Marketable securities (short-term) – the fair value of marketable securities has been determined to be amortized cost given the short duration of the securities.

The Company had no financial liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017.

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

The carrying values and estimated fair values of the Company’s financial liabilities which are not measured at fair value on a recurring basis were as follows:

	September 30, 2018
	Carrying Value		Fair Value
Liabilities:
Loans payable (Level 2)	$	25,243	$	24,801

	December 31, 2017
	Carrying Value		Fair Value
Liabilities:
Loans payable (Level 2)	$	36,825	$	36,973

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Loans payable values above include both the current and the long-term loans balances as of September 30, 2018 and December 31, 2017.

The financial liabilities above are measured at fair value using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3). Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor does it indicate the Company’s intent or ability to dispose of the financial instrument.

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

The Company had no material financial assets not measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017.

4. Investments

Marketable Securities

Marketable securities consisted of the following:

	September 30, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Losses		Losses		Value
Short-term marketable securities:
Certificates of deposit	$	1,736	$	—	$	—	$	1,736
Total	$	1,736	$	—	$	—	$	1,736

	December 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Losses		Losses		Value
Short-term marketable securities:
Certificates of deposit	$	747	$	—	$	—	$	747
Total	$	747	$	—	$	—	$	747

At September 30, 2018 and December 31, 2017, short-term marketable securities consisted of investments that mature within one year. Short-term marketable securities are recorded as short-term investments in the consolidated balance sheets.

5. Inventories

Inventories are stated at the lower of cost and net realizable value and consisted of the following:

	September 30, 2018		December 31, 2017
Raw materials	$	243	$	1,132
Work-in-process		8,980		12,322
Finished goods		4,509		122
	$	13,732	$	13,576

During the three and nine months ended September 30, 2018, the Company recognized inventory valuation adjustment losses in cost of product sales in the amount of $883 and $1,218, respectively, from application of the lower of cost and net realizable value. The losses primarily related to ENTYCEinventories that were written down. Unfavorable outcomes of the Company’s ENTYCE commercialization efforts could result in additional inventory write downs in future periods.

During the three and nine months ended September 30, 2017, the Company recognized inventory valuation adjustment losses in cost of product sales in the amount of $342 and $394, respectively, from application of the lower of cost and net realizable value. The losses related to GALLIPRANTinventories that were written down.

As of December 31, 2017, raw materials included $777 of GALLIPRANT inventories. As part of the manufacturing transfer of GALLIPRANT (Note 10), the Company transferred these raw materials to Elanco, and was reimbursed for the raw materials by Elanco during the first quarter of 2018.

As of September 30, 2018 and December 31, 2017, the Company had non-cancellable open orders for the purchase of inventories of approximately $1,154, which is expected to be paid in the next twelve months, and $7,132, respectively.

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6. Goodwill

Goodwill is recorded as an indefinite-lived asset and is not amortized for financial reporting purposes but is tested for impairment on an annual basis or when indications of impairment exist. No goodwill impairment losses have been recognized to date. Goodwill is not expected to be deductible for income tax purposes.

The Company completed its annual goodwill impairment testing during the third quarter of 2018. The Company elected to bypass the

qualitative assessment. The Company determined as of the testing date that it consisted of one operating segment, which is comprised of one reporting unit. In performing the quantitative goodwill impairment test, the Company determined that its fair value, determined to be its market capitalization, was greater than its carrying value, determined to be stockholders’ equity. Based on this result, the Company determined there was no impairment of goodwill during the third quarter of 2018.

Goodwill as of September 30, 2018, was as follows:

	Gross		Impairment		Net
	Carrying Value		Losses		Carrying Value
Goodwill	$	40,846	$	—	$	40,846

The change in the net book value of goodwill for the nine months ended September 30, 2018, was as follows:

	2018
As of January 1,	$	41,295
Effect of foreign currency exchange		(449)
As of the end of the period,	$	40,846

7. Intangible Assets, Net

The change in the net book value of intangible assets for the nine months ended September 30, 2018, was as follows:

	2018
As of January 1,	$	6,616
Amortization expense		(388)
As of the end of the period,	$	6,228

The Company recognized amortization expense of $129 and $388 for the three and nine months ended September 30, 2018, respectively, and $85 and $235 for the three and nine months ended September 30, 2017, respectively.

Amortized Intangible Assets

Amortized intangible assets as of September 30, 2018, were as follows (excluding intellectual property rights for formerly marketed products that were fully impaired in prior periods):

	Gross				Net		Weighted
	Carrying		Accumulated		Carrying		Average
	Value		Amortization		Value		Useful Life
Intellectual property rights for currently marketed products	$	7,000	$	772	$	6,228	14.1	Years

Amortized intangible assets as of December 31, 2017, were as follows:

	Gross				Net		Weighted
	Carrying		Accumulated		Carrying		Average
	Value		Amortization		Value		Useful Life
Intellectual property rights for currently marketed products	$	7,000	$	384	$	6,616	14.1	Years
Intellectual property rights for formerly marketed products		38,652		38,652		—	N/A
	$	45,652	$	39,036	$	6,616

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Unfavorable outcomes of the Company’s development activities or the Company’s estimates of the market opportunities for its therapeutic candidates could result in additional impairment charges in future periods.

Intellectual Property Rights for Currently Marketed Products

As of September 30, 2018 and December 31, 2017, intellectual property rights for currently marketed products relate to intangible assets capitalized for NOCITA, GALLIPRANT and ENTYCE in conjunction with approval/post-approval milestone payments made under the Company's licensing agreements.

8. Debt

Loan and Security Agreements

Effective as of October 16, 2015, the Company and its wholly-owned subsidiary Vet Therapeutics, Inc. (the “Borrowers”), entered into a Loan and Security Agreement (“Loan Agreement”), with Pacific Western Bank, or Pacific Western, as a collateral agent and Oxford Finance, LLC (collectively, the “Lenders”), pursuant to which the Lenders agreed to make available to the Company a term loan in an aggregate principal amount up to $35,000 and a revolving credit facility in an aggregate principal amount up to $5,000 subject to certain conditions to funding. The term loan and the revolving credit facility are secured by all of the Borrowers’ personal property other than intellectual property and certain other customary exclusions. Subject to customary exceptions, the Company is not permitted to encumber its intellectual property. The outstanding principal balance under the Loan Agreement was $19,500 under the term loan facility and $5,000 under the revolving credit facility at September 30, 2018.  During the three and nine months ended September 30, 2018, the Company recognized interest expense of $716 and $2,357, respectively, and during the three and nine months ended September 30, 2017, the Company recognized interest expense of $870 and $2,601, respectively. Amortization of debt issuance costs and accretion of final payment and termination fees, recognized as interest expense, were $139 and $417 for the three and nine months ended September 30, 2018, respectively, and $131 and $370 for the three and nine months ended September 30, 2017, respectively.

The Company was required to make interest-only payments on the revolving credit facility until October 16, 2017, when all principal and accrued interest were due. Effective as of July 31, 2017, the Borrowers and Lenders entered into a second amendment to the Loan Agreement (the “Second Amendment”). The terms of the Second Amendment, among other things, extended the maturity date of the existing revolving credit facility to October 16, 2019 (the “Revolving Line Maturity Date”), with amortized equal repayments of the principal outstanding under the revolving credit facility beginning November 1, 2018, and provided a six-month interest only period for the term loans, starting on the date of the Second Amendment. The Company is not subject to any new financial covenants as a result of the Second Amendment. At the closing of the Second Amendment, the Company paid the Lenders an amendment fee of $150 and a facility fee of $60. The Company is also obligated to pay a new termination fee equal to $165 upon the earliest to occur of the Revolving Line Maturity Date, the acceleration of the revolving credit facility or the termination of the revolving credit facility. The existing termination fee of $165 was due upon the original revolving maturity date, October 16, 2017, and was paid on October 17, 2017.

The term loan and the revolving credit facility bear interest per annum at the greater of (i) 6.91% or (ii) 3.66% plus the prime rate, which is customarily defined. As of September 30, 2018, the interest rate for the term loan and the revolving credit facility was 8.91%. In addition, the Company is obligated to pay a final payment fee equal to 3.30% of the principal amount of such term loan, if the term loan is being prepaid or repaid with respect to the term loan upon the earliest to occur of October 16, 2019, the acceleration of any term loan or the prepayment of a term loan. The Company will also be obligated to pay an unused-line fee equal to 0.25% per annum of the average unused portion of the revolving credit facility.

The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, limits or restrictions on the Borrowers’ ability to incur liens, incur indebtedness, make certain restricted payments, make certain investments, merge, consolidate, make an acquisition, enter into certain licensing arrangements and dispose of certain assets. In addition, the Loan Agreement contains customary events of default that entitle the Lenders to cause the Borrowers’ indebtedness under the Loan Agreement to become immediately due and payable. The events of default, some of which are subject to cure periods, include, among others, a non-payment default, a covenant default, the occurrence of a material adverse change in the Company’s business, the occurrence of an insolvency, a material judgment default, defaults regarding other indebtedness and certain actions by governmental authorities. Upon the occurrence and for the duration of an event of default, an additional default interest rate equal to 4% per annum will apply to all obligations owed under the Loan Agreement.

The Loan Agreement requires that the Company maintain certain minimum liquidity at all times (the greater of cash equal to fifty percent (50%) of outstanding credit extensions or remaining months’ liquidity, which is calculated on an average trailing three (3) month basis, equal to six (6) months or greater), which as of September 30, 2018, was approximately $12,250. If the minimum liquidity covenant is not met, the Company may be required to repay the term loan and the revolving credit facility prior to their scheduled maturity dates. At September 30, 2018, the Company was in compliance with all financial covenants.

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The Company’s loans payable balance as of September 30, 2018, was as follows:

Principal amounts
Term loan, 8.91%, principal payments from February 1, 2018 through October 1, 2019	$	19,500
Revolving credit facility, 8.91%, principal payments from November 1, 2018 through October 1, 2019		5,000
Add: accretion of final payment and termination fees		933
Less: unamortized debt issuance costs		(190)
As of the end of the period	$	25,243

As of September 30, 2018, $18,000 and $4,583 related to the term loan and the revolving credit facility, respectively, were classified as current portion – loans payable.

9. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

	September 30, 2018		December 31, 2017
Payroll and related expenses	$	2,081	$	2,314
Professional fees		644		208
Royalty expense		1,356		718
Interest expense		178		249
Research and development costs		107		5
Other		882		218
Total	$	5,248	$	3,712

10. Agreements

RaQualia Pharma Inc. (“RaQualia”)

On December 27, 2010, the Company entered into two Exclusive License Agreements with RaQualia (as amended, the “RaQualia Agreements”) that granted the Company global rights, subject to certain exceptions for injectables in Japan, Korea, China and Taiwan for development and commercialization of licensed animal health products for compounds RQ-00000005 (ENTYCE®, also known as AT-002) and RQ-00000007 (GALLIPRANT®, also known as AT-001). The Company will be required to pay RaQualia remaining milestone payments associated with GALLIPRANT and ENTYCE of up to $4,000 and $3,000, respectively, upon the Company’s achievement of certain development, regulatory and commercial milestones, as well as mid-single digit royalties on the Company’s or the Company’s sublicensee’s product sales.

As of September 30, 2018, the Company had paid $11,500 in milestone payments since execution of the RaQualia Agreements, and no milestone payments were accrued.  No milestones were achieved during the three and nine months ended September 30, 2018. It is possible that a milestone related to the RaQualia Agreements will be achieved within the next twelve months totaling $2,000.

Pacira Pharmaceuticals, Inc. (“Pacira”)

On December 5, 2012, the Company entered into an Exclusive License, Development, and Commercialization Agreement with Pacira (the “Pacira License Agreement”) that granted the Company global rights for development and commercialization of licensed animal health products for NOCITA® (also known as AT-003). On the same date, the Company also entered into a supply agreement with Pacira (the “Pacira Supply Agreement”, and together with the Pacira License Agreement, the “Pacira Agreements”).

On July 5, 2018 (the “Effective Date”), the Company and Pacira entered into an amendment and restatement of the Pacira License Agreement (“A&R License Agreement”) and an amendment and restatement of the Pacira Supply Agreement (the “A&R Supply Agreement”, and together with the A&R Pacira Agreement, the “Amended Agreements”).

Under the A&R Supply Agreement, Pacira has agreed to manufacture and supply the licensed product in a 10 mL vial size in addition to the 20 mL vial size that is currently supplied to the Company. The supply price for the 10 mL vial size will remain fixed until December 31, 2021. Prior to December 31, 2021, the Company and Pacira have agreed to negotiate in good faith the applicable terms related to the 10 mL vial, including the price, for after December 31, 2021. If the Company and Pacira are unable to reach agreement, then as of January 1, 2022 and on each anniversary thereafter during the term of the A&R Supply Agreement, the price for the 10 mL vial will be automatically increased by a low single-digit percentage.

The A&R License Agreement amended various sections of the Pacira License Agreement, including milestone payments and royalties, to incorporate the introduction of the 10 mL vial size. Prior to December 31, 2021, the Company will not be obligated to pay any royalty payments to Pacira on the sales of the 10 mL vial and thereafter, the Company and Pacira have agreed to negotiate in good faith the applicable terms relating to the 10 mL vial in accordance with the A&R Supply Agreement. The tiered royalties on the Company’s product sales of 20 mL vials remain unchanged. In addition, the A&R License Agreement reduces the annual net sales

17

thresholds for achieving each of the potential commercial milestone payments owed to Pacira. The remaining $40,000 of commercial milestones per the A&R License Agreement begin to be triggered once NOCITA annual net sales reach $50,000 with the final tier being owed to Pacira once NOCITA annual net sales reach $250,000. Further, the A&R License Agreement lowered the minimum annual revenue payment to be provided to Pacira by the Company and delayed by one year the first period in which this minimum annual revenue payment requirement would be triggered such that the period is now expected to commence on January 1, 2023. The definition of a competing product was specified and narrowed to those injectable analgesic products preventing pain for at least forty-eight to seventy-two hours post-surgery as an active pharmaceutical ingredient labelled for the control of post-operative pain for surgical veterinary use. The term of the A&R License Agreement was extended with the initial term commencing as of the new Effective Date.

As of September 30, 2018, the Company had paid $2,500 in milestone payments since execution of the Pacira License Agreement, and no milestone payments were accrued.  No milestones were achieved during the three and nine months ended September 30, 2018. The Company does not expect to achieve any milestones related to the A&R License Agreement in the next twelve months.

Elanco

GALLIPRANT

On April 22, 2016, the Company entered into the Collaboration Agreement pursuant to which the Company granted Elanco rights to develop, manufacture, market and commercialize the Company’s products based on licensed grapiprant rights and technology, including GALLIPRANT (collectively, “Grapiprant Products”). Pursuant to the Collaboration Agreement, Elanco will have exclusive rights globally outside the United States and co-promotion rights with the Company in the United States during the term of the Collaboration Agreement.

Under the terms of the Collaboration Agreement, the Company received a non-refundable, non-creditable upfront payment of $45,000. The Company is eligible to receive a  $4,000 milestone payment upon European approval of a Grapiprant Product for the treatment of pain and inflammation, another $4,000 payment upon achievement of a development milestone related to the manufacturing of a Grapiprant Product from an alternate supply source, and payments up to $75,000 upon the achievement of certain sales milestones. The sales milestone payments are subject to a one-third reduction for each year the occurrence of the milestone is not achieved beyond December 31, 2021, with any non-occurrence beyond December 31, 2023, cancelling out the applicable milestone payment obligation entirely.

The Collaboration Agreement also provides that Elanco will pay the Company royalty payments on a percentage of net sales in the mid-single to low-double digits. The Company was responsible for all development activities required to obtain the first registration or regulatory approval for a Grapiprant Product for use in dogs in each of the European Union (“the EU Product Registration”) and the United States, and Elanco is responsible for all other development activities. First registration for a Grapiprant Product in the United States was achieved before the completion of the Collaboration Agreement and EU Product Registration was achieved in January 2018. In addition, the Company and Elanco have agreed to pay 25% and 75%, respectively, of all third-party development fees and expenses through December 31, 2018, in connection with preclinical and clinical trials necessary for any additional registration or regulatory approval of Grapiprant Products, provided that the Company’s contribution to such development fees and expenses is capped at $7,000, which was recorded as licensing and collaboration commitment liability in the consolidated balance sheets at December 31, 2017. Upon adoption of ASC 606 (Note 2), the Company relieved $6,800 of its licensing and collaboration commitment liability. The licensing and collaboration commitment liability balance in future periods will be updated at each future reporting date to reflect current facts and circumstances. Any remaining balance will be recognized as licensing and collaboration revenue on December 31, 2018, when the Company’s obligation to fund 25% of Elanco’s development efforts expires.

Commencing on the effective date of the Collaboration Agreement, the Company was responsible for the manufacture and supply of all of Elanco’s reasonable requirements of active pharmaceutical ingredient (“API”) and/or finished Grapiprant Products under the supply terms agreed upon pursuant to the Collaboration Agreement. However, Elanco retained the ability to assume all or a portion of the manufacturing responsibility during the term of the Collaboration Agreement. On April 28, 2017, the Company and Elanco entered into an amendment (the “Amendment”) to the Collaboration Agreement. Under the Amendment, Elanco agreed to submit binding purchase orders to the Company, within 15 days of the effective date of the Amendment, for certain finished Grapiprant Products to be produced from certain batches of API the Company agreed to purchase from its third-party manufacturer (the “API Batches”). In addition, Elanco agreed to pay the Company for the API Batches within 30 days after the Company provides Elanco with proof of payment to the manufacturer for such API Batches. The Amendment provides that, in the event Elanco provided notice of its intent to assume responsibility for manufacturing, Elanco would assume all responsibilities of the Company with respect to any undelivered API, including paying the third-party manufacturer for such undelivered API. In July 2017, pursuant to Sections 8.2.2 and 10.1(c) of the Collaboration Agreement, as amended, Elanco provided the Company notice of its intent to assume responsibility for manufacturing of the Grapiprant Products and its intent to assume the applicable regulatory approvals. In September 2017, the Company and Elanco finalized the transfer of the applicable regulatory approvals in the United States and the responsibility for manufacturing of Grapiprant Products to Elanco. In connection with this assumption of manufacturing responsibility, Elanco compensated the Company $10,832 for certain Grapiprant Product inventories and manufacturing considerations.

As of September 30, 2018, $15,000 was accrued for a sales milestone earned during the three months ended September 30, 2018. As of September 30, 2018, the Company had earned $15,000 of milestones since execution of the Collaboration Agreement. The

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Company will recognize revenue from any additional milestones if and when they are achieved by Elanco.

On April 22, 2016, in connection with the Collaboration Agreement, the Company entered into the Co-Promotion Agreement to co-promote Grapiprant Products in the United States.

Under the terms of the Co-Promotion Agreement, Elanco has agreed to pay the Company, as a fee for promotional services performed and expenses incurred by the Company under the Co-Promotion Agreement, (i) 25% of the gross margin on net sales of Grapiprant Product sold in the United States under the Collaboration Agreement prior to December 31, 2018 (unless extended by mutual agreement), and (ii) a mid-single digit percentage of net sales of the Grapiprant Product in the United States after December 31, 2018 through 2028 (unless extended by mutual agreement).

VetStem BioPharma, Inc. (“VetStem”)

On June 12, 2014, the Company entered into an Exclusive License Agreement with VetStem (as amended, the “VetStem Agreement”) that granted the Company the exclusive United States rights for commercialization and development of VetStem’s allogeneic stem cells being developed for the treatment of pain and inflammation of canine osteoarthritis.

In January 2018, the Company exercised its right to terminate the VetStem Agreement, and on April 19, 2018, the termination became effective. During the nine months ended September 30, 2018, the Company did not incur any development expenses or milestones. As a result of the termination of the VetStem Agreement, the Company does not anticipate having to reimburse any further development expenses or make milestone payments to VetStem.

AskAt Inc. (“AskAt”)

AT-019

On February 28, 2018, the Company entered into an Exclusive License Agreement with AskAt (the “AskAt Agreement”) that granted the Company an exclusive global license for development and commercialization of compound AT-019 in the field of animal health. Under the terms of the AskAt Agreement, the Company paid an initial upfront license fee of $500 in the second quarter of 2018. The AskAt Agreement was accounted for as an asset acquisition. On the date of acquisition, the licensed technology had not reached technological feasibility in animal health indications and had no alternative future use in the field of animal health. Accordingly, in-process research and development expense of $500 was recorded upon acquisition in the first quarter of 2018 and paid in the second quarter of 2018.

The Company will be required to pay remaining milestone payments of up to $15,500 upon the Company’s achievement of milestones, including $3,000 of development/regulatory milestones and $12,500 of commercial milestones, as well as tiered single digit royalties on the Company’s product sales, if any. The commercial milestones owed to AskAt under the AskAt Agreement begin to be triggered upon the first commercial sale with the final tier being owed to AskAt once annual net sales reach $100,000. Milestones, at the discretion of the Company, can be paid 50% in cash and 50% in a number of the Company’s shares as determined per the terms of the AskAt Agreement. As of September 30, 2018, the Company had not accrued or paid any milestone or royalty payments since execution of the AskAt Agreement. The Company does not expect to achieve any milestones related to the AskAt Agreement in the next twelve months.

Collaboration and Option Agreement

On February 28, 2018, in connection with the AskAt Agreement, the Company entered into a Collaboration and Option Agreement (the “COA”) with AskAt for animal health research, including a right of first negotiation agreement for multiple therapeutic candidates with potential in pain, allergy and cancer. During the first quarter of 2018, the Company paid an initial upfront option fee of $500 under the terms of the COA, which was recognized as research and development expense in the consolidated statements of operations.

