ARATANA THERAPEUTICS, INC.

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		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017	3
	Consolidated Statements of Operations for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~	4
	Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~	5
	Consolidated Statements of Cash Flows for the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1822
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2732
Item 4.	Controls and Procedures	2732
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	2833
Item 1A.	Risk Factors	2833
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2833
Item 3.	Defaults Upon Senior Securities	2833
Item 4.	Mine Safety Disclosures	2833
Item 5.	Other Information	2833
Item 6.	Exhibits	2834
SIGNATURES		2935

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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)



	June 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	78,823	$	87,307	$	66,427	$	66,868
Short-term investments		1,494		996		498		747
Accounts receivable, net		4,893		87		2,438		2,406
Inventories		6,961		11,130		13,952		13,576
Prepaid expenses and other current assets		6,605		2,022		1,263		1,642
Total current assets		98,776		101,542		84,578		85,239
Property and equipment, net		1,503		1,948		1,047		1,166
Goodwill		40,500		39,382		41,683		41,295
Intangible assets, net		11,033		7,639		6,486		6,616
Restricted cash		350		350		350		350
Other long-term assets		555		545		528		526
Total assets	$	152,717	$	151,406	$	134,672	$	135,192
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,902	$	7,436	$	1,929	$	7,451
Accrued expenses		5,602		5,827
Accrued expenses and other current liabilities						2,875		3,712
Licensing and collaboration commitment		7,000		7,000		200		7,000
Current portion – loans payable		8,797		14,413		20,083		17,333
Other current liabilities		—		12
Total current liabilities		23,301		34,688		25,087		35,496
Loans payable, net		29,296		25,775		13,882		19,492
Other long-term liabilities		72		540		67		70
Total liabilities		52,669		61,003		39,036		55,058
Commitments and contingencies (Notes 4 and 15)
Commitments and contingencies (Notes 5 and 16)
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized at June 30, 2017 and December 31, 2016, 42,402,677 and 36,607,922 issued and outstanding at June 30, 2017 and December 31, 2016, respectively		42		37
Treasury stock		(1,099)		(1,088)
Common stock, $0.001 par value; 100,000,000 shares authorized at March 31, 2018 and December 31, 2017, and 46,033,850 and 42,532,725 issued and outstanding at March 31, 2018 and December 31, 2017, respectively						46		43
Treasury stock, at cost; 89,604 and 80,916 shares at March 31, 2018 and December 31, 2017, respectively						(1,149)		(1,107)
Additional paid-in capital		318,044		286,909		338,483		321,599
Accumulated deficit		(208,798)		(185,593)		(235,064)		(233,316)
Accumulated other comprehensive loss		(8,141)		(9,862)		(6,680)		(7,085)
Total stockholders’ equity		100,048		90,403		95,636		80,134
Total liabilities and stockholders’ equity	$	152,717	$	151,406	$	134,672	$	135,192

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



	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2017		2016		2017		2016		2018		2017
Revenues
Licensing and collaboration revenue	$	804	$	38,000	$	1,707	$	38,151	$	1,706	$	903
Product sales		4,354		47		7,246		68		2,337		2,892
Total revenues		5,158		38,047		8,953		38,219		4,043		3,795
Costs and expenses
Cost of product sales		3,691		1,741		6,785		1,760		536		3,094
Royalty expense		353		20		676		38		806		323
Research and development		3,700		5,303		8,354		16,052		2,205		4,654
Selling, general and administrative		6,918		6,148		14,413		12,699		7,699		7,495
Amortization of intangible assets		86		95		150		190		130		64
Impairment of intangible assets		—		2,780		—		2,780
In-process research and development										500		—
Total costs and expenses		14,748		16,087		30,378		33,519		11,876		15,630
Income (loss) from operations		(9,590)		21,960		(21,425)		4,700
Loss from operations										(7,833)		(11,835)
Other income (expense)
Interest income		88		83		173		160		141		85
Interest expense		(871)		(846)		(1,731)		(1,695)		(853)		(860)
Other expense, net		(7)		(1)		(9)		(36)		(3)		(2)
Total other expense		(790)		(764)		(1,567)		(1,571)		(715)		(777)
Net income (loss)	$	(10,380)	$	21,196	$	(22,992)	$	3,129
Net income attributable to participating securities		—		(20)		—		(3)
Net income (loss) attributable to common stockholders	$	(10,380)	$	21,176	$	(22,992)	$	3,126
Net income (loss) per share attributable to common stockholders:
Net income (loss) per share, basic and diluted	$	(0.26)	$	0.61	$	(0.60)	$	0.09
Weighted average shares outstanding, basic		40,206,042		34,762,533		38,486,329		34,708,006
Weighted average shares outstanding, diluted		40,206,042		34,938,455		38,486,329		34,779,786
Net loss									$	(8,548)	$	(12,612)
Net loss per share, basic and diluted									$	(0.19)	$	(0.34)
Weighted average shares outstanding, basic and diluted										44,788,068		36,711,601