11. Common Stock

Authorized Common Stock

As of September 30, 2018 and December 31, 2017, the authorized number of shares of common stock was 100,000,000, par value $0.001 per share.

Common Stock Outstanding

As of September 30, 2018 and December 31, 2017, there were 47,981,034 and 42,532,725 shares of the Company’s common stock outstanding, net of 645,753 and 491,861shares of unvested restricted common stock, respectively.

Treasury Stock

As of September 30, 2018 and December 31, 2017, there were 92,099 and 80,916 shares of the Company’s common stock held as treasury stock at a cost of $1,162 and $1,107, respectively. During the nine months ended September 30, 2018 and 2017, 11,183 and 1,342 shares of restricted stock at a cost of $4.96 and $7.88 per share, respectively, were withheld to satisfy employee tax withholding obligations arising in conjunction with the vesting of restricted stock pursuant to the Company’s 2013 Incentive Award Plan (the

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“2013 Plan”).

Shelf Registration Statement

On August 4, 2017, the Company filed a shelf registration statement on Form S-3 (Reg. No. 333-219681) (the “Shelf Registration Statement”) with the SEC. The Shelf Registration Statement was declared effective by the SEC on August 16, 2017.

The Shelf Registration Statement allows the Company to offer and sell, from time to time, up to $100,000 of common stock, preferred stock, debt securities, warrants, units or any combination of the foregoing in one or more future public offerings. The terms of any future offering would be determined at the time of the offering and would be subject to market conditions and approval by the Company’s Board of Directors. Any offering of securities covered by the Shelf Registration Statement will be made only by means of a written prospectus and prospectus supplement authorized and filed by the Company.

At-the-Market Offering

Cowen and Company, LLC

On December 18, 2017, the Company entered into a Sales Agreement (“Cowen Sales Agreement”) with Cowen and Company, LLC (“Cowen”) pursuant to which the Company may sell from time to time, at its option, up to an aggregate of $50,000 of shares of its common stock through Cowen, as sales agent. Any sales of the shares of common stock would be made under the Company’s effective Registration Statement on Form S-3 (Reg. No. 333-219681), by means of ordinary brokers’ transactions on the Nasdaq Global Market or otherwise. Additionally, under the terms of the Cowen Sales Agreement, the shares of common stock may be sold at market prices, at negotiated prices or at prices related to the prevailing market price. The Company has agreed to pay Cowen a commission of 3% of the gross proceeds from the sale of such shares of common stock.

During the three and nine months ended September 30, 2018, the Company sold 962,053 and 5,144,244 shares of common stock for aggregate net proceeds of $4,863 and $24,230, after deducting commission fees of $151 and $754 and issuance costs of $21 and $164, respectively. As of the date of this filing, approximately $24,852 of shares of common stock remained available for sale under the Cowen Sales Agreement.

Barclays Capital Inc.(“Barclays”)

On October 16, 2015, the Company entered into a sales agreement with Barclays pursuant to which the Company could sell from time to time, at its option, up to an aggregate of $52,000 of shares of its common stock through Barclays, as sales agent. Sales of the shares of common stock were made under the Company’s then effective registration statement on Form S-3 (Reg. No. 333-197414), by means of ordinary brokers’ transactions on the Nasdaq Global Market or otherwise. Additionally, under the terms of the Barclays sales agreement, the shares of common stock could be sold at market prices, at negotiated prices or at prices related to the prevailing market price. The Company paid Barclays a commission of 2.75% of the gross proceeds from the sale of the shares of common stock.

On April 28, 2017, the Company terminated its Barclays sales agreement. As of that date, the Company had sold an aggregate of approximately $18,000 of the $52,000 available to be sold under the Barclays sales agreement.

Registered Direct Offering

On May 3, 2017, the Company entered into a Placement Agency Agreement (“PAA”) with Barclays, pursuant to which Barclays agreed to serve as placement agent for an offering of shares of common stock. In conjunction with the PAA, on May 3, 2017, the Company also entered into a Securities Purchase Agreement with certain investors for the sale by the Company of 5,000,000 shares of common stock at a purchase price of $5.25 per share (the “Offering”). The shares of common stock were offered and sold pursuant to the Company’s previously filed and then effective registration statement on Form S-3 (File No. 333-197414) and a related prospectus supplement. The Company agreed to pay Barclays an aggregate fee equal to 6.0% of the gross proceeds received by the Company from the Offering. The Offering closed on May 9, 2017, and the Company received aggregate net proceeds from the Offering of approximately $24,400, after deducting placement agent fees of $1,575 and offering expenses of $273.

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12. Stock-Based Awards

2010 Equity Incentive Plan

Activity related to stock options under the 2010 Equity Incentive Plan (the “2010 Plan”) for the nine months ended September 30, 2018, was as follows:

				Weighted
	Shares	Weighted		Average
	Issuable	Average		Remaining	Aggregate
	Under	Exercise		Contractual	Intrinsic
	Options	Price		Term	Value
				(In Years)
Outstanding as of December 31, 2017	57,394	$	4.22	5.11	$	73
Granted	—		—
Exercised	—		—
Forfeited	—		—
Expired	(4,011)		5.57
Outstanding as of September 30, 2018	53,383	$	4.12	4.35	$	82

No stock options have been granted under the 2010 Plan since the effective date of the 2013 Plan.

2013 Plan

On January 1, 2018, the annual increase in the number of shares available for issuance under the 2013 Plan was determined to be 1,203,369 shares in accordance with the automatic annual increase provisions of the 2013 Plan. As of September 30, 2018, there were 1,662,687 shares available for future grant under the 2013 Plan.

Activity related to stock options under the 2013 Plan for the nine months ended September 30, 2018, was as follows:

				Weighted
	Shares	Weighted		Average
	Issuable	Average		Remaining	Aggregate
	Under	Exercise		Contractual	Intrinsic
	Options	Price		Term	Value
				(in Years)
Outstanding as of December 31, 2017	2,557,143	$	11.45	7.41	$	794
Granted	798,000		4.84
Exercised	(3,843)		3.14
Forfeited	(45,090)		7.51
Expired	(64,847)		19.00
Outstanding as of September 30, 2018	3,241,363	$	9.73	7.26	$	1,559

For the nine months ended September 30, 2018, the weighted average grant date fair value of stock options granted was $3.16. For the nine months ended September 30, 2018, the total intrinsic value of options exercised was $6 and the total received from stock option exercises was $12.

Activity related to restricted stock under the 2013 Plan for the nine months ended September 30, 2018, was as follows:

		Weighted
		Average Grant
	Shares	Date Fair Value
Unvested restricted common stock as of December 31, 2017	491,861	$	7.59
Issued	476,000		4.80
Vested	(311,405)		7.76
Forfeited	(10,703)		5.31
Unvested restricted common stock as of September 30, 2018	645,753	$	5.49

For the nine months ended September 30, 2018, the total fair value of restricted common stock vested was $1,481. The Company did not receive cash proceeds for any of the restricted common stock issued during the nine months ended September 30, 2018.

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Stock-Based Compensation

The Company recorded stock-based compensation expense related to stock options and restricted stock as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Cost of product sales and inventories	$	29	$	42	$	92	$	126
Research and development		158		229		490		717
Selling, general and administrative		1,007		1,528		3,253		4,614
	$	1,194	$	1,799	$	3,835	$	5,457

As of September 30, 2018, the Company had an aggregate of $4,596 and $2,978 of unrecognized stock-based compensation expense for options outstanding and restricted stock awards, respectively, which is expected to be recognized over a weighted average period of 2.47 years and 1.80 years, respectively.

13. Net Income (Loss) Per Share

Basic and diluted net income (loss) per share was calculated as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Basic net income (loss) per share:
Numerator:
Net income (loss)	$	8,833	$	(8,920)	$	(6,088)	$	(31,912)
Denominator:
Weighted average shares outstanding, basic		47,310,408		42,445,553		46,128,197		39,820,573
Net income (loss) per share, basic	$	0.19	$	(0.21)	$	(0.13)	$	(0.80)
Diluted net income (loss) per share:
Numerator:
Net income (loss)	$	8,833	$	(8,920)	$	(6,088)	$	(31,912)
Denominator:
Weighted average shares outstanding, basic		47,310,408		42,445,553		46,128,197		39,820,573
Dilutive effect of outstanding stock awards		174,976		—		—		—
Weighted average shares outstanding, diluted		47,485,384		42,445,553		46,128,197		39,820,573
Net income (loss) per share, diluted	$	0.19	$	(0.21)	$	(0.13)	$	(0.80)

Stock options for the purchase of 2,986,462 weighted average shares of common stock and 177,219 weighted average unvested restricted stock awards were excluded from the computation of diluted net income per share for the three months ended September 30, 2018, because these stock awards had an anti-dilutive impact on net income earned for the period.

Stock options for the purchase 3,294,746 shares of common stock and 645,753 unvested restricted stock awards were excluded from the computation of diluted net loss per share for the nine months ended September 30, 2018, because these stock awards had an anti-dilutive impact due to the net loss incurred for the period.

Stock options for the purchase of 2,649,334 shares of common stock and 540,464 unvested restricted stock awards were excluded from the computation of diluted net loss per share for the three and nine months ended September 30, 2017, because these stock awards had an anti-dilutive impact due to the net loss incurred for the period. 

14. Income Taxes

The Company recorded no income tax expense or benefit during the three and nine months ended September 30, 2018 and 2017, due to a full valuation allowance recognized against its deferred tax assets.

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The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 22, 2017. SAB 118 provides a one-year measurement period from a registrant’s reporting period that includes the Tax Cuts and Jobs Act of 2017 (“TCJA”) enactment date to allow the registrant sufficient time to obtain, prepare and analyze information to complete the accounting required under ASC 740. Although the Company made a reasonable estimate of the gross amounts of the deferred tax assets as discussed in the 2017 Annual Report, a final determination of the TCJA’s impact on the deferred tax assets and related valuation allowance requirements remains incomplete pending a full analysis of the provisions of the TCJA and their interpretations. The ultimate impact of the TCJA on the Company’s reported results in 2018 and beyond may differ from the estimates provided therein, possibly materially, due to, among other things, changes in interpretations and assumptions the Company has made, guidance that may be issued, and other actions the Company may take as a result of the TCJA, different from what is presently contemplated. As of September 30, 2018, the Company has not recorded incremental accounting adjustments related to the TCJA as it continues to consider interpretations of its application, however, the Company expects to complete the accounting by December 2018.

15. Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss, net of their related tax effects, were as follows:

	Foreign		Accumulated
	Currency		Other
	Translation		Comprehensive
	Adjustment		Loss
As of December 31, 2017	$	(7,085)	$	(7,085)
Foreign currency translation adjustment		(473)		(473)
As of September 30, 2018	$	(7,558)	$	(7,558)

16. Legal Contingencies

From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business, including those related to patents, product liability and government investigations. The Company is not presently a party to any litigation which it believes to be material, and is not aware of any pending or threatened litigation against the Company which it believes could have a material effect on its consolidated financial statements. The Company accrues contingent liabilities when it is probable that a future liability has been incurred and such liability can be reasonably estimated.

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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 statements contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q that are not statements of historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. In this Quarterly Report on Form 10-Q, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” “estimates,” “plans,” “would,” “should,” “potential,” “continues” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. The forward-looking statements herein include without limitation, statements with respect to our plans and strategy for our business, anticipated timing of regulatory submissions and approvals, anticipated timing of availability and announcement of study results, anticipated timing of launch and commercialization of therapeutic candidates, ongoing efforts regarding the commercialization of therapeutic candidates, beliefs regarding market opportunities for our products and potential success of our therapeutic candidates, and anticipated milestone payments. These and other forward-looking statements included in this Quarterly Report on Form 10-Q involve risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to: our history of operating losses and our expectation that we will continue to incur losses for the foreseeable future; failure to obtain sufficient capital to fund our operations; risks relating to the impairment of intangible assets; effects ofstockholder class action lawsuits; unstable market and economic conditions; restrictions on our financial flexibility due to the terms of our credit facility; our substantial dependence upon the commercial success of our therapeutics GALLIPRANT, ENTYCE and NOCITA; development of our biologic therapeutic candidates is dependent upon relatively novel technologies and uncertain regulatory pathways, and biologics may not be commercially viable; denial or delay of regulatory approval for our existing or future therapeutic candidates; failure of our therapeutics, and our current or future therapeutic candidates that may obtain regulatory approval to achieve market acceptance or commercial success; effects of product liability lawsuits; failure to realize anticipated benefits of our acquisitions and difficulties associated with integrating the acquired businesses; development of pet therapeutics is a lengthy and expensive process with an uncertain outcome; competition in the pet therapeutics market, including from generic alternatives to our therapeutic candidates, and failure to compete effectively; failure to identify, license or acquire, develop and commercialize additional therapeutic candidates; failure to attract and retain senior management and key scientific personnel; our reliance on third-party manufacturers, suppliers and collaborators; regulatory restrictions on the marketing of our approved therapeutics and therapeutic candidates; our small commercial sales organization, and any failure to create a sales force or collaborate with third-parties to commercialize our approved therapeutics and therapeutic candidates; difficulties in managing the growth of our company; significant costs of being a public company; risks related to the effectiveness of our internal controls; changes in distribution channels for pet therapeutics; consolidation of our veterinarian customers; limitations on our ability to use our net operating loss carryforwards; the impact of new legislation on tax reform on our financial position or results of operations; impacts of generic products; safety or efficacy concerns with respect to our therapeutics; effects of system failures or security breaches; failure to perform under our agreements with Elanco Animal Health, or termination thereof; failure to obtain ownership of issued patents covering our therapeutic candidates or failure to prosecute or enforce licensed patents; failure to comply with our obligations under our license agreements; effects of patent or other intellectual property lawsuits; failure to protect our intellectual property; changing patent laws and regulations; non-compliance with any legal or regulatory requirements; litigation resulting from the misuse of our confidential information; the uncertainty of the regulatory approval process and the costs associated with government regulation of our therapeutic candidates; failure to obtain regulatory approvals in foreign jurisdictions; effects of legislative or regulatory reform with respect to pet therapeutics; the volatility of the price of our common stock; our status as an emerging growth company, which could make our common stock less attractive to investors; dilution of our common stock as a result of future financings; the influence of certain significant stockholders over our business; and provisions in our charter documents and under Delaware law could delay or prevent a change in control. These and other important factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2018, 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

Aratana Therapeutics, Inc. (“Aratana,” the “Company,” “we,” “us” or “our”) is a pet therapeutics company focused on licensing, developing and commercializing innovative therapeutics for dogs and cats. As a pioneer in pet therapeutics, Aratana’s mission is to deliver safe and effective therapeutics that elevate the standard of care in veterinary medicine. We work with companion animal veterinarians to bring new therapeutics to market that support the needs of pets and their owners.

We have three marketed therapeutics, including ENTYCE® (capromorelin oral solution) for appetite stimulation in dogs; NOCITA® (bupivacaine liposome injectable suspension) as a local post-operative analgesia for cranial cruciate ligament surgery in dogs and for use as a peripheral nerve block to provide regional post-operative analgesia following onychectomy in cats; and GALLIPRANT®  (grapiprant tablets) for the control of pain and inflammation associated with osteoarthritis in dogs, which we co-promote under an agreement with Elanco Animal Health, Inc. (“Elanco”). Our Canine Osteosarcoma Vaccine, Live Listeria Vector (AT-014) is conditionally licensed and is available at approximately two dozen study sites across the United States. Our pipeline has multiple therapeutic candidates in development for the potential treatment of pain, allergy, viral disease and cancer for dogs and cats.

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We have incurred significant net losses since our inception. These losses have resulted principally from costs incurred in connection with in-licensing our therapeutic candidates, research and development activities, and selling, general and administrative costs associated with our operations. As of September 30, 2018, we had a deficit accumulated since inception of $232.6 million and cash, cash equivalents, restricted cash and short-term investments of $56.4 million.

Business Updates

During the three months ended September 30, 2018, we recorded $21.6 million in net revenues for our three Food and Drug Administration (“FDA”) approved and marketed therapeutics. In the third quarter of 2018, we recorded $1.3 million in ENTYCE net product sales and we continue to see sequentially increasing revenues from target accounts. ENTYCE continues to show strong clinic penetration and re-order rates. We believe there are strong indicators, including quarter-over-quarter increasing net product sales in target accounts, that interactions by our sales team directly impact the uptake of ENTYCE. Therefore, our focus remains on education to drive frequency and duration of use within ENTYCE target accounts. For the three months ended September 30, 2018, we recorded $1.9 million in NOCITA net product sales, which continue to be driven by re-orders. We also recorded $18.4 million in licensing and collaboration revenue from Elanco for GALLIPRANT in the third quarter of 2018, which includes earning a $15.0 million commercial milestone based on year-to-date GALLIPRANT net product sales exceeding $35.0 million. According to Elanco, GALLIPRANT continues to show growth in net product sales, strong account penetration and has gained market share.

In the third quarter of 2018, we continued to make progress on our late-stage pipeline of therapeutic candidates for cats, in particular with regard to progress on NOCITA (bupivacaine liposome injectable suspension) and AT-002 (capromorelin). On August 3, 2018, we received FDA approval of NOCITA for its use as a peripheral nerve block to provide regional post-operative analgesia following onychectomy in cats. In August 2018, we submitted the technical section for safety to the FDA’s Center for Veterinary Medicine (“CVM”) for AT-002 in cats. Additionally, we anticipate the pivotal field effectiveness study evaluating AT-002 will complete target enrollment in mid-2019 and we anticipate submitting the technical section for chemistry, manufacturing and controls (“CMC”) for the cat-specific formulation of capromorelin to CVM in 2018.

Sales and Marketing

We reported $21.6 million in net revenues in the third quarter of 2018 related to ENTYCE sales, NOCITA sales, and GALLIPRANT licensing and collaboration revenues, which compares to $6.2 million in net revenues in the third quarter of 2017. Revenues in the third quarter of 2017 were primarily related to GALLIPRANT with $3.2 million in product sales of GALLIPRANT finished goods sold to Elanco prior to the manufacturing transfer and $2.2 million in licensing and collaboration revenue, which included a one-time payment of $1.0 million for the transfer of manufacturing responsibility to Elanco.

ENTYCE® (capromorelin oral solution) for appetite stimulation in dogs.

ENTYCE is commercially available to veterinarians in the United States through our direct sales organization and our network of national and regional distributors. In the third quarter of 2018, we recorded $1.3 million in ENTYCE net product sales. According to clinic level sales data, move-out of ENTYCE to veterinary clinics from distributors was 10% higher in the third quarter of 2018 compared to the second quarter. While inventory levels across the sales channels have been relatively stable, distributors did not re-stock as much volume within the third quarter. Within accounts targeted by our therapeutic specialists, net product sales continue to sequentially increase quarter-over-quarter. ENTYCE continues to have strong clinic penetration and as of September 30, 2018, nearly half of the approximately 25,000 veterinary clinics in the United States have ordered ENTYCE. In the third quarter of 2018, more than 50% of the approximately 12,000 total ENTYCE customers re-ordered the therapeutic. Further, within targeted accounts, we have observed a positive correlation between the number of interactions (educational events or interactions with our therapeutic specialists) and ENTYCE net sales.

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Market research completed in June 2018 showed that of the veterinarians surveyed who are prescribing ENTYCE, 90% cite doing so because of their belief in the therapeutic’s efficacy. We believe strong target account penetration and sequentially increasing revenue within target accounts, paired with positive feedback on the therapeutic profile, indicates that veterinarians are satisfied with ENTYCE. Our focus remains on building awareness of canine inappetence through educational events and gaining greater use within existing accounts. We continue to believe the frequency with which a veterinarian reaches for ENTYCE and duration of therapy, as measured in days, has the potential to increase sales as veterinarians become increasingly familiar with the use of ENTYCE.

Aratana is continuing to explore capromorelin for weight management in cats with chronic kidney disease and if approved, we believe the therapeutic candidate may better address weight loss in cats as a mimetic to the naturally occurring hunger hormone.

NOCITA® (bupivacaine liposome injectable suspension) to provide local postoperative analgesia for cranial cruciate ligament
surgery in dogs and for use as a peripheral nerve block to provide regional post-operative analgesia following onychectomy in cats.

NOCITA is commercially available to veterinarians in the United States through our direct sales organization. In the third quarter of 2018, we recorded $1.9 million in NOCITA net product sales as compared to $0.7 million in the third quarter of 2017. We believe the continued quarter-over-quarter sequential increase in sales since launch is primarily driven by strong re-order rates in the third quarter of 2018.

We believe the sequential growth is also correlated to strong brand awareness and satisfaction among surgeons. Our market research among surgeons demonstrated more than 90% of participants are aware of NOCITA, and veterinarians prescribing NOCITA cite the therapeutic’s ability to provide 72 hours of pain relief and its safety profile as the primary benefits. Following the FDA approval to expand the NOCITA label for a cat procedure on August 3, 2018, we believe a wider set of veterinarians will become increasingly interested in the therapeutic given the two administration techniques and two species on the label. However, we believe NOCITA will continue to remain most relevant to surgeons. In addition, we have amended our agreements with Pacira Pharmaceuticals, Inc. (“Pacira”), the supplier of NOCITA, and anticipate commencing the regulatory process for a smaller vial size (10 mL). We believe having NOCITA available in a smaller volume vial size will be attractive to a broader set of veterinarians for dosing cats and smaller dogs. If approved by the FDA, we anticipate NOCITA in a 10 mL vial could be available to veterinarians in the fall of 2019.