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, ~~2016~~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, ~~2017.~~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 ~~$208,798~~$235,064 as of ~~June 30, 2017.~~March 31, 2018. The Company expects to continue to generate operating losses for the foreseeable future. The Company believes that its cash, cash equivalents and short-term investments at March 31, 2018, will be sufficient to fund operations and debt obligations ~~for~~ at least ~~one year from the issuance of these consolidated financial statements.~~ through June 30, 2019.

~~The Company expects to continue to incur operating losses for the next several years as it works to develop and commercialize its therapeutics and therapeutic candidates. If the Company cannot generate sufficient cash from operations in the future, it may~~ seek to fund its operations through collaborations and licensing arrangements, as well as public or private equity offerings or further debt (re)financings. If the Company is not able to raise additional capital on terms acceptable to it, or at all, as and when needed, it may be required to curtail its operations which could include delaying the commercial launch of its therapeutics, discontinuing therapeutic development programs, or granting rights to develop and market therapeutics or therapeutic candidates that it would otherwise prefer to develop and market itself. As disclosed in Note 78 to the consolidated financial statements, the Company has a term loan and a revolving credit facility with an aggregate principal balance of ~~$37,667~~$33,500 as of ~~June 30, 2017.~~March 31, 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 ~~June 30, 2017,~~March 31, 2018, was approximately ~~$22,523.~~$26,950. If the minimum liquidity covenant is not met, the Company may be required to repay the loans prior to their scheduled maturity dates. At ~~June 30, 2017,~~March 31, 2018, the Company was in compliance with all financial covenants.

The Company expects an increase in its 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, the Company will need additional capital to fund its operations and debt obligations beyond June 30, 2019, which the Company may obtain from corporate collaborations and licensing arrangements, or other sources, such as public or private equity offerings and further debt (re)financings. The future viability of the Company beyond June 30, 2019, is dependent on its ability to raise additional capital to finance its operations, to fund on-going research and development costs, commercialization of its therapeutics and therapeutic candidates and to satisfy debt covenants. 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 ~~and a consolidated variable interest entity (“VIE”) through the deconsolidation date in December 2016.~~. Intercompany balances and transactions are eliminated in consolidation.

To determine if the Company holds a controlling financial interest in an entity, the Company first evaluates if it is required to apply the VIE model to the entity. Where the Company holds current or potential rights that give it the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance combined with a variable interest that gives it the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, the Company is the primary beneficiary of that VIE. When changes occur to the design of an entity, the Company reconsiders whether it is subject to the VIE model. The Company continuously evaluates whether it is the primary beneficiary of a consolidated VIE and upon determination that the Company no longer remains the primary beneficiary, the Company deconsolidates the entity and a gain or loss is recognized upon deconsolidation.

Use of Estimates

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

Revenue from Contracts with Customers

Effective January 1, 2018, the Company adopted 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.

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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 which is 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 due to such asset is deemed to be fully impaired at the time of product return.

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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 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 not able to overcome the variable consideration constraint, not considered probable or that are determined to be sales-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 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.

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Property and Equipment, ~~net~~Net

Property and equipment is recorded at historical cost, net of accumulated depreciation and amortization of ~~$1,378~~$1,310 and ~~$920~~$1,188, as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively.

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New Accounting Standards

Revenue from Contracts with Customers

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

In July 2015, the FASB approved a one-year delay in the effective date of the new revenue standard. These changes become effective for the Company on January 1, 2018. Early adoption is permitted but not before the original effective date of January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently assessing the method of adoption and the impact this new guidance will have on its consolidated financial statements. The timing of revenue recognition for variable consideration under the Company’s licensing and collaboration agreements may be different as a result of this new guidance. The Company is reviewing its licensing and collaboration agreements for variable consideration, and if any such consideration exists, whether it should be estimated and recognized earlier than under the current revenue guidance.

~~Inventory~~

In July 2015, the FASB issued guidance that requires entities to measure most inventory “at lower of cost and net realizable value” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted and is to be applied using a prospective basis. The Company adopted this guidance on January 1, ~~2017, and the~~2018. The impact of adoption ~~did not have a material impact on its consolidated financial statements.~~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 ~~using~~on a modified retrospective ~~method.~~transition. The Company is currently assessing the effect that adoption of this guidance will have on its consolidated financial statements.