GALLIPRANT® (grapiprant tablets) for the control of pain and inflammation associated with osteoarthritis in dogs.

GALLIPRANT is commercially available to veterinarians in the United States through our commercial collaborator Elanco, our sales organization and distributors. In the third quarter of 2018, Aratana recorded $18.4 million in licensing and collaboration revenue from Elanco, which includes earning a $15.0 million commercial milestone based on year-to-date GALLIPRANT net product sales exceeding $35.0 million. Under the Collaboration, License, Development and Commercialization Agreement with Elanco (as amended, the “Collaboration Agreement”), the Company is entitled to two additional payments totaling up to $60 million upon the achievement of certain sales milestones. Elanco recorded approximately $18 million in net product sales in the third quarter of 2018 and the increase is attributed to the re-supply of the 100mg SKUs andconfidence in the brand. The $18.4 million in licensing and collaboration revenue is compared to $2.2 million in the third quarter of 2017, which includes a one-time $1.0 million manufacturing payment from Elanco.

GALLIPRANT has been purchased by more than two-thirds of veterinary clinics in the United States in 2018 to-date. According to third-party market research through August 2018, GALLIPRANT is the leading branded therapeutic in the competitive NSAID category and has achieved approximately 14% market share.

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Canine Osteosarcoma Vaccine, Live Listeria Vector (AT-014)for the treatment of dogs diagnosed with osteosarcoma, one year of age or older.

The Canine Osteosarcoma Vaccine is conditionally licensed by the USDA’s Center for Veterinary Biologics and is available at approximately two dozen veterinary oncology practice groups participating in an extended field study across the United States. The study is required by USDA to progress from conditional licensure to full licensure and study sites are enrolling dogs. While the study is on-going, any product purchased for use in the clinical study will offset research and development expenses.

Research and Development

The following summarizes our regulatory and development advances in the third quarter of 2018 for therapeutic candidates being developed under FDA and USDA regulations:

NOCITA (bupivacaine liposome injectable suspension) for cats.
On August 3, 2018, we received FDA approval of the NOCITA New Animal Drug Application to include its use as a peripheral nerve block to provide regional post-operative analgesia following onychectomy in cats. The approval is based on a multi-center, placebo-controlled, randomized and masked field study of 241 client-owned cats undergoing an elective onychectomy surgery. Results from the study showed NOCITA met efficacy success criteria of no required rescue analgesia using a cat-specific post-operative pain assessment tool. Cats receiving NOCITA demonstrated a statistically significant improvement in pain evaluation success rates at primary and secondary endpoints. At 72 hours, NOCITA success rates were 68.4% compared to 35.3% for placebo. Separately, in a 22-day laboratory safety study with cats receiving NOCITA, bupivacaine HCl or saline as a femoral nerve block, NOCITA was well-tolerated when administered on days 0, 9 and 18 at doses representing 2, 4 and 6 times the maximum labeled dose of 5.3 mg/kg/forelimb.

AT-002 (capromorelin) for cats.
In August 2018, we submitted the target animal safety technical section to the FDA’s CVM for AT-002, a ghrelin receptor agonist. The pivotal field effectiveness study evaluating AT-002 for weight management in cats with chronic kidney disease is on-going and we anticipate target enrollment will be completed in mid-2019. We anticipate submitting the technical section for CMC for the cat-specific formulation of capromorelin to CVM in 2018.

AT-018 (timapiprant) for dogs.
We plan on expanding the on-going pilot study evaluating AT-018, an oral CRTH2 antagonist for atopic dermatitis, to include more dogs and anticipate completing target enrollment in mid-2019, which we believe may help us benefit from new regulations on conditional approval introduced with the 2018 reauthorization of the Animal Drug User Fee Act (“ADUFA”).

AT-019.
We have started formulation and active pharmaceutical ingredient (“API”) work for AT-019, a next-generation EP4 receptor antagonist, which we believe has potential in pain, inflammation and other indications in dogs and cats.

Manufacturing and Supply Chain

We manage third-party manufacturers to supply API, drug product and packaged product for the development and commercialization of our small molecule product candidates. We have chosen to rely on third-party contract manufacturer organizations (“CMOs”) rather than devote resources toward developing or acquiring internal manufacturing facilities.

ENTYCE® (capromorelin oral solution).
Given prior investments in ENTYCE commercial supply, we believe we have sufficient inventories of ENTYCE. Over time, we intend to initiate process improvements to improve our margins.

NOCITA® (bupivacaine liposome injectable suspension).

For NOCITA, Pacira is our exclusive supplier and under our supply agreement, Pacira is responsible for supplying us with finished drug product in vials. In July 2018, we announced that we have amended our agreements with Pacira to include a smaller vial size (10 mL), as further discussed in Note 10 to our consolidated financial statements. We anticipate commencing the post-approval submission process with the FDA and if approved, we anticipate the 10 mL vial could be available in the fall of 2019.

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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.

Except as discussed in Note 1, “Summary of Significant Accounting Policies – New Accounting Standards”, and Note 2, “Revenue”, to our consolidated financial statements included within this report, there have been no material changes to our critical accounting policies through September 30, 2018, from those discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 14, 2018.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2018 and 2017

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018		2017		% Change		2018		2017		% Change
	(Dollars in thousands)						(Dollars in thousands)
Revenues:
Licensing and collaboration revenue	$	18,385	$	2,192	>100.0	%	$	21,982	$	3,899	>100.0	%
Product sales		3,170		3,971	(20.2)	%		8,524		11,217	(24.0)	%
Total revenues		21,555		6,163	>100.0	%		30,506		15,116	>100.0	%
Costs and expenses:
Cost of product sales		2,172		3,690	(41.1)	%		4,013		10,475	(61.7)	%
Royalty expense		1,346		441	>100.0	%		3,067		1,117	>100.0	%
Research and development		1,507		3,220	(53.2)	%		5,288		11,574	(54.3)	%
Selling, general and administrative		7,010		6,910	1.4	%		21,418		21,323	0.4	%
Amortization of intangible assets		129		85	51.8	%		388		235	65.1	%
In-process research and development		—		—	NA			500		—	NA
Other income (expense):
Interest income		159		138	15.2	%		441		311	41.8	%
Interest expense		(716)		(870)	(17.7)	%		(2,357)		(2,601)	(9.4)	%
Other expense, net		(1)		(5)	(80.0)	%		(4)		(14)	(71.4)	%

Revenues

During the three and nine months ended September 30, 2018, total revenues increased by $15.4 million, as compared to the corresponding 2017 periods. The increase in total revenues during the three months ended September 30, 2018, was due to an increase of $16.2 million in licensing and collaboration revenue recognized from the Collaboration Agreement and the Co-Promotion Agreement with Elanco (collectively, the “Elanco Agreements”), partially offset by a decrease of $0.8 million in net product sales primarily as a result of transferring GALLIPRANT manufacturing to Elanco which occurred in the fourth quarter of 2017. The increase in total revenues during the nine months ended September 30, 2018, was due to an increase of $18.1 million in licensing and collaboration revenue recognized from the Elanco Agreements, partially offset by a decrease of $2.7 million in net product sales primarily as a result of transferring GALLIPRANT manufacturing to Elanco which occurred in the fourth quarter of 2017. During the three and nine months ended September 30, 2018, product sales consisted of net sales of NOCITA and ENTYCE. During the three and nine months ended September 30, 2017, product sales consisted of net sales of GALLIPRANT, which began in the first quarter of 2017 and ended in the fourth quarter of 2017, NOCITA, BLONTRESS, and TACTRESS.

We believe that product sales for the remainder of 2018 will be a combination of sales of ENTYCE and NOCITA. Our licensing and collaboration revenue in the third quarter of 2018 included the $15.0 million GALLIPRANT sales milestone earned from Elanco, which we expect to receive in the fourth quarter of 2018. Our licensing and collaboration revenue continues to be substantially dependent on Elanco’s ability to successfully commercialize GALLIPRANT in accordance with the Elanco Agreements.

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Cost of product sales

During the three and nine months ended September 30, 2018, cost of product sales decreased by $1.5 million and $6.5 million, respectively, as compared to the corresponding 2017 periods. The decrease in both periods was primarily due to cost of product sales of GALLIPRANT, which we sold to Elanco during 2017, partially offset by an increase in cost of product sales of ENTYCE and NOCITA. During the three and nine months ended September 30, 2018, we recognized inventory valuation adjustment losses in cost of product sales in the amounts of $0.9 million and $1.2 million, respectively, from application of the lower of cost and net realizable value. These losses are primarily related to certain SKUs of ENTYCE finished goods that were written down. Prior to the launch of ENTYCE, we made a considerable investment in ENTYCE inventories. The majority of our ENTYCE inventories consist of API, which has a shelf life of several years. Our current inventory levels represent our market expectations. As we are in the early stages of commercialization of our products, we will continue to evaluate the net realizable value of our inventories and may experience future inventory valuation adjustment losses.

We anticipate cost of product sales as a percentage of product sales will improve in 2018 as compared to 2017. This improvement is expected to be largely due to the fact that GALLIPRANT manufacturing responsibilities have been assumed by Elanco. However, this margin improvement related to GALLIPRANT is expected to be partially offset by lower margins on ENTYCE as we are no longer selling inventories from process validation batches that were previously written down and by inventory valuation adjustment losses.

Royalty expense

During the three and nine months ended September 30, 2018, royalty expense increased by $0.9 million and $2.0 million, respectively, as compared to the corresponding 2017 periods. The increase in both periods was primarily a result of our product sales of NOCITA and ENTYCE, and Elanco’s product sales of GALLIPRANT. We believe any future royalty expense for the remainder of 2018 will be substantially dependent on Elanco’s ability to successfully commercialize GALLIPRANT in accordance with the Elanco Agreements, and our continuing efforts to commercialize NOCITA and ENTYCE.

Research and development

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018		2017		% Change		2018		2017		% Change
	(Dollars in thousands)						(Dollars in thousands)
Contracted development costs	$	632	$	2,229	(71.6)	%	$	2,028	$	8,669	(76.6)	%
Personnel costs		772		835	(7.5)	%		2,346		2,527	(7.2)	%
Other costs		103		156	(34.0)	%		914		378	>100.0	%
Total research and development	$	1,507	$	3,220	(53.2)	%	$	5,288	$	11,574	(54.3)	%

During the three and nine months ended September 30, 2018, research and development expense decreased by $1.7 million and $6.3 million, respectively, as compared to the corresponding 2017 periods. The decrease during the three months ended September 30, 2018, was due primarily to a decrease in contracted development costs of $1.6 million due to fewer ongoing pivotal programs, a decrease in personnel costs of $0.1 million and a decrease in other costs of $0.1 million. The decrease during the nine months ended September 30, 2018, was due primarily to a decrease in contracted development costs of $6.6 million due to fewer ongoing pivotal programs and a decrease in personnel costs of $0.2 million, partially offset by an increase in other costs of $0.5 million primarily from an initial upfront option fee of $0.5 million pursuant to the collaboration and option agreement with AskAt.

Since we have completed several of our pivotal studies and achieved several development milestones for GALLIPRANT, ENTYCE and NOCITA, we expect our research and development expenses to be lower in the fourth quarter of 2018 than in the fourth quarter of 2017. Research and development expenses in the remainder of 2018 are expected to be primarily related to expanding the label of our approved therapeutics for additional indications and/or species and advancing our development portfolio.

Selling, general and administrative expense

During the three and nine months ended September 30, 2018, selling, general and administrative expense increased by $0.1 million, as compared to the corresponding 2017 periods. We expect selling, general and administrative expense to remain relatively consistent throughout 2018 as we have substantially completed the build out of our sales organization and corporate infrastructure in support of the commercialization of NOCITA and ENTYCE, and our co-promotion of GALLIPRANT.

In-process research and development

During the three and nine months ended September 30, 2018, in-process research and development expense increased by $0.0 million and $0.5 million, respectively, as compared to the corresponding 2017 periods. The increase during the nine months ended September 30, 2018, was solely due to an initial upfront license fee of $0.5 million pursuant to the exclusive license agreement with AskAt.  

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Financial Condition, Liquidity and Capital Resources

Our financial condition is summarized as follows:

	September 30, 2018		December 31, 2017		Change %
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	54,285	$	66,868	(18.8)	%
Marketable securities - short-term		1,736		747	>100.0	%
Total cash, cash equivalents and marketable securities	$	56,021	$	67,615	(17.1)	%
Borrowings:
Loans payable, net	$	25,243	$	36,825	(31.5)	%
Working capital:
Current assets	$	91,068	$	85,239	6.8	%
Current liabilities		28,688		35,496	(19.2)	%
Total working capital	$	62,380	$	49,743	25.4	%

We have incurred significant net losses since our inception. These losses have resulted principally from costs incurred in connection with in-licensing of our therapeutic candidates, research and development activities and selling, general and administrative costs associated with our operations. As of September 30, 2018, we had an accumulated deficit of $232.6 million and cash, cash equivalents and short-term investments of $56.0million.

We expect to continue to incur operating losses for the foreseeable future as we work to develop and commercialize our therapeutics and therapeutic candidates. If we cannot generate sufficient cash from operations in the future, we may seek to fund our operations through corporate collaborations and licensing arrangements, or other sources such as public or private equity offerings and further debt (re)financings. If we are not able to raise additional capital on terms acceptable to us, or at all, as and when needed, we would be forced to delay, reduce, or eliminate certain research and development programs, reduce or eliminate discretionary operating expenses or grant rights to develop and market therapeutics or therapeutic candidates that we would otherwise prefer to develop and market ourselves, which could otherwise adversely affect our business prospects. Our failure to raise capital, as and when needed, would have a negative impact on our financial condition and our ability to pursue our business strategies as this capital is necessary for us to perform the research and development and commercial activities required to generate future revenue streams. As disclosed in Note 8 to our consolidated financial statements, we have a term loan and a revolving credit facility with an aggregate principal balance of $24.5 million as of September 30, 2018. The terms of the loan agreement require us to maintain certain minimum liquidity at all times (the greater of cash equal to fifty percent (50%) of outstanding balance or remaining months’ liquidity, which is calculated on an average trailing three (3) month basis, equal to six (6) months or greater), which as of September 30, 2018, was approximately $12.3 million. If the minimum liquidity is not met, we may be required to repay the loans prior to their scheduled maturity dates. At September 30, 2018, we were in compliance with all financial covenants. As of the date of the filing of this Quarterly Report on Form 10-Q, we believe that our existing cash, cash equivalents and short-term investments of $56.0 million as of September 30, 2018, will allow us to fund our operations and our debt obligations for at least one year from the issuance of our consolidated financial statements. Our assessment through one year from the issuance of these consolidated financial statements does not include receipt of the $15.0 million milestone receivable under the Collaboration Agreement with Elanco. The receipt of the milestone payment will allow us to extend our cash beyond one year from the issuance of these consolidated financial statements into 2020.

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.

Shelf Registration Statement

On August 4, 2017, we filed a new shelf registration statement on Form S-3 (Reg. No. 333-219681) (the “Shelf Registration Statement”) with the SEC. The Shelf Registration Statement was declared effective by the SEC on August 16, 2017.

The Shelf Registration Statement allows us to offer and sell, from time to time, up to $100.0 million of common stock, preferred stock, debt securities, warrants, units or any combination of the foregoing in one or more future public offerings. The terms of any future offering would be determined at the time of the offering and would be subject to market conditions and approval by our Board

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of Directors. Any offering of securities covered by the Shelf Registration Statement will be made only by means of a written prospectus and prospectus supplement authorized and filed by us.

At-the-Market Offering

Cowen and Company, LLC

On December 18, 2017, we entered into a Sales Agreement (“Cowen Sales Agreement”) with Cowen and Company, LLC (“Cowen”) pursuant to which we may sell from time to time, at our option, up to an aggregate of $50.0 million of shares of our common stock through Cowen, as sales agent. Any sales of the shares of common stock would be made under our effective Registration Statement on Form S-3 (Reg. No. 333-219681), by means of ordinary brokers’ transactions on the Nasdaq Global Market or otherwise. Additionally, under the terms of the Cowen Sales Agreement, the shares of common stock may be sold at market prices, at negotiated prices or at prices related to the prevailing market price. We have agreed to pay Cowen a commission of 3% of the gross proceeds from the sale of such shares of common stock.

During the three and nine months ended September 30, 2018, we sold 962,053 and 5,144,244 shares of common stock for aggregate net proceeds of $4.9 million and $24.2 million, after deducting commission fees of $0.2 million and $0.8 million and issuances costs of less than $0.1 million and $0.2 million, respectively. As of the date of this filing, approximately $24.9 million of shares of common stock remained available for sale under the Cowen Sales Agreement.

Indebtedness

On October 16, 2015, we and our wholly-owned subsidiary Vet Therapeutics, Inc. (together the “Borrowers”) entered into a Loan and Security Agreement, as amended on February 24, 2017 (the “Loan Agreement”), with Pacific Western Bank (“Pacific Western”) as collateral agent (“Collateral Agent”) and a lender and Oxford Finance LLC as a lender (“Oxford” and together with Pacific Western, the “Lenders”), pursuant to which the Lenders agreed to make available to the Borrowers, a term loan in an aggregate principal amount up to $35.0 million (the “Term Loan”), and a revolving credit facility in an aggregate principal amount up to $5.0 million (the “Revolving Line”), subject to certain conditions to funding. The Term Loan and the Revolving Line bear interest per annum at the greater of (i) 6.91% or (ii) 3.66% plus the prime rate, which is customarily defined. Under the Loan Agreement, all principal and accrued interest on the Term Loan is due on October 16, 2019 (the “Term Loan Maturity Date”), and all principal and accrued interest on the Revolving Line was due on October 16, 2017 (the “Prior Revolving Maturity Date”). Effective as of July 31, 2017, we amended the Loan Agreement (the “Second Amendment”). The terms of the Second Amendment, among other things, extended the maturity of the Revolving Line to October 16, 2019 (the “Revolving Line Maturity Date”), with amortized equal repayments of the principal outstanding under the Revolving Line beginning November 1, 2018, and provided a six (6) month interest only period for the Term Loan, starting on the date of the Second Amendment.

As security for their obligations under the Loan Agreement, the Borrowers granted a security interest in substantially all of their existing and after-acquired assets except for their intellectual property and certain other customary exclusions. Subject to customary exceptions, the Borrowers are not permitted to encumber their intellectual property.

The Borrowers are obligated to pay a final payment fee equal to 3.30% of the principal amount of such Term Loan, if the Term Loan is being prepaid or repaid upon the earliest to occur of the Term Loan Maturity Date, the acceleration of any Term Loan or the prepayment of a Term Loan. The Borrowers were obligated to pay a termination fee equal to 3.30% of the highest outstanding amount of the Revolving Line with respect to the Revolving Line upon the earliest to occur of the Prior Revolving Maturity Date, the acceleration of the Revolving Line or the termination of the Revolving Line. The Borrowers will also be obligated to pay an unused-line fee equal to 0.25% per annum of the average unused portion of the Revolving Line.

We are not subject to any new financial covenants as a result of the Second Amendment. At the closing of the Second Amendment, we paid the Lenders an amendment fee of $0.2 million and a facility fee of $0.1 million. We are obligated to pay a new termination fee equal to $0.2 million upon the earliest to occur of the Revolving Line Maturity Date, the acceleration of the Revolving Line or the termination of the Revolving Line. The existing termination fee of $0.2 million was due on the Prior Revolving Maturity Date, and was paid on October 17, 2017.

The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, limits or restrictions on the Borrowers’ ability to incur liens, incur indebtedness, make certain restricted payments, make certain investments, merge, consolidate, make an acquisition, enter into certain licensing arrangements and dispose of certain assets. In addition, the Loan Agreement contains customary events of default that entitle the Lenders to cause the Borrowers’ indebtedness under the Loan Agreement to become immediately due and payable. The events of default, some of which are subject to cure periods, include, among others, a non-payment default, a covenant default, the occurrence of a material adverse change in our business, the occurrence of an insolvency, a material judgment default, defaults regarding other indebtedness and certain actions by governmental authorities. Upon the occurrence and for the duration of an event of default, an additional default interest rate equal to 4% per annum will apply to all obligations owed under the Loan Agreement. The Loan Agreement requires that we maintain certain minimum liquidity at all times, which as of September 30, 2018, was approximately $12.3 million. If the minimum liquidity requirement is not met, the Borrowers may be required to repay the loans prior to their scheduled maturity dates. At September 30, 2018, the Borrowers were in compliance with all financial covenants, including the minimum liquidity covenant.

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Working Capital

We define working capital as current assets less current liabilities. The increase in working capital at September 30, 2018, from December 31, 2017, reflects an increase in total current assets of $5.8 million and a decrease in total current liabilities of $6.8 million. The increase in total current assets was primarily driven by an increase in accounts receivable, primarily due to the $15.0 million GALLIPRANT sales milestone earned from Elanco, as well as by proceeds from the at-the-market offering and customer payments, partially offset by a decrease in cash and cash equivalents due to payments for our research and development activities related to our programs, payments for inventories, selling, general and administrative expenses, and payments of debt principal and interest. The decrease in total current liabilities was primarily a result of payments for ENTYCE inventories and a decrease in licensing and collaboration commitment as a result of the adoption of the Accounting Standards Codification Topic 606, partially offset by an increase in the current portion of loans payable based on their amortization schedules.  

Cash Flows

A summary of our cash flows for the nine months ended September 30, 2018 and 2017, is as follows:

	Nine Months Ended
	September 30,
	2018		2017
	(Dollars in thousands)
Net cash used in operating activities	$	(23,768)	$	(38,528)
Net cash used in investing activities	$	(989)	$	(3,514)
Net cash provided by financing activities	$	12,187	$	23,554

Net cash used in operating activities

During the nine months ended September 30, 2018, net cash used in operating activities was $23.8 million. We had a net loss of $6.1 million which includes a non-cash expense for stock-based compensation of $3.8 million, a non-cash depreciation and amortization expense of $0.7 million, a non-cash interest expense of $0.4 million and market value adjustments to inventories of $1.2 million. Our net loss was primarily attributed to our research and development activities related to our programs and our selling, general and administrative expenses, partially offset by product sales revenues and licensing and collaboration revenues from the Collaboration Agreement with Elanco. Net cash used in operating assets and liabilities was primarily due to an increase in accounts receivable, net of $17.2 million, a decrease in accounts payable of $6.8 million, an increase in inventories of $1.4 million, and an increase in prepaid expenses and other current assets of $0.1 million, partially offset by an increase in accrued expenses and other liabilities of $1.5 million. The decrease in accounts payable was primarily related to payments for ENTYCE inventories and trade payables. The increase in accounts receivable was primarily due to the $15.0 million GALLIPRANT sales milestone earned from Elanco during the third quarter of 2018.

During the nine months ended September 30, 2017, net cash used in operating activities was $38.5 million. We had a net loss of $31.9 million which includes a non-cash expense for stock-based compensation of $5.5 million, a non-cash depreciation and amortization expense of $0.9 million, a non-cash interest expense of $0.4 million, and market value adjustments to inventories of $0.4 million. Our net loss was primarily attributed to our research and development activities related to our programs and our selling, general and administrative expenses, partially offset by product sales revenues and licensing and collaboration revenues from the Elanco Agreements. Net cash used in operating assets and liabilities was primarily due to an increase in accounts receivable of $9.3 million, a decrease in accounts payable of $4.0 million, and a decrease in accrued expenses and other liabilities of $2.4 million, partially offset by a decrease in inventories of $1.7 million, a decrease in prepaid expenses and other current assets of $0.2 million and a decrease in other assets of $0.1 million. The decrease in accounts payable was primarily related to payments for GALLIPRANT inventories and trade payables. The increase in accounts receivable and the decrease in inventories were primarily related to GALLIPRANT sales. Also, accounts receivable increased due to receivables under the Elanco Agreements.

Net cash used in investing activities

During the nine months ended September 30, 2018, net cash used in investing activities was $1.0 million, which consisted of the purchases of investments of $3.0 million, partially offset by the proceeds from the maturities and sales of investments of $2.0 million.

During the nine months ended September 30, 2017, net cash used in investing activities was $3.5 million, which primarily consisted of a $3.0 million milestone payment for intangible assets for currently marketed products and the purchases of investments of $3.0 million, partially offset by proceeds from the maturities and sales of investments of $2.5 million.

Net cash provided by financing activities

During the nine months ended September 30, 2018, net cash provided by financing activities was $12.2 million. Net cash provided by financing activities consisted of the proceeds, net of commission fees, from the issuance of common stock of $24.4 million, partially offset by $12.0 million of payments on loans payable and $0.2 million of payments for common stock issuance costs.

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During the nine months ended September 30, 2017, net cash provided by financing activities was $23.6 million. Net cash provided by financing activities consisted of the proceeds, net of commission fees, from the issuance of common stock of $27.5 million and proceeds from stock option exercises of $0.2 million, partially offset by $3.5 million of payments on loans payable, $0.3 million of payments for common stock issuance costs and $0.2 million of payments for debt issuance costs.

Contractual Obligations andOff-Balance Sheet Arrangements

Contractual Obligations

Our contractual obligations primarily consist of our obligations under our loans payable, non-cancellable operating leases, minimum royalties and other purchase obligations, excluding amounts related to other funding commitments, contingent development, regulatory and commercial milestone payments, contract manufacturer commitments and off-balance sheet arrangements as described below. As of September 30, 2018, there were no material changes in our contractual obligations since December 31, 2017, except for the contract manufacturer commitments described below.

Other Funding Commitments

As of September 30, 2018, we have several ongoing development programs in various stages of the regulatory process. Our most significant expenditures are to clinical research and contract manufacturing organizations. The contracts are generally cancellable, with notice, at our option.

Contingent Development, Regulatory and Commercial Milestone Payments

Based on our development plans as of September 30, 2018, we have committed to make potential future milestone payments to third parties of up to approximately $118.4 million, of which $86.4 million are for commercial milestones, as part of our various collaborations, including licensing and development programs. Approximately $79.4 million of the commercial milestones relate to the achievement of various sales thresholds. 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 was not considered probable as of September 30, 2018, such contingencies have not been recorded in our consolidated financial statements.

We anticipate that we may pay approximately $0.0 million and $2.0 million of milestone payments during the remainder of 2018 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 that may not be achieved.

Contract Manufacturer Commitments

Our independent CMOs manufacture our products and product components based on our forecasts. These forecasts are based on estimates of future demand for our products, which are in turn based on available historical trends and analysis from sales and product marketing organizations, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate supply, we may issue forecasts and orders for components and products that are non-cancellable. As of September 30, 2018 and December 31, 2017, we had non-cancellable open orders for the purchase of inventories of $1.2 million and $7.1 million, respectively.

Off-Balance Sheet Arrangements

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

Recently Issued and Adopted Accounting Pronouncements

For a discussion of new accounting standards please read Note 1, “Summary of Significant Accounting Policies – New Accounting Standards” to our consolidated financial statements included within this report.

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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, 2017, filed with the SEC on March 14, 2018. As of September 30, 2018, there were no material changes to our market risks or management of such risks since December 31, 2017.

Item 4. Controls and Procedures

Limitations on Effectiveness of Controls and Procedures

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

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2018.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) identified in connection with the evaluation of our internal control performed during the fiscal quarter ended September 30, 2018, 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

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any litigation that we believe to be material and we are not aware of any pending or threatened litigation against us that we believe could have a material adverse effect on our business, operating results, financial condition or cash flows.

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 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, 2017.

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

Unregistered Sales of Equity Securities

None.

Repurchases of Common Stock

The repurchase activity for the three months ended September 30, 2018, was as follows:

					Total Number of	Maximum Number of
	Total Number		Average		Shares Purchased	Shares That May Yet Be
	of Shares		Price Paid		as Part of Publicly	Purchased Under the
	Purchased		Per Share		Announced Plan or Program	Plan or Program
July 1, 2018 - July 31, 2018	784	(1)	$	4.36	—	N/A
August 1, 2018 - August 31, 2018	—			—	—	N/A
September 1, 2018 - September 30, 2018	949	(1)		5.96	—	N/A

(1) Consists of shares of restricted stock that were withheld to satisfy employee tax withholding obligations arising in conjunction with the vesting of restricted stock pursuant to our 2013 Incentive Award Plan.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

		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.

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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: November 2, 2018	By:	/s/    Steven St. Peter
		Steven St. Peter, M.D.
		President and Chief Executive Officer
		(Principal Executive Officer)
Date: November 2, 2018	By:	/s/    Craig Tooman
		Craig Tooman
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Steven St. Peter, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Aratana Therapeutics, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 2, 2018

/s/ Steven St. Peter

Steven St. Peter, M.D.

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Craig Tooman, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Aratana Therapeutics, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 2, 2018

/s/ Craig Tooman

Craig Tooman

Chief Financial Officer and Treasurer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Steven St. Peter, Chief Executive Officer of Aratana Therapeutics, Inc. (the “Company”), hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Quarterly Report on Form 10-Q of the Company for the period endedSeptember 30, 2018 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 2, 2018

/s/ Steven St. Peter

Steven St. Peter, M.D.

Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Craig Tooman, Chief Financial Officer and Treasurer of Aratana Therapeutics, Inc. (the “Company”), hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Quarterly Report on Form 10-Q of the Company for the periodended September 30, 2018 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 2, 2018

/s/ Craig Tooman

Craig Tooman

Chief Financial Officer and Treasurer

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2018	Oct. 29, 2018
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2018
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q3
Entity Registrant Name	ARATANA THERAPEUTICS, INC.
Entity Central Index Key	0001509190
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	true
Entity Ex Transition Period	true
Trading Symbol	petx
Entity Common Stock, Shares Outstanding		48,624,202

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 54,285	$ 66,868
Short-term investments	1,736	747
Accounts receivable, net	19,577	2,406
Inventories	13,732	13,576
Prepaid expenses and other current assets	1,738	1,642
Total current assets	91,068	85,239
Property and equipment, net	811	1,166
Goodwill	40,846	41,295
Intangible assets, net	6,228	6,616
Restricted cash	351	350
Other long-term assets	499	526
Total assets	139,803	135,192
Current liabilities:
Accounts payable	657	7,451
Accrued expenses and other current liabilities	5,248	3,712
Licensing and collaboration commitment	200	7,000
Current portion – loans payable	22,583	17,333
Total current liabilities	28,688	35,496
Loans payable, net	2,660	19,492
Other long-term liabilities	60	70
Total liabilities	31,408	55,058
Commitments and contingencies (Notes 5 and 16)
Stockholders' equity:
Common stock, $0.001 par value; 100,000,000 shares authorized at September 30, 2018 and December 31, 2017, and 47,981,034 and 42,532,725 issued and outstanding at September 30, 2018 and December 31, 2017, respectively	48	43
Treasury stock, at cost; 92,099 and 80,916 shares at September 30, 2018 and December 31, 2017, respectively	(1,162)	(1,107)
Additional paid-in capital	349,671	321,599
Accumulated deficit	(232,604)	(233,316)
Accumulated other comprehensive loss	(7,558)	(7,085)
Total stockholders' equity	108,395	80,134
Total liabilities and stockholders' equity	$ 139,803	$ 135,192

XML

Consolidated Balance Sheets (Parenthetical) - $ / shares	Sep. 30, 2018	Dec. 31, 2017
Consolidated Balance Sheets [Abstract]
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	47,981,034	42,532,725
Common stock, shares outstanding	47,981,034	42,532,725
Treasury stock, shares	92,099	80,916

XML

Consolidated Statements of Operations - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Revenues
Total revenues	$ 21,555	$ 6,163	$ 30,506	$ 15,116
Costs and expenses
Cost of product sales	2,172	3,690	4,013	10,475
Royalty expense	1,346	441	3,067	1,117
Research and development	1,507	3,220	5,288	11,574
Selling, general and administrative	7,010	6,910	21,418	21,323
Amortization of intangible assets	129	85	388	235
In-process research and development			500
Total costs and expenses	12,164	14,346	34,674	44,724
Income (loss) from operations	9,391	(8,183)	(4,168)	(29,608)
Other income (expense)
Interest income	159	138	441	311
Interest expense	(716)	(870)	(2,357)	(2,601)
Other expense, net	(1)	(5)	(4)	(14)
Total other expense	(558)	(737)	(1,920)	(2,304)
Net income (loss)	$ 8,833	$ (8,920)	$ (6,088)	$ (31,912)
Net income (loss) per share, basic and diluted	$ 0.19	$ (0.21)	$ (0.13)	$ (0.80)
Weighted average shares outstanding, basic	47,310,408	42,445,553	46,128,197	39,820,573
Weighted average shares outstanding, diluted	47,485,384	42,445,553	46,128,197	39,820,573
Licensing and Collaboration [Member]
Revenues
Total revenues	$ 18,385	$ 2,192	$ 21,982	$ 3,899
Product Sales [Member]
Revenues
Total revenues	$ 3,170	$ 3,971	$ 8,524	$ 11,217

XML

Consolidated Statements of Comprehensive Income (Loss) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Consolidated Statements of Comprehensive Loss [Abstract]
Net income (loss)	$ 8,833	$ (8,920)	$ (6,088)	$ (31,912)
Other comprehensive income (loss):
Foreign currency translation adjustment		801	(473)	2,522
Other comprehensive income (loss)		801	(473)	2,522
Comprehensive income (loss)	$ 8,833	$ (8,119)	$ (6,561)	$ (29,390)

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Cash flows from operating activities
Net loss	$ (6,088)	$ (31,912)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense	3,835	5,457
Depreciation and amortization expense	743	928
Non-cash interest expense	418	369
Market value adjustments to inventories	1,218	394
Changes in operating assets and liabilities:
Accounts receivable, net	(17,171)	(9,349)
Inventories	(1,374)	1,695
Prepaid expenses and other current assets	(96)	185
Other assets	12	100
Accounts payable	(6,794)	(4,033)
Accrued expenses and other liabilities	1,529	(2,362)
Net cash used in operating activities	(23,768)	(38,528)
Cash flows from investing activities
Milestone payments for intangible assets		(3,000)
Purchases of property and equipment, net		(16)
Purchase of investments	(2,978)	(2,984)
Proceeds from maturities of investments	1,989	2,486
Net cash used in investing activities	(989)	(3,514)
Cash flows from financing activities
Taxes paid for awards vested under equity incentive plans	(55)	(11)
Proceeds from stock option exercises	12	157
Proceeds from issuance of common stock, net of commissions and underwriter fees	24,394	27,463
Payments for common stock issuance costs	(164)	(345)
Payments for debt issuance costs		(210)
Payments on loans payable	(12,000)	(3,500)
Net cash provided by financing activities	12,187	23,554
Effect of exchange rate on cash	(12)	30
Net decrease in cash, cash equivalents and restricted cash	(12,582)	(18,458)
Cash, cash equivalents and restricted cash, beginning of period	67,218	87,657
Cash, cash equivalents and restricted cash, end of period	54,636	69,199
Supplemental disclosure of cash flow information
Cash paid for interest	$ 2,011	$ 2,237

XML

Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2018

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Business Overview

Aratana Therapeutics, Inc., including its subsidiaries (the “Company” or “Aratana”) was incorporated on December 1, 2010 under the laws of the State of Delaware. The Company is a pet therapeutics company focused on licensing, developing and commercializing innovative therapeutics for dogs and cats. The Company has one operating segment: pet therapeutics.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States 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, 2017 and the notes thereto in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 14, 2018 (“2017 Annual Report”). In the opinion of management, all adjustments, consisting of a normal and recurring nature, considered necessary for a fair presentation, have been included.

The Company has incurred recurring losses and negative cash flows from operations and has an accumulated deficit of $232,604 as ofSeptember 30, 2018. The Company expects to continue to generate operating losses for the foreseeable future. The Company believes that its cash, cash equivalents and short-term investments at September 30, 2018, will be sufficient to fund operations and debt obligations for at least one year from the issuance of these consolidated financial statements.

As disclosed in Note 8 to the consolidated financial statements, the Company has a term loan and a revolving credit facility with an aggregate principal balance of $24,500 as of September 30, 2018. The loan agreement requires that the Company maintain certain minimum liquidity at all times (the greater of cash equal to fifty percent (50%) of outstanding balance or remaining months’ liquidity, which is calculated on an average trailing three (3) month basis, equal to six (6) months or greater), which as of September 30, 2018, was approximately $12,250. If the minimum liquidity covenant is not met, the Company may be required to repay the loans prior to their scheduled maturity dates. At September 30, 2018, the Company was in compliance with all financial covenants.

The Company expects continued investment related to commercial activities, including procuring of inventories needed to supply the marketplace, investing to further support adoption and awareness of the Company’s marketed products and payment of milestones related to approval and commencement of commercial sales. This will impact the minimum liquidity that needs to be maintained under the loan agreement. As a result, if the Company cannot generate sufficient cash from operations in the future, the Company may seek to fund its operations through corporate collaborations and licensing arrangements, or other sources, such as public or private equity offerings and further debt (re)financings. If the Company is not able to raise additional capital on terms acceptable to it, or at all, as and when needed, the Company would be forced to delay, reduce, or eliminate certain research and development programs, reduce or eliminate discretionary operating expenses or grant rights to develop and market therapeutics or therapeutic candidates that it would otherwise prefer to develop and market itself, which could otherwise adversely affect its business prospects. The Company’s failure to raise capital, as and when needed, would have a negative impact on its financial condition and its ability to pursue its business strategies as this capital is necessary for it to perform the research and development and commercial activities required to generate future revenue streams.

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.

Prior to July 1, 2018, the functional currency of the Company’s foreign subsidiary was the local currency of the country where the subsidiary is located. Foreign currency denominated assets and liabilities of the foreign subsidiary were translated into U.S. dollars and translation gains and losses were included in accumulated other comprehensive income (loss) in the consolidated balance sheets. Significant changes in economic facts and circumstances in the operations of the foreign subsidiary had occurred resulting in a change in the functional currency of this subsidiary. Accordingly, effective July 1, 2018, the functional currency of the Company’s foreign subsidiary was changed from the local currency to the U.S. dollar, which is the Company’s reporting currency. Effective as of the date of the change, translation adjustments for prior periods were not removed from equity and the translated amounts for nonmonetary assets at the end of the prior period became the accounting basis for those assets in the period of the change and subsequent periods. Future gains or losses from the remeasurement of monetary assets and liabilities will be recorded in earnings.

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.

Revenue from Contracts with Customers

Effective January 1, 2018, the Company adopted the Accounting Standards Codification Topic (“ASC”) 606 “Revenue from Contracts with Customers” (“ASC 606”) using the modified retrospective transition method. Prior to January 1, 2018, the Company recognized revenue using the guidance of ASC 605 “Revenue Recognition” (“ASC 605”).

The Company recognizes revenue when its customer obtains control of the promised goods or services, in an amount that reflects the consideration which the Company expects to be entitled to in exchange for those goods or services.

The Company determines revenue recognition from contracts with customers as follows:

· identify the contract(s);

· identify the performance obligations in the contract(s);

· determine the transaction price;

· allocate the transaction price to the performance obligations in the contract; and

· recognize revenue when (or as) the Company satisfies a performance obligation.

The Company’s principal revenue streams and their respective accounting treatments are discussed below and further in Note 2, “Revenue”:

(i) Product Sales, Net

The Company sells its products to its customers who could either be the end users (such as veterinarians, clinics, or animal hospitals) of the product or distributors who subsequently resell the Company’s products to end users.

Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, upon delivery to the customer. The Company’s delivery of its products to customers constitutes a single performance obligation as there are no other promises to deliver goods or services beyond what is specified in each accepted customer order.

Product sales are recorded net of applicable reserves for variable consideration, including product returns, allowances, discounts, and rebates.

Reserves for Variable Consideration

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include product returns, allowances, discounts, and rebates. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable (generally, for credits that the Company issues for free goods provided by distributors to end customers in conjunction with promotional programs) or a current liability (generally, reserves for products that remained in the distribution channel inventories at each reporting period end that the Company expects the distributors will provide to end customers free of charge in conjunction with promotional programs). These estimates take into consideration a range of possible outcomes for the expected value (probability-weighted estimate) or relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.

The amount of variable consideration included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

Product Returns

Consistent with the industry practice, the Company generally offers customers a limited right of return of damaged or expired product that has been purchased from the Company or the Company’s distributors in exchange for an unexpired product. Exchanges due to expiry are typically allowed for a period of six months after the product’s expiration date. The Company estimates the amount of its product sales that may be returned by its customers and records these estimates as a reduction of product revenues in the period the related product revenues are recognized, as well as within accrued expenses and other current liabilities, net in the consolidated balances sheets. The Company currently estimates product return liabilities using available industry data, its own sales data and data provided by the Company’s distributors such as the inventories remaining in the distribution channel. The Company has received an immaterial amount of returns to date and believes that returns of its products in future periods will be minimal. The Company does not record a return asset associated with the returned damaged or expired goods because such asset is deemed to be fully impaired at the time of product return.

Sales Discounts and Allowances

The Company compensates its distributors for sales order management, data and distribution and other services through sales discounts and allowances. However, such services are not distinct from the Company’s sale of products to distributors and, therefore, these discounts and allowances are recorded as a reduction of revenue in the consolidated statements of operations, as well as a reduction to accounts receivable, net in the consolidated balance sheets.

(ii) Licensing and Collaboration Revenues

Revenues derived from product out-licensing arrangements typically consist of an initial non-refundable, up-front payment at inception of the license, subsequent milestone payments contingent on the achievement of certain regulatory, development and commercial milestones, and royalties on the net sales of the Company’s products.

Licenses of Intellectual Property

If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the contract, the Company recognizes revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company will evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Milestones

Revenues from achievement of milestones generally represent a form of variable consideration as the payments are likely to be contingent on the occurrence of future events. The Company estimates milestones probable to be achieved and includes in the transaction price based on either the expected value (probability-weighted estimate) or most likely amount approach. The most likely amount is used by the Company for milestone payments with a binary outcome (i.e., the Company receives all or none of the milestone payment). Milestone payments that are not within the control of the Company or the customer, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The estimated milestone-related variable consideration is only recognized as revenue when the related performance obligation is satisfied and the Company determines that it is probable that there will not be a significant reversal of cumulative revenue recognized in future periods (i.e. variable consideration constraint). At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect licensing and collaboration revenues and earnings in the period of adjustment.

For milestones that are not able to overcome the variable consideration constraint, that are not considered probable or that are determined to be sales-based or usage royalties, as described later, the Company recognizes revenue when the milestones are achieved.

Sales-Based Royalty Revenue

The Company’s sales-based royalty revenue could consist of sales-based milestones or a percentage of net sales royalties. The Company recognizes sales-based royalties related to the Company’s out-licensed intellectual property when (or as) the later of the following events occurs:

· the sale occurs; or

· the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied).

Sales-based royalties revenues recorded by the Company are based on the licensee’s or sub-licensee’s sales that occurred during the relevant period. Differences between actual and estimated royalty revenues are adjusted in the period in which they become known, typically in the following quarter. If the Company is unable to reasonably estimate royalty revenue or does not have access to the information, then the Company records royalty revenue when the information needed for a reliable estimate becomes available. Royalty revenue is included in licensing and collaboration revenue in the consolidated statements of operations.