~~Compensation – Stock Compensation~~

~~In March 2016,~~The Company currently expects that its operating lease commitments will be subject to the ~~FASB issued~~new guidance ~~that simplifies several aspects~~which will result in recognition of operating lease liabilities and right-of-use assets in the consolidated balance sheets upon the adoption of the ~~accounting for employee share-based payment transactions including accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in~~new guidance. However, the ~~statement~~Company’s assessment of ~~cash flows. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early~~the impact of adoption is ~~permitted.~~still ongoing. ~~The Company adopted this guidance on January 1, 2017, and the adoption did not have a material impact on its consolidated financial statements.~~

~~Statement of Cash Flows~~

In August 2016, the FASB issued guidance on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company adopted this guidance on January 1, 2017, and the adoption did not have a material impact on its consolidated financial statements.

~~Intangibles—Goodwill and Other~~

In January 2017, the FASB issued guidance on simplifying the subsequent measurement of goodwill by eliminating Step 2 (measuring a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill) from the goodwill impairment test. Under the amendments in this guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The guidance requires application using a prospective method. The Company adopted this guidance on January 1, 2017, and the adoption did not have a material impact on its consolidated financial statements.

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Compensation – Stock Compensation

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

2. Revenue

2.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 licensing and collaboration agreement with Elanco Animal Health, Inc., a division of Eli Lilly & Co. (“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. The Company records a contract liability based on the amount of the obligation that it expects to pay which was $200 as of March 31, 2018. 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 months ended March 31, 2018, revenues would have been the same as compared to ASC 606.

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Disaggregated Revenues

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


	Three Months Ended
	March 31,
	2018		2017 (1)
Revenues
Licensing and collaboration revenue
GALLIPRANT	$	1,706	$	903
Total licensing and collaboration revenue		1,706		903
Product sales
NOCITA	$	1,547	$	327
ENTYCE		790		—
GALLIPRANT		—		2,545
Other		—		20
Total product sales		2,337		2,892
Total revenues	$	4,043	$	3,795

⁽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, and distributor product sales revenues consist primarily of ENTYCE.

As of March 31, 2018 and December 31, 2017, respectively, reserves for product returns and allowances related to NOCITA and ENTYCE were $145 and $114.

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 (“the 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 three months ended March 31, 2018, was as follows:

Licensing and Collaboration Commitment


		2018
As of January 1,	$	7,000
ASC 606 adoption		(6,800)
Revenue recognized		—
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 March 31, 2018, are required, and therefore, no change in variable consideration was recognized as revenue for the three months ended March 31, 2018.

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Unsatisfied Performance Obligations

As of the adoption date of ASC 606 and March 31, 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.

3. Fair Value of Financial Assets and Liabilities

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

The ~~following~~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		March 31, 2018 Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Certificates of deposit	$	9,462	$	—	$	9,462	$	—	$	9,462
Short-term investments:
Short-term marketable securities - certificates of deposit		498		—		498		—		498
	$	9,960	$	—	$	9,960	$	—	$	9,960



			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).

Fair Value Measurements as of

Carrying

June 30, 2017 Using:


Value

Level 1

Level 2

Level 3

Total
Assets:










Cash equivalents:


Certificates of deposit

$
7,221

$
—

$
7,221

$
—

$
7,221
Short-term investments:

Short-term marketable securities - certificates of deposit

1,494

—

1,494

—

1,494


$
8,715

$
—

$
8,715

$
—

$
8,715

Fair Value Measurements as of

Carrying

December 31, 2016 Using:


Value

Level 1

Level 2

Level 3

Total
Assets:










Cash equivalents:


Certificates of deposit

$
7,719

$
—

$
7,719

$
—

$
7,719
Short-term investments:

Short-term marketable securities - certificates of deposit

996

—

996

—

996


$
8,715

$
—

$
8,715

$
—

$
8,715

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 March 31, 2018 and December 31, 2017.

Table of Contents

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

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



	June 30, 2017				March 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
Liabilities:
Loans payable (Level 2)	$	38,093	$	38,172	$	33,965	$	33,807

Loans payable values above include both the current and the long-term loans balances as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016.~~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 amount shown above is not necessarily indicative of the amounts that the Company would realize upon disposition, nor does it indicate the Company’s intent or ability to dispose of the financial instrument.

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

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

At ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~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.

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

As of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, the Company had non-cancellable open orders for the purchase of inventories of approximately ~~$27,667~~$2,687, which is expected to be paid in the next 12 months, and ~~$17,800,~~$7,132, respectively.

As of ~~June 30, 2017 and~~ December 31, ~~2016,~~2017, raw materials included $777 of GALLIPRANT inventories. As part of the manufacturing transfer of GALLIPRANT (Note 10), the Company ~~had deposits~~transferred these raw materials to Elanco, and was reimbursed for ~~inventories of $5,313 and $0, respectively, recorded as prepaid expenses and other current assets in~~ the ~~consolidated balance sheets.~~ raw materials by Elanco during the three months ended March 31, 2018.