The Company recognizes revenue from sales-based milestones when the milestones are achieved.

Property and Equipment, Net

Property and equipment is recorded at historical cost, net of accumulated depreciation and amortization of $1,545 and $1,188, as of September 30, 2018 and December 31, 2017, respectively.

New Accounting Standards

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on recognizing revenue in contracts with customers. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This guidance superseded the revenue recognition requirements in ASC 605 and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this guidance on January 1, 2018. The impact of adoption is described further in Note 2, “Revenue.”

Leases

In February 2016, the FASB issued guidance that requires, for operating leases, a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted and is to be applied on a modified retrospective transition. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements. The Company currently expects that its operating lease commitments will be subject to the new guidance which will result in recognition of operating lease liabilities and right-of-use assets in the consolidated balance sheets upon the adoption of the new guidance. However, the Company’s assessment of the impact of adoption, which may be material, is still ongoing.

Compensation – Stock Compensation:Scope of Modification Accounting

In May 2017, the FASB issued guidance on determining which changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2018, and the adoption did not have a material impact on its consolidated financial statements.

Compensation – Stock Compensation:  Improvements to Nonemployee Share-Based Payment Accounting

In June 2018, the FASB issued guidance that largely aligns the accounting for share-based payment awards issued to employees and nonemployees. Under the new guidance, the existing employee guidance generally will apply to nonemployee share-based transactions, with the exception of specific guidance related to inputs to an option pricing model and the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including in interim periods, but no earlier than an entity’s adoption of ASC 606. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.

Intangibles – Goodwill and Other – Internal-Use Software

In August 2018, the FASB issued guidance that largely aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance provides criteria for determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The capitalized implementation costs are required to be expensed over the term of the hosting arrangement. The guidance also clarifies the presentation requirements for reporting such costs in the entity’s financial statements. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.

Fair Value Measurements

In August 2018, the FASB issued guidance related to disclosure requirements for fair value measurements. This guidance eliminates, modifies and adds disclosure requirements for fair value measurements. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.

XML

Revenue

9 Months Ended

Sep. 30, 2018

Revenue [Abstract]

Revenue

2.  Revenue

Adoption of ASC 606

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605.

The Company recorded a net reduction of $6,800, net of $0 tax, to the opening balance of accumulated deficit within stockholders’ equity, and a corresponding reduction to licensing and collaboration commitment as of January 1, 2018, due to the cumulative impact of adopting ASC 606, with the impact solely related to the Company’s variable consideration within its Collaboration Agreement (as defined below) with Elanco Animal Health, Inc. (“Elanco”).  Under previous guidance of ASC 605, this commitment was fully deferred and recognized as a liability until such time as payments under the obligation were made, or any unpaid portion would have been recognized as revenue when the commitment expired on December 31, 2018. Under ASC 606, this obligation is accounted for as variable consideration. At the adoption date, the Company recorded a contract liability based on the amount of the obligation expected to be paid, which was $200. This amount was determined based on management estimates, which included consideration of Elanco’s development plan. Since inception of the arrangement, no amounts had been paid out or submitted to the Company for reimbursement.

Had the Company still applied ASC 605 for the three and nine months ended September 30, 2018, revenues would have been the same as compared to ASC 606.

Disaggregated Revenues

The following table presents the Company’s revenues disaggregated by revenue source. All product sales are derived from United States sources and sales taxes are excluded from revenues.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017 (1)		2018		2017 (1)
Revenues
Licensing and collaboration revenue
GALLIPRANT	$	18,385	$	2,192	$	21,982	$	3,899
Total licensing and collaboration revenue		18,385		2,192		21,982		3,899
Product sales
NOCITA	$	1,916	$	717	$	5,219	$	1,681
ENTYCE		1,254		—		3,305		—
GALLIPRANT		—		3,248		—		9,494
Other		—		6		—		42
Total product sales		3,170		3,971		8,524		11,217
Total revenues	$	21,555	$	6,163	$	30,506	$	15,116

(1)Prior period amounts have not been adjusted under the modified retrospective method.

Product Sales

The Company generates product sales revenues primarily by selling its marketed therapeutics directly to end users (such as veterinarians, clinics, or animal hospitals) and distributors. Direct to end user sales revenues consist primarily of NOCITA sales, and distributor product sales revenues consist primarily of ENTYCE sales.

As of September 30, 2018 and December 31, 2017, reserves for product returns related to NOCITA and ENTYCE were $265 and $90, respectively.

Licensing and Collaboration Revenue

The Company generates licensing and collaboration revenue solely from the Elanco Collaboration, License, Development and Commercialization Agreement (as amended, the “Collaboration Agreement”) and Co-Promotion Agreement (collectively, “the Elanco Agreements”) as follows:

· sales-based royalties from the Elanco Agreements consisting of a percentage of net sales of GALLIPRANT by Elanco that are recognized as revenue as the underlying sales of GALLIPRANT are made by Elanco;

· sales-based royalties from the Collaboration Agreement consisting of sales-based milestones of GALLIPRANT by Elanco that are recognized as revenue if and when the sales threshold is achieved by Elanco;

· regulatory milestones from the Collaboration Agreement that are recognized as revenue if and when achieved; and

· variable consideration related to the Collaboration Agreement licensing and collaboration commitment (contract liability) that is recognized as revenue when it is not subject to variable consideration constraint.

Reconciliation of Contract Balances

The change in contract liability balances for the nine months ended September 30, 2018, was as follows:

Licensing and Collaboration Commitment

		2018
As of January 1,	$	7,000
ASC 606 adoption		(6,800)
Revenue recognized		—
Payments made		—
As of the end of period,	$	200

The Company recorded a net reduction of $6,800, net of $0 tax, to the opening balance of accumulated deficit within stockholders' equity as of January 1, 2018, due to the cumulative impact of adopting ASC 606.

The Company reviewed the current facts and circumstances and concluded that no changes to the previously estimated transaction price for the Collaboration Agreement at September 30, 2018, are required, and therefore, no change in variable consideration was recognized as revenue for the three and nine months ended September 30, 2018.

Unsatisfied Performance Obligations

As of the adoption date of ASC 606 and September 30, 2018, the Company had no unsatisfied performance obligations.

Significant Judgements

The Company’s significant judgements relate to the updating of the transaction price and variable consideration of the Collaboration Agreement. The Company used current facts and circumstances to calculate the updated transaction price using the expected value (probability weighted estimate). Facts and circumstances considered included the current Elanco development plan for GALLIPRANT.

Practical Expedients and Exemptions

The Company has deemed that there is no significant financing component present in the agreements with the Company’s customers as trade payment terms with its customers do not exceed one year. The Company expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses.

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Fair Value of Financial Assets and Liabilities

9 Months Ended

Sep. 30, 2018

Fair Value of Financial Assets and Liabilities [Abstract]

Fair Value of Financial Assets and Liabilities

3. Fair Value of Financial Assets and Liabilities

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

The carrying values and estimated fair values of the Company’s financial assets which are measured at fair value on a recurring basis were as follows:

			Fair Value Measurements as of
	Carrying		September 30, 2018 Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Certificates of deposit	$	8,680	$	—	$	8,680	$	—	$	8,680
Short-term investments:
Short-term marketable securities - certificates of deposit		1,736		—		1,736		—		1,736
	$	10,416	$	—	$	10,416	$	—	$	10,416

			Fair Value Measurements as of
	Carrying		December 31, 2017 Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Certificates of deposit	$	8,964	$	—	$	8,964	$	—	$	8,964
Short-term investments:
Short-term marketable securities - certificates of deposit		747		—		747		—		747
	$	9,711	$	—	$	9,711	$	—	$	9,711

The financial assets above are measured at fair value using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3). Certain estimates and judgments are required to develop the fair value amounts shown above. The fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.

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

· Cash equivalents – the fair value of the cash equivalents has been determined to be amortized cost given the short duration of the securities.

· Marketable securities (short-term) – the fair value of marketable securities has been determined to be amortized cost given the short duration of the securities.

The Company had no financial liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017.

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

The carrying values and estimated fair values of the Company’s financial liabilities which are not measured at fair value on a recurring basis were as follows:

	September 30, 2018
	Carrying Value		Fair Value
Liabilities:
Loans payable (Level 2)	$	25,243	$	24,801

	December 31, 2017
	Carrying Value		Fair Value
Liabilities:
Loans payable (Level 2)	$	36,825	$	36,973

Loans payable values above include both the current and the long-term loans balances as of September 30, 2018 and December 31, 2017.

The financial liabilities above are measured at fair value using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3). Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor does it indicate the Company’s intent or ability to dispose of the financial instrument.

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

The Company had no material financial assets not measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017.

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Investments

9 Months Ended

Sep. 30, 2018

Investments [Abstract]

Investments

4. Investments

Marketable Securities

Marketable securities consisted of the following:

	September 30, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Losses		Losses		Value
Short-term marketable securities:
Certificates of deposit	$	1,736	$	—	$	—	$	1,736
Total	$	1,736	$	—	$	—	$	1,736

	December 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Losses		Losses		Value
Short-term marketable securities:
Certificates of deposit	$	747	$	—	$	—	$	747
Total	$	747	$	—	$	—	$	747

At September 30, 2018 and December 31, 2017, short-term marketable securities consisted of investments that mature within one year. Short-term marketable securities are recorded as short-term investments in the consolidated balance sheets.

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Inventories

9 Months Ended

Sep. 30, 2018

Inventories [Abstract]

Inventories

5. Inventories

Inventories are stated at the lower of cost and net realizable value and consisted of the following:

	September 30, 2018		December 31, 2017
Raw materials	$	243	$	1,132
Work-in-process		8,980		12,322
Finished goods		4,509		122
	$	13,732	$	13,576

During the three and nine months ended September 30, 2018, the Company recognized inventory valuation adjustment losses in cost of product sales in the amount of $883 and $1,218, respectively, from application of the lower of cost and net realizable value. The losses primarily related to ENTYCEinventories that were written down. Unfavorable outcomes of the Company’s ENTYCE commercialization efforts could result in additional inventory write downs in future periods.

During the three and nine months ended September 30, 2017, the Company recognized inventory valuation adjustment losses in cost of product sales in the amount of $342 and $394, respectively, from application of the lower of cost and net realizable value. The losses related to GALLIPRANTinventories that were written down.

As of December 31, 2017, raw materials included $777 of GALLIPRANT inventories. As part of the manufacturing transfer of GALLIPRANT (Note 10), the Company transferred these raw materials to Elanco, and was reimbursed for the raw materials by Elanco during the first quarter of 2018.

As of September 30, 2018 and December 31, 2017, the Company had non-cancellable open orders for the purchase of inventories of approximately $1,154, which is expected to be paid in the next twelve months, and $7,132, respectively.

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Goodwill

9 Months Ended

Sep. 30, 2018

Goodwill and Intangible Assets [Abstract]

Goodwill

6. Goodwill

Goodwill is recorded as an indefinite-lived asset and is not amortized for financial reporting purposes but is tested for impairment on an annual basis or when indications of impairment exist. No goodwill impairment losses have been recognized to date. Goodwill is not expected to be deductible for income tax purposes.

The Company completed its annual goodwill impairment testing during the third quarter of 2018. The Company elected to bypass the

qualitative assessment. The Company determined as of the testing date that it consisted of one operating segment, which is comprised of one reporting unit. In performing the quantitative goodwill impairment test, the Company determined that its fair value, determined to be its market capitalization, was greater than its carrying value, determined to be stockholders’ equity. Based on this result, the Company determined there was no impairment of goodwill during the third quarter of 2018.

Goodwill as of September 30, 2018, was as follows:

	Gross		Impairment		Net
	Carrying Value		Losses		Carrying Value
Goodwill	$	40,846	$	—	$	40,846

The change in the net book value of goodwill for the nine months ended September 30, 2018, was as follows:

	2018
As of January 1,	$	41,295
Effect of foreign currency exchange		(449)
As of the end of the period,	$	40,846

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Intangible Assets, Net

9 Months Ended

Sep. 30, 2018

Goodwill and Intangible Assets [Abstract]

Intangible Assets, Net

7. Intangible Assets, Net

The change in the net book value of intangible assets for the nine months ended September 30, 2018, was as follows:

	2018
As of January 1,	$	6,616
Amortization expense		(388)
As of the end of the period,	$	6,228

The Company recognized amortization expense of $129 and $388 for the three and nine months ended September 30, 2018, respectively, and $85 and $235 for the three and nine months ended September 30, 2017, respectively.

Amortized Intangible Assets

Amortized intangible assets as of September 30, 2018, were as follows (excluding intellectual property rights for formerly marketed products that were fully impaired in prior periods):

	Gross				Net		Weighted
	Carrying		Accumulated		Carrying		Average
	Value		Amortization		Value		Useful Life
Intellectual property rights for currently marketed products	$	7,000	$	772	$	6,228	14.1	Years

Amortized intangible assets as of December 31, 2017, were as follows:

	Gross				Net		Weighted
	Carrying		Accumulated		Carrying		Average
	Value		Amortization		Value		Useful Life
Intellectual property rights for currently marketed products	$	7,000	$	384	$	6,616	14.1	Years
Intellectual property rights for formerly marketed products		38,652		38,652		—	N/A
	$	45,652	$	39,036	$	6,616

Unfavorable outcomes of the Company’s development activities or the Company’s estimates of the market opportunities for its therapeutic candidates could result in additional impairment charges in future periods.

Intellectual Property Rights for Currently Marketed Products

As of September 30, 2018 and December 31, 2017, intellectual property rights for currently marketed products relate to intangible assets capitalized for NOCITA, GALLIPRANT and ENTYCE in conjunction with approval/post-approval milestone payments made under the Company's licensing agreements.

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Debt

9 Months Ended

Sep. 30, 2018

Debt [Abstract]

Debt

8. Debt

Loan and Security Agreements

Effective as of October 16, 2015, the Company and its wholly-owned subsidiary Vet Therapeutics, Inc. (the “Borrowers”), entered into a Loan and Security Agreement (“Loan Agreement”), with Pacific Western Bank, or Pacific Western, as a collateral agent and Oxford Finance, LLC (collectively, the “Lenders”), pursuant to which the Lenders agreed to make available to the Company a term loan in an aggregate principal amount up to $35,000 and a revolving credit facility in an aggregate principal amount up to $5,000 subject to certain conditions to funding. The term loan and the revolving credit facility are secured by all of the Borrowers’ personal property other than intellectual property and certain other customary exclusions. Subject to customary exceptions, the Company is not permitted to encumber its intellectual property. The outstanding principal balance under the Loan Agreement was $19,500 under the term loan facility and $5,000 under the revolving credit facility at September 30, 2018.  During the three and nine months ended September 30, 2018, the Company recognized interest expense of $716 and $2,357, respectively, and during the three and nine months ended September 30, 2017, the Company recognized interest expense of $870 and $2,601, respectively. Amortization of debt issuance costs and accretion of final payment and termination fees, recognized as interest expense, were $139 and $417 for the three and nine months ended September 30, 2018, respectively, and $131 and $370 for the three and nine months ended September 30, 2017, respectively.

The Company was required to make interest-only payments on the revolving credit facility until October 16, 2017, when all principal and accrued interest were due. Effective as of July 31, 2017, the Borrowers and Lenders entered into a second amendment to the Loan Agreement (the “Second Amendment”). The terms of the Second Amendment, among other things, extended the maturity date of the existing revolving credit facility to October 16, 2019 (the “Revolving Line Maturity Date”), with amortized equal repayments of the principal outstanding under the revolving credit facility beginning November 1, 2018, and provided a six-month interest only period for the term loans, starting on the date of the Second Amendment. The Company is not subject to any new financial covenants as a result of the Second Amendment. At the closing of the Second Amendment, the Company paid the Lenders an amendment fee of $150 and a facility fee of $60. The Company is also obligated to pay a new termination fee equal to $165 upon the earliest to occur of the Revolving Line Maturity Date, the acceleration of the revolving credit facility or the termination of the revolving credit facility. The existing termination fee of $165 was due upon the original revolving maturity date, October 16, 2017, and was paid on October 17, 2017.

The term loan and the revolving credit facility bear interest per annum at the greater of (i) 6.91% or (ii) 3.66% plus the prime rate, which is customarily defined. As of September 30, 2018, the interest rate for the term loan and the revolving credit facility was 8.91%. In addition, the Company is obligated to pay a final payment fee equal to 3.30% of the principal amount of such term loan, if the term loan is being prepaid or repaid with respect to the term loan upon the earliest to occur of October 16, 2019, the acceleration of any term loan or the prepayment of a term loan. The Company will also be obligated to pay an unused-line fee equal to 0.25% per annum of the average unused portion of the revolving credit facility.

The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, limits or restrictions on the Borrowers’ ability to incur liens, incur indebtedness, make certain restricted payments, make certain investments, merge, consolidate, make an acquisition, enter into certain licensing arrangements and dispose of certain assets. In addition, the Loan Agreement contains customary events of default that entitle the Lenders to cause the Borrowers’ indebtedness under the Loan Agreement to become immediately due and payable. The events of default, some of which are subject to cure periods, include, among others, a non-payment default, a covenant default, the occurrence of a material adverse change in the Company’s business, the occurrence of an insolvency, a material judgment default, defaults regarding other indebtedness and certain actions by governmental authorities. Upon the occurrence and for the duration of an event of default, an additional default interest rate equal to 4% per annum will apply to all obligations owed under the Loan Agreement.

The Loan Agreement requires that the Company maintain certain minimum liquidity at all times (the greater of cash equal to fifty percent (50%) of outstanding credit extensions or remaining months’ liquidity, which is calculated on an average trailing three (3) month basis, equal to six (6) months or greater), which as of September 30, 2018, was approximately $12,250. If the minimum liquidity covenant is not met, the Company may be required to repay the term loan and the revolving credit facility prior to their scheduled maturity dates. At September 30, 2018, the Company was in compliance with all financial covenants.

The Company’s loans payable balance as of September 30, 2018, was as follows:

Principal amounts
Term loan, 8.91%, principal payments from February 1, 2018 through October 1, 2019	$	19,500
Revolving credit facility, 8.91%, principal payments from November 1, 2018 through October 1, 2019		5,000
Add: accretion of final payment and termination fees		933
Less: unamortized debt issuance costs		(190)
As of the end of the period	$	25,243

As of September 30, 2018, $18,000 and $4,583 related to the term loan and the revolving credit facility, respectively, were classified as current portion – loans payable.

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Accrued Expenses and Other Current Liabilities

9 Months Ended

Sep. 30, 2018

Accrued Expenses and Other Current Liabilities [Abstract]

Accrued Expenses and Other Current Liabilities

9. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

	September 30, 2018		December 31, 2017
Payroll and related expenses	$	2,081	$	2,314
Professional fees		644		208
Royalty expense		1,356		718
Interest expense		178		249
Research and development costs		107		5
Other		882		218
Total	$	5,248	$	3,712

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Agreements

9 Months Ended

Sep. 30, 2018

Agreements [Abstract]

Agreements

10. Agreements

RaQualia Pharma Inc. (“RaQualia”)

On December 27, 2010, the Company entered into two Exclusive License Agreements with RaQualia (as amended, the “RaQualia Agreements”) that granted the Company global rights, subject to certain exceptions for injectables in Japan, Korea, China and Taiwan for development and commercialization of licensed animal health products for compounds RQ-00000005 (ENTYCE®, also known as AT-002) and RQ-00000007 (GALLIPRANT®, also known as AT-001). The Company will be required to pay RaQualia remaining milestone payments associated with GALLIPRANT and ENTYCE of up to $4,000 and $3,000, respectively, upon the Company’s achievement of certain development, regulatory and commercial milestones, as well as mid-single digit royalties on the Company’s or the Company’s sublicensee’s product sales.

As of September 30, 2018, the Company had paid $11,500 in milestone payments since execution of the RaQualia Agreements, and no milestone payments were accrued.  No milestones were achieved during the three and nine months ended September 30, 2018.  It is possible that a milestone related to the RaQualia Agreements will be achieved within the next twelve months totaling $2,000.

Pacira Pharmaceuticals, Inc. (“Pacira”)

On December 5, 2012, the Company entered into an Exclusive License, Development, and Commercialization Agreement with Pacira (the “Pacira License Agreement”) that granted the Company global rights for development and commercialization of licensed animal health products for NOCITA® (also known as AT-003). On the same date, the Company also entered into a supply agreement with Pacira (the “Pacira Supply Agreement”, and together with the Pacira License Agreement, the “Pacira Agreements”).

On July 5, 2018 (the “Effective Date”), the Company and Pacira entered into an amendment and restatement of the Pacira License Agreement (“A&R License Agreement”) and an amendment and restatement of the Pacira Supply Agreement (the “A&R Supply Agreement”, and together with the A&R Pacira Agreement, the “Amended Agreements”).

Under the A&R Supply Agreement, Pacira has agreed to manufacture and supply the licensed product in a 10 mL vial size in addition to the 20 mL vial size that is currently supplied to the Company. The supply price for the 10 mL vial size will remain fixed until December 31, 2021. Prior to December 31, 2021, the Company and Pacira have agreed to negotiate in good faith the applicable terms related to the 10 mL vial, including the price, for after December 31, 2021. If the Company and Pacira are unable to reach agreement, then as of January 1, 2022 and on each anniversary thereafter during the term of the A&R Supply Agreement, the price for the 10 mL vial will be automatically increased by a low single-digit percentage.

The A&R License Agreement amended various sections of the Pacira License Agreement, including milestone payments and royalties, to incorporate the introduction of the 10 mL vial size. Prior to December 31, 2021, the Company will not be obligated to pay any royalty payments to Pacira on the sales of the 10 mL vial and thereafter, the Company and Pacira have agreed to negotiate in good faith the applicable terms relating to the 10 mL vial in accordance with the A&R Supply Agreement. The tiered royalties on the Company’s product sales of 20 mL vials remain unchanged. In addition, the A&R License Agreement reduces the annual net sales thresholds for achieving each of the potential commercial milestone payments owed to Pacira. The remaining $40,000 of commercial milestones per the A&R License Agreement begin to be triggered once NOCITA annual net sales reach $50,000 with the final tier being owed to Pacira once NOCITA annual net sales reach $250,000. Further, the A&R License Agreement lowered the minimum annual revenue payment to be provided to Pacira by the Company and delayed by one year the first period in which this minimum annual revenue payment requirement would be triggered such that the period is now expected to commence on January 1, 2023. The definition of a competing product was specified and narrowed to those injectable analgesic products preventing pain for at least forty-eight to seventy-two hours post-surgery as an active pharmaceutical ingredient labelled for the control of post-operative pain for surgical veterinary use. The term of the A&R License Agreement was extended with the initial term commencing as of the new Effective Date.

As of September 30, 2018, the Company had paid $2,500 in milestone payments since execution of the Pacira License Agreement, and no milestone payments were accrued.  No milestones were achieved during the three and nine months ended September 30, 2018.  The Company does not expect to achieve any milestones related to the A&R License Agreement in the next twelve months.

Elanco

GALLIPRANT

On April 22, 2016, the Company entered into the Collaboration Agreement pursuant to which the Company granted Elanco rights to develop, manufacture, market and commercialize the Company’s products based on licensed grapiprant rights and technology, including GALLIPRANT (collectively, “Grapiprant Products”). Pursuant to the Collaboration Agreement, Elanco will have exclusive rights globally outside the United States and co-promotion rights with the Company in the United States during the term of the Collaboration Agreement.

Under the terms of the Collaboration Agreement, the Company received a non-refundable, non-creditable upfront payment of $45,000. The Company is eligible to receive a $4,000 milestone payment upon European approval of a Grapiprant Product for the treatment of pain and inflammation, another $4,000 payment upon achievement of a development milestone related to the manufacturing of a Grapiprant Product from an alternate supply source, and payments up to $75,000 upon the achievement of certain sales milestones. The sales milestone payments are subject to a one-third reduction for each year the occurrence of the milestone is not achieved beyond December 31, 2021, with any non-occurrence beyond December 31, 2023, cancelling out the applicable milestone payment obligation entirely.

The Collaboration Agreement also provides that Elanco will pay the Company royalty payments on a percentage of net sales in the mid-single to low-double digits. The Company was responsible for all development activities required to obtain the first registration or regulatory approval for a Grapiprant Product for use in dogs in each of the European Union (“the EU Product Registration”) and the United States, and Elanco is responsible for all other development activities. First registration for a Grapiprant Product in the United States was achieved before the completion of the Collaboration Agreement and EU Product Registration was achieved in January 2018. In addition, the Company and Elanco have agreed to pay 25% and 75%, respectively, of all third-party development fees and expenses through December 31, 2018, in connection with preclinical and clinical trials necessary for any additional registration or regulatory approval of Grapiprant Products, provided that the Company’s contribution to such development fees and expenses is capped at $7,000, which was recorded as licensing and collaboration commitment liability in the consolidated balance sheets at December 31, 2017. Upon adoption of ASC 606 (Note 2), the Company relieved $6,800 of its licensing and collaboration commitment liability. The licensing and collaboration commitment liability balance in future periods will be updated at each future reporting date to reflect current facts and circumstances. Any remaining balance will be recognized as licensing and collaboration revenue on December 31, 2018, when the Company’s obligation to fund 25% of Elanco’s development efforts expires.

Commencing on the effective date of the Collaboration Agreement, the Company was responsible for the manufacture and supply of all of Elanco’s reasonable requirements of active pharmaceutical ingredient (“API”) and/or finished Grapiprant Products under the supply terms agreed upon pursuant to the Collaboration Agreement. However, Elanco retained the ability to assume all or a portion of the manufacturing responsibility during the term of the Collaboration Agreement. On April 28, 2017, the Company and Elanco entered into an amendment (the “Amendment”) to the Collaboration Agreement. Under the Amendment, Elanco agreed to submit binding purchase orders to the Company, within 15 days of the effective date of the Amendment, for certain finished Grapiprant Products to be produced from certain batches of API the Company agreed to purchase from its third-party manufacturer (the “API Batches”). In addition, Elanco agreed to pay the Company for the API Batches within 30 days after the Company provides Elanco with proof of payment to the manufacturer for such API Batches. The Amendment provides that, in the event Elanco provided notice of its intent to assume responsibility for manufacturing, Elanco would assume all responsibilities of the Company with respect to any undelivered API, including paying the third-party manufacturer for such undelivered API. In July 2017, pursuant to Sections 8.2.2 and 10.1(c) of the Collaboration Agreement, as amended, Elanco provided the Company notice of its intent to assume responsibility for manufacturing of the Grapiprant Products and its intent to assume the applicable regulatory approvals. In September 2017, the Company and Elanco finalized the transfer of the applicable regulatory approvals in the United States and the responsibility for manufacturing of Grapiprant Products to Elanco. In connection with this assumption of manufacturing responsibility, Elanco compensated the Company $10,832 for certain Grapiprant Product inventories and manufacturing considerations.

As of September 30, 2018, $15,000 was accrued for a sales milestone earned during the three months ended September 30, 2018. As of September 30, 2018, the Company had earned $15,000 of milestones since execution of the Collaboration Agreement. The Company will recognize revenue from any additional milestones if and when they are achieved by Elanco.

On April 22, 2016, in connection with the Collaboration Agreement, the Company entered into the Co-Promotion Agreement to co-promote Grapiprant Products in the United States.

Under the terms of the Co-Promotion Agreement, Elanco has agreed to pay the Company, as a fee for promotional services performed and expenses incurred by the Company under the Co-Promotion Agreement, (i) 25% of the gross margin on net sales of Grapiprant Product sold in the United States under the Collaboration Agreement prior to December 31, 2018 (unless extended by mutual agreement), and (ii) a mid-single digit percentage of net sales of the Grapiprant Product in the United States after December 31, 2018 through 2028 (unless extended by mutual agreement).

VetStem BioPharma, Inc. (“VetStem”)

On June 12, 2014, the Company entered into an Exclusive License Agreement with VetStem (as amended, the “VetStem Agreement”) that granted the Company the exclusive United States rights for commercialization and development of VetStem’s allogeneic stem cells being developed for the treatment of pain and inflammation of canine osteoarthritis.

In January 2018, the Company exercised its right to terminate the VetStem Agreement, and on April 19, 2018, the termination became effective. During the nine months ended September 30, 2018, the Company did not incur any development expenses or milestones. As a result of the termination of the VetStem Agreement, the Company does not anticipate having to reimburse any further development expenses or make milestone payments to VetStem.

AskAt Inc. (“AskAt”)

AT-019

On February 28, 2018, the Company entered into an Exclusive License Agreement with AskAt (the “AskAt Agreement”) that granted the Company an exclusive global license for development and commercialization of compound AT-019 in the field of animal health. Under the terms of the AskAt Agreement, the Company paid an initial upfront license fee of $500 in the second quarter of 2018. The AskAt Agreement was accounted for as an asset acquisition. On the date of acquisition, the licensed technology had not reached technological feasibility in animal health indications and had no alternative future use in the field of animal health. Accordingly, in-process research and development expense of $500 was recorded upon acquisition in the first quarter of 2018 and paid in the second quarter of 2018.

The Company will be required to pay remaining milestone payments of up to $15,500 upon the Company’s achievement of milestones, including $3,000 of development/regulatory milestones and $12,500 of commercial milestones, as well as tiered single digit royalties on the Company’s product sales, if any. The commercial milestones owed to AskAt under the AskAt Agreement begin to be triggered upon the first commercial sale with the final tier being owed to AskAt once annual net sales reach $100,000. Milestones, at the discretion of the Company, can be paid 50% in cash and 50% in a number of the Company’s shares as determined per the terms of the AskAt Agreement. As of September 30, 2018, the Company had not accrued or paid any milestone or royalty payments since execution of the AskAt Agreement. The Company does not expect to achieve any milestones related to the AskAt Agreement in the next twelve months.

Collaboration and Option Agreement

On February 28, 2018, in connection with the AskAt Agreement, the Company entered into a Collaboration and Option Agreement (the “COA”) with AskAt for animal health research, including a right of first negotiation agreement for multiple therapeutic candidates with potential in pain, allergy and cancer. During the first quarter of 2018, the Company paid an initial upfront option fee of $500 under the terms of the COA, which was recognized as research and development expense in the consolidated statements of operations.

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Common Stock

9 Months Ended

Sep. 30, 2018

Common Stock [Abstract]

Common Stock

11. Common Stock

Authorized Common Stock

As of September 30, 2018 and December 31, 2017, the authorized number of shares of common stock was 100,000,000, par value $0.001 per share.

Common Stock Outstanding

As of September 30, 2018 and December 31, 2017, there were 47,981,034 and 42,532,725 shares of the Company’s common stock outstanding, net of 645,753 and 491,861shares of unvested restricted common stock, respectively.

Treasury Stock

As of September 30, 2018 and December 31, 2017, there were 92,099 and 80,916 shares of the Company’s common stock held as treasury stock at a cost of $1,162 and $1,107, respectively. During the nine months ended September 30, 2018 and 2017, 11,183 and 1,342 shares of restricted stock at a cost of $4.96 and $7.88 per share, respectively, were withheld to satisfy employee tax withholding obligations arising in conjunction with the vesting of restricted stock pursuant to the Company’s 2013 Incentive Award Plan (the “2013 Plan”).

Shelf Registration Statement

On August 4, 2017, the Company filed a shelf registration statement on Form S-3 (Reg. No. 333-219681) (the “Shelf Registration Statement”) with the SEC. The Shelf Registration Statement was declared effective by the SEC on August 16, 2017.

The Shelf Registration Statement allows the Company to offer and sell, from time to time, up to $100,000 of common stock, preferred stock, debt securities, warrants, units or any combination of the foregoing in one or more future public offerings. The terms of any future offering would be determined at the time of the offering and would be subject to market conditions and approval by the Company’s Board of Directors. Any offering of securities covered by the Shelf Registration Statement will be made only by means of a written prospectus and prospectus supplement authorized and filed by the Company.

At-the-Market Offering

Cowen and Company, LLC

On December 18, 2017, the Company entered into a Sales Agreement (“Cowen Sales Agreement”) with Cowen and Company, LLC (“Cowen”) pursuant to which the Company may sell from time to time, at its option, up to an aggregate of $50,000 of shares of its common stock through Cowen, as sales agent. Any sales of the shares of common stock would be made under the Company’s effective Registration Statement on Form S-3 (Reg. No. 333-219681), by means of ordinary brokers’ transactions on the Nasdaq Global Market or otherwise. Additionally, under the terms of the Cowen Sales Agreement, the shares of common stock may be sold at market prices, at negotiated prices or at prices related to the prevailing market price. The Company has agreed to pay Cowen a commission of 3% of the gross proceeds from the sale of such shares of common stock.

During the three and nine months ended September 30, 2018, the Company sold 962,053 and 5,144,244 shares of common stock for aggregate net proceeds of $4,863 and $24,230, after deducting commission fees of $151 and $754 and issuance costs of $21 and $164, respectively. As of the date of this filing, approximately $24,852 of shares of common stock remained available for sale under the Cowen Sales Agreement.

Barclays Capital Inc.(“Barclays”)

On October 16, 2015, the Company entered into a sales agreement with Barclays pursuant to which the Company could sell from time to time, at its option, up to an aggregate of $52,000 of shares of its common stock through Barclays, as sales agent. Sales of the shares of common stock were made under the Company’s then effective registration statement on Form S-3 (Reg. No. 333-197414), by means of ordinary brokers’ transactions on the Nasdaq Global Market or otherwise. Additionally, under the terms of the Barclays sales agreement, the shares of common stock could be sold at market prices, at negotiated prices or at prices related to the prevailing market price. The Company paid Barclays a commission of 2.75% of the gross proceeds from the sale of the shares of common stock.

On April 28, 2017, the Company terminated its Barclays sales agreement. As of that date, the Company had sold an aggregate of approximately $18,000 of the $52,000 available to be sold under the Barclays sales agreement.

Registered Direct Offering

On May 3, 2017, the Company entered into a Placement Agency Agreement (“PAA”) with Barclays, pursuant to which Barclays agreed to serve as placement agent for an offering of shares of common stock. In conjunction with the PAA, on May 3, 2017, the Company also entered into a Securities Purchase Agreement with certain investors for the sale by the Company of 5,000,000 shares of common stock at a purchase price of $5.25 per share (the “Offering”). The shares of common stock were offered and sold pursuant to the Company’s previously filed and then effective registration statement on Form S-3 (File No. 333-197414) and a related prospectus supplement. The Company agreed to pay Barclays an aggregate fee equal to 6.0% of the gross proceeds received by the Company from the Offering. The Offering closed on May 9, 2017, and the Company received aggregate net proceeds from the Offering of approximately $24,400, after deducting placement agent fees of $1,575 and offering expenses of $273.

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Stock-Based Awards

9 Months Ended

Sep. 30, 2018

Stock-Based Awards [Abstract]

Stock-Based Awards

12. Stock-Based Awards

2010 Equity Incentive Plan

Activity related to stock options under the 2010 Equity Incentive Plan (the “2010 Plan”) for the nine months ended September 30, 2018, was as follows:

				Weighted
	Shares	Weighted		Average
	Issuable	Average		Remaining	Aggregate
	Under	Exercise		Contractual	Intrinsic
	Options	Price		Term	Value
				(In Years)
Outstanding as of December 31, 2017	57,394	$	4.22	5.11	$	73
Granted	—		—
Exercised	—		—
Forfeited	—		—
Expired	(4,011)		5.57
Outstanding as of September 30, 2018	53,383	$	4.12	4.35	$	82

No stock options have been granted under the 2010 Plan since the effective date of the 2013 Plan.

2013 Plan

On January 1, 2018, the annual increase in the number of shares available for issuance under the 2013 Plan was determined to be 1,203,369 shares in accordance with the automatic annual increase provisions of the 2013 Plan. As of September 30, 2018, there were 1,662,687 shares available for future grant under the 2013 Plan.

Activity related to stock options under the 2013 Plan for the nine months ended September 30, 2018, was as follows:

				Weighted
	Shares	Weighted		Average
	Issuable	Average		Remaining	Aggregate
	Under	Exercise		Contractual	Intrinsic
	Options	Price		Term	Value
				(in Years)
Outstanding as of December 31, 2017	2,557,143	$	11.45	7.41	$	794
Granted	798,000		4.84
Exercised	(3,843)		3.14
Forfeited	(45,090)		7.51
Expired	(64,847)		19.00
Outstanding as of September 30, 2018	3,241,363	$	9.73	7.26	$	1,559

For the nine months ended September 30, 2018, the weighted average grant date fair value of stock options granted was $3.16. For the nine months ended September 30, 2018, the total intrinsic value of options exercised was $6 and the total received from stock option exercises was $12.

Activity related to restricted stock under the 2013 Plan for the nine months ended September 30, 2018, was as follows:

		Weighted
		Average Grant
	Shares	Date Fair Value
Unvested restricted common stock as of December 31, 2017	491,861	$	7.59
Issued	476,000		4.80
Vested	(311,405)		7.76
Forfeited	(10,703)		5.31
Unvested restricted common stock as of September 30, 2018	645,753	$	5.49

For the nine months ended September 30, 2018, the total fair value of restricted common stock vested was $1,481. The Company did not receive cash proceeds for any of the restricted common stock issued during the nine months ended September 30, 2018.

Stock-Based Compensation

The Company recorded stock-based compensation expense related to stock options and restricted stock as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Cost of product sales and inventories	$	29	$	42	$	92	$	126
Research and development		158		229		490		717
Selling, general and administrative		1,007		1,528		3,253		4,614
	$	1,194	$	1,799	$	3,835	$	5,457

As of September 30, 2018, the Company had an aggregate of $4,596 and $2,978 of unrecognized stock-based compensation expense for options outstanding and restricted stock awards, respectively, which is expected to be recognized over a weighted average period of 2.47 years and 1.80 years, respectively.

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Net Income (Loss) Per Share

9 Months Ended

Sep. 30, 2018

Net Income (Loss) Per Share [Abstract]

Net Income (Loss) Per Share

13. Net Income (Loss) Per Share

Basic and diluted net income (loss) per share was calculated as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Basic net income (loss) per share:
Numerator:
Net income (loss)	$	8,833	$	(8,920)	$	(6,088)	$	(31,912)
Denominator:
Weighted average shares outstanding, basic		47,310,408		42,445,553		46,128,197		39,820,573
Net income (loss) per share, basic	$	0.19	$	(0.21)	$	(0.13)	$	(0.80)
Diluted net income (loss) per share:
Numerator:
Net income (loss)	$	8,833	$	(8,920)	$	(6,088)	$	(31,912)
Denominator:
Weighted average shares outstanding, basic		47,310,408		42,445,553		46,128,197		39,820,573
Dilutive effect of outstanding stock awards		174,976		—		—		—
Weighted average shares outstanding, diluted		47,485,384		42,445,553		46,128,197		39,820,573
Net income (loss) per share, diluted	$	0.19	$	(0.21)	$	(0.13)	$	(0.80)

Stock options for the purchase of 2,986,462 weighted average shares of common stock and 177,219 weighted average unvested restricted stock awards were excluded from the computation of diluted net income per share for the three months ended September 30, 2018, because these stock awards had an anti-dilutive impact on net income earned for the period.

Stock options for the purchase 3,294,746 shares of common stock and 645,753 unvested restricted stock awards were excluded from the computation of diluted net loss per share for the nine months ended September 30, 2018, because these stock awards had an anti-dilutive impact due to the net loss incurred for the period.

Stock options for the purchase of 2,649,334 shares of common stock and 540,464 unvested restricted stock awards were excluded from the computation of diluted net loss per share for the three and nine months ended September 30, 2017, because these stock awards had an anti-dilutive impact due to the net loss incurred for the period. 

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Income Taxes

9 Months Ended

Sep. 30, 2018

Income Taxes [Abstract]

Income Taxes

14. Income Taxes

The Company recorded no income tax expense or benefit during the three and nine months ended September 30, 2018 and 2017, due to a full valuation allowance recognized against its deferred tax assets.

The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 22, 2017. SAB 118 provides a one-year measurement period from a registrant’s reporting period that includes the Tax Cuts and Jobs Act of 2017 (“TCJA”) enactment date to allow the registrant sufficient time to obtain, prepare and analyze information to complete the accounting required under ASC 740. Although the Company made a reasonable estimate of the gross amounts of the deferred tax assets as discussed in the 2017 Annual Report, a final determination of the TCJA’s impact on the deferred tax assets and related valuation allowance requirements remains incomplete pending a full analysis of the provisions of the TCJA and their interpretations. The ultimate impact of the TCJA on the Company’s reported results in 2018 and beyond may differ from the estimates provided therein, possibly materially, due to, among other things, changes in interpretations and assumptions the Company has made, guidance that may be issued, and other actions the Company may take as a result of the TCJA, different from what is presently contemplated. As of September 30, 2018, the Company has not recorded incremental accounting adjustments related to the TCJA as it continues to consider interpretations of its application, however, the Company expects to complete the accounting by December 2018.

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Accumulated Other Comprehensive Loss

9 Months Ended

Sep. 30, 2018

Accumulated Other Comprehensive Loss [Abstract]

Accumulated Other Comprehensive Loss

15. Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss, net of their related tax effects, were as follows:

	Foreign		Accumulated
	Currency		Other
	Translation		Comprehensive
	Adjustment		Loss
As of December 31, 2017	$	(7,085)	$	(7,085)
Foreign currency translation adjustment		(473)		(473)
As of September 30, 2018	$	(7,558)	$	(7,558)

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Legal Contingencies

9 Months Ended

Sep. 30, 2018

Legal Contingencies [Abstract]

Legal Contingencies

16. Legal Contingencies

From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business, including those related to patents, product liability and government investigations. The Company is not presently a party to any litigation which it believes to be material, and is not aware of any pending or threatened litigation against the Company which it believes could have a material effect on its consolidated financial statements. The Company accrues contingent liabilities when it is probable that a future liability has been incurred and such liability can be reasonably estimated.

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Summary of Significant Accounting Policies (Policy)

9 Months Ended

Sep. 30, 2018

Summary of Significant Accounting Policies [Abstract]

Business Overview

Business Overview

Aratana Therapeutics, Inc., including its subsidiaries (the “Company” or “Aratana”) was incorporated on December 1, 2010 under the laws of the State of Delaware. The Company is a pet therapeutics company focused on licensing, developing and commercializing innovative therapeutics for dogs and cats. The Company has one operating segment: pet therapeutics.

Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States 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, 2017 and the notes thereto in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 14, 2018 (“2017 Annual Report”). In the opinion of management, all adjustments, consisting of a normal and recurring nature, considered necessary for a fair presentation, have been included.

The Company has incurred recurring losses and negative cash flows from operations and has an accumulated deficit of $232,604 as ofSeptember 30, 2018. The Company expects to continue to generate operating losses for the foreseeable future. The Company believes that its cash, cash equivalents and short-term investments at September 30, 2018, will be sufficient to fund operations and debt obligations for at least one year from the issuance of these consolidated financial statements.

As disclosed in Note 8 to the consolidated financial statements, the Company has a term loan and a revolving credit facility with an aggregate principal balance of $24,500 as of September 30, 2018. The loan agreement requires that the Company maintain certain minimum liquidity at all times (the greater of cash equal to fifty percent (50%) of outstanding balance or remaining months’ liquidity, which is calculated on an average trailing three (3) month basis, equal to six (6) months or greater), which as of September 30, 2018, was approximately $12,250. If the minimum liquidity covenant is not met, the Company may be required to repay the loans prior to their scheduled maturity dates. At September 30, 2018, the Company was in compliance with all financial covenants.

The Company expects continued investment related to commercial activities, including procuring of inventories needed to supply the marketplace, investing to further support adoption and awareness of the Company’s marketed products and payment of milestones related to approval and commencement of commercial sales. This will impact the minimum liquidity that needs to be maintained under the loan agreement. As a result, if the Company cannot generate sufficient cash from operations in the future, the Company may seek to fund its operations through corporate collaborations and licensing arrangements, or other sources, such as public or private equity offerings and further debt (re)financings. If the Company is not able to raise additional capital on terms acceptable to it, or at all, as and when needed, the Company would be forced to delay, reduce, or eliminate certain research and development programs, reduce or eliminate discretionary operating expenses or grant rights to develop and market therapeutics or therapeutic candidates that it would otherwise prefer to develop and market itself, which could otherwise adversely affect its business prospects. The Company’s failure to raise capital, as and when needed, would have a negative impact on its financial condition and its ability to pursue its business strategies as this capital is necessary for it to perform the research and development and commercial activities required to generate future revenue streams.

Consolidation

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.

Prior to July 1, 2018, the functional currency of the Company’s foreign subsidiary was the local currency of the country where the subsidiary is located. Foreign currency denominated assets and liabilities of the foreign subsidiary were translated into U.S. dollars and translation gains and losses were included in accumulated other comprehensive income (loss) in the consolidated balance sheets. Significant changes in economic facts and circumstances in the operations of the foreign subsidiary had occurred resulting in a change in the functional currency of this subsidiary. Accordingly, effective July 1, 2018, the functional currency of the Company’s foreign subsidiary was changed from the local currency to the U.S. dollar, which is the Company’s reporting currency. Effective as of the date of the change, translation adjustments for prior periods were not removed from equity and the translated amounts for nonmonetary assets at the end of the prior period became the accounting basis for those assets in the period of the change and subsequent periods. Future gains or losses from the remeasurement of monetary assets and liabilities will be recorded in earnings.

Use of Estimates

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.

Revenue from Contracts with Customers

Revenue from Contracts with Customers

Effective January 1, 2018, the Company adopted the Accounting Standards Codification Topic (“ASC”) 606 “Revenue from Contracts with Customers” (“ASC 606”) using the modified retrospective transition method. Prior to January 1, 2018, the Company recognized revenue using the guidance of ASC 605 “Revenue Recognition” (“ASC 605”).

The Company recognizes revenue when its customer obtains control of the promised goods or services, in an amount that reflects the consideration which the Company expects to be entitled to in exchange for those goods or services.

The Company determines revenue recognition from contracts with customers as follows:

· identify the contract(s);

· identify the performance obligations in the contract(s);

· determine the transaction price;

· allocate the transaction price to the performance obligations in the contract; and

· recognize revenue when (or as) the Company satisfies a performance obligation.

The Company’s principal revenue streams and their respective accounting treatments are discussed below and further in Note 2, “Revenue”:

(i) Product Sales, Net

The Company sells its products to its customers who could either be the end users (such as veterinarians, clinics, or animal hospitals) of the product or distributors who subsequently resell the Company’s products to end users.

Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, upon delivery to the customer. The Company’s delivery of its products to customers constitutes a single performance obligation as there are no other promises to deliver goods or services beyond what is specified in each accepted customer order.

Product sales are recorded net of applicable reserves for variable consideration, including product returns, allowances, discounts, and rebates.

Reserves for Variable Consideration

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include product returns, allowances, discounts, and rebates. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable (generally, for credits that the Company issues for free goods provided by distributors to end customers in conjunction with promotional programs) or a current liability (generally, reserves for products that remained in the distribution channel inventories at each reporting period end that the Company expects the distributors will provide to end customers free of charge in conjunction with promotional programs). These estimates take into consideration a range of possible outcomes for the expected value (probability-weighted estimate) or relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.

The amount of variable consideration included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

Product Returns

Consistent with the industry practice, the Company generally offers customers a limited right of return of damaged or expired product that has been purchased from the Company or the Company’s distributors in exchange for an unexpired product. Exchanges due to expiry are typically allowed for a period of six months after the product’s expiration date. The Company estimates the amount of its product sales that may be returned by its customers and records these estimates as a reduction of product revenues in the period the related product revenues are recognized, as well as within accrued expenses and other current liabilities, net in the consolidated balances sheets. The Company currently estimates product return liabilities using available industry data, its own sales data and data provided by the Company’s distributors such as the inventories remaining in the distribution channel. The Company has received an immaterial amount of returns to date and believes that returns of its products in future periods will be minimal. The Company does not record a return asset associated with the returned damaged or expired goods because such asset is deemed to be fully impaired at the time of product return.

Sales Discounts and Allowances

The Company compensates its distributors for sales order management, data and distribution and other services through sales discounts and allowances. However, such services are not distinct from the Company’s sale of products to distributors and, therefore, these discounts and allowances are recorded as a reduction of revenue in the consolidated statements of operations, as well as a reduction to accounts receivable, net in the consolidated balance sheets.

(ii) Licensing and Collaboration Revenues

Revenues derived from product out-licensing arrangements typically consist of an initial non-refundable, up-front payment at inception of the license, subsequent milestone payments contingent on the achievement of certain regulatory, development and commercial milestones, and royalties on the net sales of the Company’s products.

Licenses of Intellectual Property

If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the contract, the Company recognizes revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company will evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Milestones

Revenues from achievement of milestones generally represent a form of variable consideration as the payments are likely to be contingent on the occurrence of future events. The Company estimates milestones probable to be achieved and includes in the transaction price based on either the expected value (probability-weighted estimate) or most likely amount approach. The most likely amount is used by the Company for milestone payments with a binary outcome (i.e., the Company receives all or none of the milestone payment). Milestone payments that are not within the control of the Company or the customer, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The estimated milestone-related variable consideration is only recognized as revenue when the related performance obligation is satisfied and the Company determines that it is probable that there will not be a significant reversal of cumulative revenue recognized in future periods (i.e. variable consideration constraint). At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect licensing and collaboration revenues and earnings in the period of adjustment.

For milestones that are not able to overcome the variable consideration constraint, that are not considered probable or that are determined to be sales-based or usage royalties, as described later, the Company recognizes revenue when the milestones are achieved.

Sales-Based Royalty Revenue

The Company’s sales-based royalty revenue could consist of sales-based milestones or a percentage of net sales royalties. The Company recognizes sales-based royalties related to the Company’s out-licensed intellectual property when (or as) the later of the following events occurs:

· the sale occurs; or

· the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied).

Sales-based royalties revenues recorded by the Company are based on the licensee’s or sub-licensee’s sales that occurred during the relevant period. Differences between actual and estimated royalty revenues are adjusted in the period in which they become known, typically in the following quarter. If the Company is unable to reasonably estimate royalty revenue or does not have access to the information, then the Company records royalty revenue when the information needed for a reliable estimate becomes available. Royalty revenue is included in licensing and collaboration revenue in the consolidated statements of operations.

The Company recognizes revenue from sales-based milestones when the milestones are achieved.

Property and Equipment, Net

Property and Equipment, Net

Property and equipment is recorded at historical cost, net of accumulated depreciation and amortization of $1,545 and $1,188, as of September 30, 2018 and December 31, 2017, respectively.

New Accounting Standards

New Accounting Standards

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on recognizing revenue in contracts with customers. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This guidance superseded the revenue recognition requirements in ASC 605 and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this guidance on January 1, 2018. The impact of adoption is described further in Note 2, “Revenue.”

Leases

In February 2016, the FASB issued guidance that requires, for operating leases, a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted and is to be applied on a modified retrospective transition. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements. The Company currently expects that its operating lease commitments will be subject to the new guidance which will result in recognition of operating lease liabilities and right-of-use assets in the consolidated balance sheets upon the adoption of the new guidance. However, the Company’s assessment of the impact of adoption, which may be material, is still ongoing.

Compensation – Stock Compensation:Scope of Modification Accounting

In May 2017, the FASB issued guidance on determining which changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2018, and the adoption did not have a material impact on its consolidated financial statements.

Compensation – Stock Compensation:  Improvements to Nonemployee Share-Based Payment Accounting

In June 2018, the FASB issued guidance that largely aligns the accounting for share-based payment awards issued to employees and nonemployees. Under the new guidance, the existing employee guidance generally will apply to nonemployee share-based transactions, with the exception of specific guidance related to inputs to an option pricing model and the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including in interim periods, but no earlier than an entity’s adoption of ASC 606. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.

Intangibles – Goodwill and Other – Internal-Use Software

In August 2018, the FASB issued guidance that largely aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance provides criteria for determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The capitalized implementation costs are required to be expensed over the term of the hosting arrangement. The guidance also clarifies the presentation requirements for reporting such costs in the entity’s financial statements. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.

Fair Value Measurements

In August 2018, the FASB issued guidance related to disclosure requirements for fair value measurements. This guidance eliminates, modifies and adds disclosure requirements for fair value measurements. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.

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Revenue (Tables)

9 Months Ended

Sep. 30, 2018

Revenue [Abstract]

Disaggregation of Revenue by Source

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017 (1)		2018		2017 (1)
Revenues
Licensing and collaboration revenue
GALLIPRANT	$	18,385	$	2,192	$	21,982	$	3,899
Total licensing and collaboration revenue		18,385		2,192		21,982		3,899
Product sales
NOCITA	$	1,916	$	717	$	5,219	$	1,681
ENTYCE		1,254		—		3,305		—
GALLIPRANT		—		3,248		—		9,494
Other		—		6		—		42
Total product sales		3,170		3,971		8,524		11,217
Total revenues	$	21,555	$	6,163	$	30,506	$	15,116

(1)Prior period amounts have not been adjusted under the modified retrospective method.

Schedule of Change in Contract Liability Balances

		2018
As of January 1,	$	7,000
ASC 606 adoption		(6,800)
Revenue recognized		—
Payments made		—
As of the end of period,	$	200

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Fair Value of Financial Assets and Liabilities (Tables)

9 Months Ended

Sep. 30, 2018

Fair Value of Financial Assets and Liabilities [Abstract]

Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis

			Fair Value Measurements as of
	Carrying		September 30, 2018 Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Certificates of deposit	$	8,680	$	—	$	8,680	$	—	$	8,680
Short-term investments:
Short-term marketable securities - certificates of deposit		1,736		—		1,736		—		1,736
	$	10,416	$	—	$	10,416	$	—	$	10,416

			Fair Value Measurements as of
	Carrying		December 31, 2017 Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Certificates of deposit	$	8,964	$	—	$	8,964	$	—	$	8,964
Short-term investments:
Short-term marketable securities - certificates of deposit		747		—		747		—		747
	$	9,711	$	—	$	9,711	$	—	$	9,711

Schedule of Liabilities not Measured at Fair Value on Recurring Basis

	September 30, 2018
	Carrying Value		Fair Value
Liabilities:
Loans payable (Level 2)	$	25,243	$	24,801

	December 31, 2017
	Carrying Value		Fair Value
Liabilities:
Loans payable (Level 2)	$	36,825	$	36,973

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Investments (Tables)

9 Months Ended

Sep. 30, 2018

Investments [Abstract]

Fair Value of Available-for-Sale Marketable Securities

	September 30, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Losses		Losses		Value
Short-term marketable securities:
Certificates of deposit	$	1,736	$	—	$	—	$	1,736
Total	$	1,736	$	—	$	—	$	1,736

	December 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Losses		Losses		Value
Short-term marketable securities:
Certificates of deposit	$	747	$	—	$	—	$	747
Total	$	747	$	—	$	—	$	747

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Inventories (Tables)

9 Months Ended

Sep. 30, 2018

Inventories [Abstract]

Components of Inventories

	September 30, 2018		December 31, 2017
Raw materials	$	243	$	1,132
Work-in-process		8,980		12,322
Finished goods		4,509		122
	$	13,732	$	13,576

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Goodwill (Tables)

9 Months Ended

Sep. 30, 2018

Goodwill and Intangible Assets [Abstract]

Summary of Goodwill

	Gross		Impairment		Net
	Carrying Value		Losses		Carrying Value
Goodwill	$	40,846	$	—	$	40,846

Summary of Change in the Net Book Value of Goodwill

	2018
As of January 1,	$	41,295
Effect of foreign currency exchange		(449)
As of the end of the period,	$	40,846

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Intangible Assets, Net (Tables)

9 Months Ended

Sep. 30, 2018

Goodwill and Intangible Assets [Abstract]

Change in the Net Book Value of Intangible Assets

	2018
As of January 1,	$	6,616
Amortization expense		(388)
As of the end of the period,	$	6,228

Summary of Amortized Intangible Assets

	Gross				Net		Weighted
	Carrying		Accumulated		Carrying		Average
	Value		Amortization		Value		Useful Life
Intellectual property rights for currently marketed products	$	7,000	$	772	$	6,228	14.1	Years

Amortized intangible assets as of December 31, 2017, were as follows:

	Gross				Net		Weighted
	Carrying		Accumulated		Carrying		Average
	Value		Amortization		Value		Useful Life
Intellectual property rights for currently marketed products	$	7,000	$	384	$	6,616	14.1	Years
Intellectual property rights for formerly marketed products		38,652		38,652		—	N/A
	$	45,652	$	39,036	$	6,616

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Debt (Tables)

9 Months Ended

Sep. 30, 2018

Debt [Abstract]

Schedule of Loan Payable Balance

Principal amounts
Term loan, 8.91%, principal payments from February 1, 2018 through October 1, 2019	$	19,500
Revolving credit facility, 8.91%, principal payments from November 1, 2018 through October 1, 2019		5,000
Add: accretion of final payment and termination fees		933
Less: unamortized debt issuance costs		(190)
As of the end of the period	$	25,243

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Accrued Expenses and Other Current Liabilities (Tables)

9 Months Ended

Sep. 30, 2018

Accrued Expenses and Other Current Liabilities [Abstract]

Schedule of Accrued Expenses and Other Current Liabilities

	September 30, 2018		December 31, 2017
Payroll and related expenses	$	2,081	$	2,314
Professional fees		644		208
Royalty expense		1,356		718
Interest expense		178		249
Research and development costs		107		5
Other		882		218
Total	$	5,248	$	3,712

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Stock-Based Awards (Tables)

9 Months Ended

Sep. 30, 2018

Compensation Related Costs, Share-based Payments [Line Items]

Summary of Stock-Based Compensation Expense Related to Stock Options and Restricted Stock

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Cost of product sales and inventories	$	29	$	42	$	92	$	126
Research and development		158		229		490		717
Selling, general and administrative		1,007		1,528		3,253		4,614
	$	1,194	$	1,799	$	3,835	$	5,457

2010 Equity Incentive Plan [Member]

Compensation Related Costs, Share-based Payments [Line Items]

Summary of Stock Option Activity

				Weighted
	Shares	Weighted		Average
	Issuable	Average		Remaining	Aggregate
	Under	Exercise		Contractual	Intrinsic
	Options	Price		Term	Value
				(In Years)
Outstanding as of December 31, 2017	57,394	$	4.22	5.11	$	73
Granted	—		—
Exercised	—		—
Forfeited	—		—
Expired	(4,011)		5.57
Outstanding as of September 30, 2018	53,383	$	4.12	4.35	$	82

2013 Plan [Member]

Compensation Related Costs, Share-based Payments [Line Items]

Summary of Stock Option Activity

				Weighted
	Shares	Weighted		Average
	Issuable	Average		Remaining	Aggregate
	Under	Exercise		Contractual	Intrinsic
	Options	Price		Term	Value
				(in Years)
Outstanding as of December 31, 2017	2,557,143	$	11.45	7.41	$	794
Granted	798,000		4.84
Exercised	(3,843)		3.14
Forfeited	(45,090)		7.51
Expired	(64,847)		19.00
Outstanding as of September 30, 2018	3,241,363	$	9.73	7.26	$	1,559

Summary of Restricted Stock Activity

		Weighted
		Average Grant
	Shares	Date Fair Value
Unvested restricted common stock as of December 31, 2017	491,861	$	7.59
Issued	476,000		4.80
Vested	(311,405)		7.76
Forfeited	(10,703)		5.31
Unvested restricted common stock as of September 30, 2018	645,753	$	5.49

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Net Income (Loss) Per Share (Tables)

9 Months Ended

Sep. 30, 2018

Net Income (Loss) Per Share [Abstract]

Schedule of Basic and Diluted Net Income (Loss) Per Share Attributable to Common Stockholders

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Basic net income (loss) per share:
Numerator:
Net income (loss)	$	8,833	$	(8,920)	$	(6,088)	$	(31,912)
Denominator:
Weighted average shares outstanding, basic		47,310,408		42,445,553		46,128,197		39,820,573
Net income (loss) per share, basic	$	0.19	$	(0.21)	$	(0.13)	$	(0.80)
Diluted net income (loss) per share:
Numerator:
Net income (loss)	$	8,833	$	(8,920)	$	(6,088)	$	(31,912)
Denominator:
Weighted average shares outstanding, basic		47,310,408		42,445,553		46,128,197		39,820,573
Dilutive effect of outstanding stock awards		174,976		—		—		—
Weighted average shares outstanding, diluted		47,485,384		42,445,553		46,128,197		39,820,573
Net income (loss) per share, diluted	$	0.19	$	(0.21)	$	(0.13)	$	(0.80)

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Accumulated Other Comprehensive Loss (Tables)

9 Months Ended

Sep. 30, 2018

Accumulated Other Comprehensive Loss [Abstract]

Summary of Changes in Accumulated Other Comprehensive Loss

	Foreign		Accumulated
	Currency		Other
	Translation		Comprehensive
	Adjustment		Loss
As of December 31, 2017	$	(7,085)	$	(7,085)
Foreign currency translation adjustment		(473)		(473)
As of September 30, 2018	$	(7,558)	$	(7,558)

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Summary of Significant Accounting Policies (Narrative) (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($) segment	Dec. 31, 2017 USD ($)
Summary Of Significant Accounting Policies [Line Items]
Date of incorporation	Dec. 01, 2010
Number of operating segments | segment	1
Accumulated deficit	$ 232,604	$ 233,316
Accumulated depreciation and amortization	1,545	$ 1,188
Term Loan And Revolving Credit Facility [Member]
Summary Of Significant Accounting Policies [Line Items]
Principal amount of debt	24,500
Term Loan [Member]
Summary Of Significant Accounting Policies [Line Items]
Principal amount of debt	$ 19,500
Minimum liquidity requirement	50.00%
Liquidity requirement	$ 12,250

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Revenue (Narrative) (Details) - USD ($)		3 Months Ended		9 Months Ended		29 Months Ended
	Jan. 01, 2018	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Dec. 31, 2017
Revenue from Contract with Customer [Line Items]
Accumulated deficit		$ (232,604,000)		$ (232,604,000)		$ (232,604,000)	$ (233,316,000)
Income tax benefit		0	$ 0	0	$ 0
Contract liability		200,000		200,000		200,000	7,000,000
Payments or submittal for reimbursement resulting in increase (decrease) in obligation						0
Changes to the previously estimated transaction price				0
Change in variable consideration		0		0
Unsatisfied performance obligations				0
Difference between Revenue Guidance in Effect before and after Topic 606 [Member] | Accounting Standards Update 2014-09 [Member]
Revenue from Contract with Customer [Line Items]
Accumulated deficit	$ 6,800,000
Income tax benefit	$ 0
NOCITA and ENTYCE [Member]
Revenue from Contract with Customer [Line Items]
Reserve for product returns and allowances		$ 265,000		$ 265,000		$ 265,000	$ 90,000

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Revenue (Disaggregation of Revenue by Source) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Disaggregation of Revenue [Line Items]
Total revenues	$ 21,555	$ 6,163	$ 30,506	$ 15,116
Licensing and Collaboration [Member]
Disaggregation of Revenue [Line Items]
Total revenues	18,385	2,192	21,982	3,899
Licensing and Collaboration [Member] | GALLIPRANT [Member]
Disaggregation of Revenue [Line Items]
Total revenues	18,385	2,192	21,982	3,899
Product Sales [Member]
Disaggregation of Revenue [Line Items]
Total revenues	3,170	3,971	8,524	11,217
Product Sales [Member] | NOCITA [Member]
Disaggregation of Revenue [Line Items]
Total revenues	1,916	717	5,219	1,681
Product Sales [Member] | ENTYCE [Member]
Disaggregation of Revenue [Line Items]
Total revenues	$ 1,254		$ 3,305
Product Sales [Member] | GALLIPRANT [Member]
Disaggregation of Revenue [Line Items]
Total revenues		3,248		9,494
Product Sales [Member] | Other [Member]
Disaggregation of Revenue [Line Items]
Total revenues		$ 6		$ 42

XML

Revenue (Schedule of Change in Contract Liability Balances) (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($)
Revenue [Abstract]
As of January 1,	$ 7,000
ASC 606 adoption	(6,800)
Revenue recognized
Payments made
As of the end of period,	$ 200

XML

Fair Value of Financial Assets and Liabilities (Narrative) (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Assets fair value	$ 10,416,000	$ 9,711,000
Fair Value, Measurements, Recurring [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Liabilities fair value	0	0
Fair Value, Measurements, Nonrecurring [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Assets fair value	$ 0	$ 0

XML

Fair Value of Financial Assets and Liabilities (Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis) (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Assets:
Assets, fair value	$ 10,416	$ 9,711
Carrying Value [Member]
Assets:
Assets, fair value	10,416	9,711
Certificates of Deposit [Member]
Assets:
Cash equivalents	8,680	8,964
Certificates of Deposit [Member] | Carrying Value [Member]
Assets:
Cash equivalents	8,680	8,964
Short-Term Marketable Securities - Certificates Of Deposit [Member]
Assets:
Short-term marketable securities - certificates of deposit	1,736	747
Short-Term Marketable Securities - Certificates Of Deposit [Member] | Carrying Value [Member]
Assets:
Short-term marketable securities - certificates of deposit	1,736	747
Level 2 [Member]
Assets:
Assets, fair value	10,416	9,711
Level 2 [Member] | Certificates of Deposit [Member]
Assets:
Cash equivalents	8,680	8,964
Level 2 [Member] | Short-Term Marketable Securities - Certificates Of Deposit [Member]
Assets:
Short-term marketable securities - certificates of deposit	$ 1,736	$ 747

XML

Fair Value of Financial Assets and Liabilities (Schedule of Liabilities not Measured at Fair Value on Recurring Basis) (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Loan payable, Carrying Value	$ 25,243
Level 2 [Member] | Fair Value, Measurements, Nonrecurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Loan payable, Carrying Value	25,243	$ 36,825
Loan payable, Fair Value	$ 24,801	$ 36,973

XML

Investments (Fair Value of Available-for-Sale Marketable Securities) (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	$ 1,736	$ 747
Fair Value	1,736	747
Certificates of Deposit [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	1,736	747
Fair Value	$ 1,736	$ 747

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Inventories (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Inventory [Line Items]
Inventory valuation adjustment losses	$ 883	$ 342	$ 1,218	$ 394
Raw materials	243		243		$ 1,132
Non-cancellable open orders	$ 1,154		$ 1,154		7,132
GALLIPRANT [Member]
Inventory [Line Items]
Raw materials					$ 777

XML

Inventories (Components of Inventories) (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Inventories [Abstract]
Raw materials	$ 243	$ 1,132
Work-in-process	8,980	12,322
Finished goods	4,509	122
Total	$ 13,732	$ 13,576

XML

Goodwill (Narrative) (Details) - USD ($)	3 Months Ended	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2018
Goodwill and Intangible Assets [Abstract]
Goodwill impairment loss	$ 0	$ 0

XML

Goodwill (Summary of Goodwill) (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Goodwill and Intangible Assets [Abstract]
Gross Carrying Value	$ 40,846
Impairment Losses
Net Carrying Value	$ 40,846	$ 41,295

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Goodwill (Summary of Change in the Net Book Value of Goodwill) (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($)
Goodwill and Intangible Assets [Abstract]
As of January 1,	$ 41,295
Effect of foreign currency exchange	(449)
As of the end of the period,	$ 40,846

XML

Intangible Assets, Net (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Goodwill and Intangible Assets [Abstract]
Amortization of intangible assets	$ 129	$ 85	$ 388	$ 235

XML

Intangible Assets, Net (Change in the Net Book Value of Intangible Assets) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Goodwill and Intangible Assets [Abstract]
As of January 1,			$ 6,616
Amortization expense	$ (129)	$ (85)	(388)	$ (235)
As of the end of the period,	$ 6,228		$ 6,228

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Intangible Assets, Net (Summary of Amortized Intangible Assets) (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Finite-Lived Intangible Assets [Line Items]
Gross carrying value		$ 45,652
Accumulated amortization		39,036
Net carrying value		6,616
Intellectual Property Rights For Currently Marketed Products [Member]
Finite-Lived Intangible Assets [Line Items]
Gross carrying value	$ 7,000	7,000
Accumulated amortization	772	384
Net carrying value	$ 6,228	$ 6,616
Weighted average useful life	14 years 1 month 6 days	14 years 1 month 6 days
Intellectual Property Rights For Formerly Marketed Products [Member]
Finite-Lived Intangible Assets [Line Items]
Gross carrying value		$ 38,652
Accumulated amortization		38,652
Net carrying value

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Debt (Narrative) (Details) - USD ($)			3 Months Ended		9 Months Ended
	Oct. 17, 2017	Jul. 31, 2017	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017	Oct. 16, 2015
Debt Instrument [Line Items]
Interest expense			$ 716,000	$ 870,000	$ 2,357,000	$ 2,601,000
Amortization of debt issuance costs			139,000	131,000	417,000	370,000
Interest expense			716,000	$ 870,000	2,357,000	$ 2,601,000
Current portion – loans payable			22,583,000		22,583,000		$ 17,333,000
Term Loan [Member]
Debt Instrument [Line Items]
Aggregate principal amount								$ 35,000,000
Aggregate principal amount borrowed					19,500,000
Principal amount of debt			$ 19,500,000		$ 19,500,000
Interest rate			8.91%		8.91%
Termination commitment fee percentage					3.30%
Minimum liquidity requirement			50.00%		50.00%
Liquidity requirement			$ 12,250,000		$ 12,250,000
Current portion – loans payable			18,000,000		18,000,000
Revolving Line due 2017 [Member]
Debt Instrument [Line Items]
Maximum borrowing capacity								$ 5,000,000
Amount outstanding			5,000,000		$ 5,000,000
Unused capacity commitment fee percentage					0.25%
Date of maturity					Oct. 16, 2017
Termination fee			165,000		$ 165,000
Termination fee paid	$ 165,000
Current portion – loans payable			4,583,000		4,583,000
Revolving Line due 2019 [Member]
Debt Instrument [Line Items]
Principal amount of debt			$ 5,000,000		$ 5,000,000
Interest rate			8.91%		8.91%
Term Loan And Revolving Credit Facility [Member]
Debt Instrument [Line Items]
Principal amount of debt			$ 24,500,000		$ 24,500,000
Excess interest rate over prime rate					3.66%
Interest rate			8.91%		8.91%
Loan Agreement, Second Amendment [Member]
Debt Instrument [Line Items]
Facility fee		$ 60,000
Interest only payment term		6 months
Date of maturity					Oct. 16, 2019
Amendment fee		$ 150,000
Termination fee		$ 165,000
Additional default interest rate			4.00%		4.00%
Minimum liquidity requirement			50.00%		50.00%
Liquidity requirement			$ 12,250,000		$ 12,250,000
Minimum [Member] | Term Loan And Revolving Credit Facility [Member]
Debt Instrument [Line Items]
Interest rate			6.91%		6.91%

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Debt (Schedule of Loan Payable Balance) (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($)
Debt Instrument [Line Items]
Add: accretion of final payment and termination fees	$ 933
Less: unamortized debt issuance costs	(190)
As of the end of the period	25,243
Term Loan [Member]
Debt Instrument [Line Items]
Principal amounts	$ 19,500
Interest rate	8.91%
Date of first principal payment	Feb. 01, 2018
Date of final principal payment	Oct. 01, 2019
Revolving Line due 2019 [Member]
Debt Instrument [Line Items]
Principal amounts	$ 5,000
Interest rate	8.91%
Date of first principal payment	Nov. 01, 2018
Date of final principal payment	Oct. 01, 2019

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Accrued Expenses and Other Current Liabilities (Schedule of Accrued Expenses and Other Current Liabilities) (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Accrued expenses:
Payroll and related expenses	$ 2,081	$ 2,314
Professional fees	644	208
Royalty expense	1,356	718
Interest expense	178	249
Research and development costs	107	5
Other	882	218
Total	$ 5,248	$ 3,712

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Agreements (RaQualia Pharma Inc Narrative) (Details) - RaQualia Agreements [Member]	3 Months Ended	9 Months Ended	12 Months Ended
	Sep. 30, 2018 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($)	Dec. 27, 2010 USD ($) agreement
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Number of license agreements | agreement				2
Milestones achieved	$ 0	$ 0
Milestones paid		11,500,000
Accrued milestones	$ 0	$ 0
Scenario, Forecast [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Milestones achieved			$ 2,000,000
GALLIPRANT [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Milestones payable				$ 4,000,000
ENTYCE [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Milestones payable				$ 3,000,000

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Agreements (Pacira Pharmaceuticals, Inc. Narrative) (Details) - USD ($)		3 Months Ended		9 Months Ended
	Jul. 05, 2018	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Cost of product sales		$ 2,172,000	$ 3,690,000	$ 4,013,000	$ 10,475,000
AT-003 [Member] | Pacira Agreement [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Annual revenue payment, period delayed	1 year
Milestones achieved		0		0
Milestones paid				2,500,000
Accrued milestones		$ 0		$ 0
AT-003 [Member] | Pacira Agreement [Member] | Minimum [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Product completion, pain prevented post-surgery, hours	48 hours
AT-003 [Member] | Pacira Agreement [Member] | Maximum [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Product completion, pain prevented post-surgery, hours	72 hours
AT-003 [Member] | Pacira Agreement [Member] | Commercial Milestone [Member] | Maximum [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Milestones payable	$ 40,000,000
Initial Tier [Member] | AT-003 [Member] | Pacira Agreement [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Net sales that must be met for milestone payable	50,000,000
Final Tier [Member] | AT-003 [Member] | Pacira Agreement [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Net sales that must be met for milestone payable	$ 250,000,000

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Agreements (Elanco GALLIPRANT Narrative) (Details) - USD ($) $ in Thousands		1 Months Ended	9 Months Ended	29 Months Ended
	Apr. 28, 2017	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2018	Dec. 31, 2017
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Licensing and collaboration commitment			$ 200	$ 200	$ 7,000
ASC 606 adoption			6,800
Contract liability			200	200	7,000
Elanco Collaboration Agreement [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Milestones achieved				15,000
Accrued milestones			15,000	15,000
Elanco Collaboration Agreement [Member] | Grapiprant Products [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Non-refundable, non-creditable up-front payment receivable			45,000	45,000
Licensing and collaboration commitment					7,000
ASC 606 adoption			$ 6,800
Contract liability					$ 7,000
Elanco Collaboration Agreement [Member] | Grapiprant Products [Member] | Aratana [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Percentage of third-party development fees and expenses to be paid			25.00%
Elanco Collaboration Agreement [Member] | Elanco Animal Health, Inc. [Member] | Grapiprant Products [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Percentage of third-party development fees and expenses to be paid			75.00%
Elanco Collaboration Agreement Amendment [Member] | Grapiprant Products [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Binding purchase order, submission period	15 days
Agreement to pay after proof of payment to manufacturer, period	30 days
Cash paid for contingent consideration		$ 10,832
Elanco Co-Promotion Agreement [Member] | Grapiprant Products [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Fee for services performed and expenses incurred as a percent of gross margin to net sales			25.00%
European Approval Milestone [Member] | Elanco Collaboration Agreement [Member] | Grapiprant Products [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Milestone receivable			$ 4,000	4,000
Manufacturing Milestone [Member] | Elanco Collaboration Agreement [Member] | Grapiprant Products [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Milestone receivable			4,000	4,000
Sales Milestone [Member] | Elanco Collaboration Agreement [Member] | Grapiprant Products [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Milestone receivable			$ 75,000	$ 75,000
Reduction for each annual occurrence milestone is not achieved			33.33%

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Agreements (VetStem BioPharma, Inc. Narrative) (Details)	9 Months Ended
	Sep. 30, 2018 USD ($)
Research and Development Arrangement, Contract to Perform for Others [Line Items]
In-process research and development	$ 500,000
AT-016 [Member] | VetStem Agreement [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
In-process research and development	0
Milestones payable	$ 0

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Agreements (AskAt Inc. Narrative) (Details) - USD ($)		3 Months Ended				9 Months Ended
	Feb. 28, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Cost of product sales		$ 2,172,000			$ 3,690,000	$ 4,013,000	$ 10,475,000
In-process research and development						500,000
AskAt Collaboration And Option Agreement [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Upfront option fee				$ 500,000
AT-019 [Member] | AskAt Agreement [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Cost of product sales			$ 500,000
Type of Cost, Good or Service [Extensible List]			us-gaap:LicenseMember
In-process research and development				$ 500,000
Milestones payable	$ 15,500,000
Net sales that must be met for milestone payable	$ 100,000,000
Percentage of milestone payable that can be paid out in cash	50.00%
Percentage of milestone payable that can be paid out in shares	50.00%
Accrued milestones		$ 0				0
Milestones paid						0
Royalty payments						$ 0
AT-019 [Member] | AskAt Agreement [Member] | Maximum [Member] | Clinical Development And Regulatory Milestone [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Milestones payable	$ 3,000,000
AT-019 [Member] | AskAt Agreement [Member] | Maximum [Member] | Commercial Milestone [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Milestones payable	$ 12,500,000

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Common Stock (Narrative) (Details) - USD ($) $ / shares in Units, $ in Thousands						3 Months Ended	9 Months Ended
	Dec. 18, 2017	May 09, 2017	May 03, 2017	Apr. 28, 2017	Oct. 16, 2015	Sep. 30, 2018	Sep. 30, 2018	Sep. 30, 2017	Nov. 02, 2018	Dec. 31, 2017	Aug. 04, 2017
Class of Stock [Line Items]
Common stock, authorized						100,000,000	100,000,000			100,000,000
Common stock, par value						$ 0.001	$ 0.001			$ 0.001
Common stock, shares outstanding						47,981,034	47,981,034			42,532,725
Treasury stock, shares						92,099	92,099			80,916
Treasury stock, value						$ 1,162	$ 1,162			$ 1,107
Restricted stock withheld to satisfy employee tax withholding, shares							11,183	1,342
Restricted stock withheld to satisfy employee tax withholding, per share							$ 4.96	$ 7.88
Proceeds from offering							$ 24,394	$ 27,463
Shelf Registration Statement [Member]
Class of Stock [Line Items]
Aggregate stock available to sell											$ 100,000
At-the-Market Offering [Member] | Common Stock [Member]
Class of Stock [Line Items]
Aggregate stock available to sell	$ 50,000				$ 52,000
Shares issued						962,053	5,144,244
Percentage of commission on gross proceeds from sale of shares	3.00%				2.75%
Proceeds from offering						$ 4,863	$ 24,230
Placement agent fee						151	754
Issuance costs						$ 21	$ 164
Value of shares issued				$ 18,000
Registered Direct Offering [Member] | Common Stock [Member]
Class of Stock [Line Items]
Shares issued			5,000,000
Price per share			$ 5.25
Percentage of commission on gross proceeds from sale of shares			6.00%
Close date			May 09, 2017
Proceeds from offering		$ 24,400
Placement agent fee		1,575
Issuance costs		$ 273
Subsequent Event [Member] | At-the-Market Offering [Member] | Common Stock [Member]
Class of Stock [Line Items]
Remaining stock available to sell									$ 24,852
2013 Plan [Member]
Class of Stock [Line Items]
Unvested restricted common stock outstanding						645,753	645,753			491,861

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Stock-Based Awards (Narrative) (Details) - USD ($)		9 Months Ended		69 Months Ended
	Jan. 01, 2018	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Proceeds from stock option exercises		$ 12,000	$ 157,000
2010 Equity Incentive Plan [Member] | Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock options granted				0
2013 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares available for future grant		1,662,687		1,662,687
Stock options granted		798,000
Annual increase in shares	1,203,369
Weighted average grant date fair value, grants		$ 4.80
Unrecognized stock-based compensation expense for options outstanding		$ 4,596,000		$ 4,596,000
Unrecognized stock-based compensation expense, other than options		2,978,000		$ 2,978,000
2013 Plan [Member] | Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Aggregate intrinsic value of options exercised		6,000
Proceeds from stock option exercises		$ 12,000
Weighted average grant date fair value of options granted		$ 3.16
Unrecognized stock-based compensation expense, recognition period		2 years 5 months 19 days
2013 Plan [Member] | Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Fair value stock awards, vested, other than options		$ 1,481,000
Proceeds from the issuance of restricted stock		$ 0
Unrecognized stock-based compensation expense, recognition period		1 year 9 months 18 days

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Stock-Based Awards (Summary of Stock Option Activity) (Details) $ / shares in Units, $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2018 USD ($) $ / shares shares	Dec. 31, 2017 USD ($) $ / shares shares
2010 Equity Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares Issuable Under Options, Outstanding as of December 31, 2017 | shares	57,394
Shares Issuable Under Options, Expired | shares	(4,011)
Shares Issuable Under Options, Outstanding as of September 30, 2018 | shares	53,383	57,394
Weighted Average Exercise Price, Outstanding as of December 31, 2017 | $ / shares	$ 4.22
Weighted Average Exercise Price, Expired | $ / shares	5.57
Weighted Average Exercise Price, Outstanding as of September 30, 2018 | $ / shares	$ 4.12	$ 4.22
Weighted Average Remaining Contractual Term, Outstanding	4 years 4 months 6 days	5 years 1 month 10 days
Aggregate Intrinsic Value, Outstanding | $	$ 82	$ 73
2013 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares Issuable Under Options, Outstanding as of December 31, 2017 | shares	2,557,143
Shares Issuable Under Options, Granted | shares	798,000
Shares Issuable Under Options, Exercised | shares	(3,843)
Shares Issuable Under Options, Forfeited | shares	(45,090)
Shares Issuable Under Options, Expired | shares	(64,847)
Shares Issuable Under Options, Outstanding as of September 30, 2018 | shares	3,241,363	2,557,143
Weighted Average Exercise Price, Outstanding as of December 31, 2017 | $ / shares	$ 11.45
Weighted Average Exercise Price, Granted | $ / shares	4.84
Weighted Average Exercise Price, Exercised | $ / shares	3.14
Weighted Average Exercise Price, Forfeited | $ / shares	7.51
Weighted Average Exercise Price, Expired | $ / shares	19.00
Weighted Average Exercise Price, Outstanding as of September 30, 2018 | $ / shares	$ 9.73	$ 11.45
Weighted Average Remaining Contractual Term, Outstanding	7 years 3 months 4 days	7 years 4 months 28 days
Aggregate Intrinsic Value, Outstanding | $	$ 1,559	$ 794

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Stock-Based Awards (Summary of Restricted Stock Activity) (Details) - 2013 Plan [Member]	9 Months Ended
	Sep. 30, 2018 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unvested restricted common stock as of December 31, 2017, Shares | shares	491,861
Issued, Shares | shares	476,000
Vested, Shares | shares	(311,405)
Forfeited, Shares | shares	(10,703)
Unvested restricted common stock as of September 30, 2018, Shares | shares	645,753
Unvested restricted common stock as of December 31, 2017, Weighted Average Grant Date Fair Value | $ / shares	$ 7.59
Issued, Weighted Average Grant Date Fair Value | $ / shares	4.80
Vested, Weighted Average Grant Date Fair Value | $ / shares	7.76
Forfeited, Weighted Average Grant Date Fair Value | $ / shares	5.31
Unvested restricted common stock as of September 30, 2018, Weighted Average Grant Date Fair Value | $ / shares	$ 5.49

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Stock-Based Awards (Summary of Stock-Based Compensation Expense Related to Stock Options and Restricted Stock) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock-based compensation expense	$ 1,194	$ 1,799	$ 3,835	$ 5,457
Cost of Product Sales and Inventories [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock-based compensation expense	29	42	92	126
Research and Development [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock-based compensation expense	158	229	490	717
Selling, General and Administrative [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock-based compensation expense	$ 1,007	$ 1,528	$ 3,253	$ 4,614

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Net Income (Loss) Per Share (Narrative) (Details) - shares	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Stock Options [Member]
Dilutive Securities Included And Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Common stock excluded from diluted net loss per share	2,986,462	2,649,334	3,294,746	2,649,334
Unvested Restricted Stock [Member]
Dilutive Securities Included And Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Common stock excluded from diluted net loss per share	177,219	540,464	645,753	540,464

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Net Income (Loss) Per Share (Schedule of Basic and Diluted Net Income (Loss) Per Share Attributable to Common Stockholders) (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Basic net income (loss) per share:
Net income (loss)	$ 8,833	$ (8,920)	$ (6,088)	$ (31,912)
Weighted average shares outstanding, basic	47,310,408	42,445,553	46,128,197	39,820,573
Net income (loss) per share, basic	$ 0.19	$ (0.21)	$ (0.13)	$ (0.80)
Diluted net income (loss) per share:
Net income (loss)	$ 8,833	$ (8,920)	$ (6,088)	$ (31,912)
Weighted average shares outstanding, basic	47,310,408	42,445,553	46,128,197	39,820,573
Dilutive effect of outstanding stock awards	174,976
Weighted average shares outstanding, diluted	47,485,384	42,445,553	46,128,197	39,820,573
Net income (loss) per share, diluted	$ 0.19	$ (0.21)	$ (0.13)	$ (0.80)

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Income Taxes (Narrative) (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Income Taxes [Abstract]
Income tax expense (benefit)	$ 0	$ 0	$ 0	$ 0

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Accumulated Other Comprehensive Loss (Summary of Changes in Accumulated Other Comprehensive Loss) (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Accumulated Other Comprehensive Income (Loss) [Line Items]
As of December 31, 2017		$ (7,085)
Foreign currency translation adjustment	$ 801	(473)	$ 2,522
As of September 30, 2018		(7,558)
Foreign Currency Translation Adjustment [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
As of December 31, 2017		(7,085)
Foreign currency translation adjustment		(473)
As of September 30, 2018		$ (7,558)