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

The change in the net book value of goodwill for the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, was as follows:

The change in the net book value of intangible assets for the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, was as follows:

The Company recognized amortization expense of ~~$86~~$130 and ~~$150~~$64 for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, ~~respectively, and $95 and $190 for the three and six months ended June 30, 2016,~~ respectively.

~~The net carrying value above includes asset impairment charges to date of $16,765.~~

Amortized intangible assets as of ~~June 30,~~March 31, 2018, were as follows (excluding intellectual property rights for formerly marketed products that were fully impaired in prior periods):

~~Accumulated amortization above includes both amortization expense and asset impairment charges. Asset impairment charges to date are $34,575.~~

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

As of March 31, 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.

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 ~~as amended on February 24, 2017~~ (“Loan Agreement”), with Pacific Western Bank, or Pacific Western, as a collateral agent and Oxford Finance, LLC ~~(the~~(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 isand the revolving credit facility are secured by ~~substantially~~ all of the Borrowers’ personal property other than intellectual property and certain other customary exclusions. Subject to customary exceptions, the Company is not permitted to encumber its intellectual ~~property~~property.. The outstanding principal balance under the Loan Agreement was ~~$32,667~~$28,500 under the term loan facility and $5,000 under the revolving credit facility at ~~June 30, 2017. Under~~March 31, 2018. During the ~~Loan Agreement,~~ three months ended March 31, 2018 and 2017, the Company recognized interest expense of $853 and $860, respectively. Amortization of debt issuance costs, recognized as interest expense, was ~~required to make interest-only payments on~~$140 and $119 for the ~~term loan for 18~~three months ended March 31, 2018 and ~~beginning on May 1,~~ 2017, ~~began to make payments of principal and accrued interest on the term loan in equal monthly installments over a term of 30 months.~~ 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. ~~The~~

term loan and 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 June 30, 2017, the interest rate for the term loan and the revolving credit facility was 7.91%. During the three and six months ended June 30, 2017, the Company recognized interest expense of $871 and $1,731, respectively, and during the three and six months ended June 30, 2016, the Company recognized interest expense of $843 and $1,687, respectively.

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

~~The Loan Agreement requires that the Company maintain certain minimum liquidity at all times~~ (the greater of cash equal to fifty percent (50%) of outstanding credit extensions or remaining months’ liquidity, which is calculated on an average trailing three (3) month basis, equal to six (6) months or greater), which as of June 30, 2017, was approximately $22,523. If the minimum liquidity covenant is not met, the Company may be required to repay the term loan and the revolving credit facility prior to their scheduled maturity dates. At June 30, 2017, the Company was in compliance with all financial covenants.

~~The Company’s~~ ~~loans payable balance as of June 30, 2017, was as follows:~~

As of June 30, 2017, $8,667 and $130 related to the term loan and the revolving credit facility, respectively, were classified as current portion – loans payable. Portions of the term loan and the revolving credit facility have been reclassified from current portion – loans payable to loans payable as the Company refinanced its debt after the balance sheet date.

Effective as of July 31, 2017, the Borrowers and Lenders entered into a second amendment to the Loan Agreement ~~(“the Second~~(the “Second Amendment”). The terms of the Second Amendment, among other things, extend the maturity date of the existing revolving credit facility to October 16, 2019 (the “Revolving Line Maturity Date”), with amortized equal repayments of the principal outstanding under the revolving credit facility beginning November 1, 2018, and provide a six-month interest only period for the term loans, starting on the date of the Second Amendment. The Company is not subject to any new financial covenants as a result of the Second Amendment. At the closing of the Second Amendment, the Company paid the Lenders an amendment fee of $150 and a facility fee of $60. The Company is also obligated to pay a new termination fee equal to $165 upon the earliest to occur of the Revolving Line Maturity Date, the acceleration of the revolving credit facility or the termination of the revolving credit facility. The existing termination fee of $165 ~~will continue~~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 March 31, 2018, interest rate for the term loan and the revolving credit facility was 8.41%. In addition, the Company is obligated to ~~be payable~~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 ~~the original revolving maturity date (October~~October 16, ~~2017),~~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~~facility.

The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, limits or restrictions on the ~~termination~~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 March 31, 2018, was approximately $26,950. If the minimum liquidity covenant is not met, the Company may be required to repay the term loan and the revolving credit ~~facility.~~

~~Accrued expenses consisted of~~facility prior to their scheduled maturity dates. At March 31, 2018, the ~~following:~~

As of March 31, 2018, $18,000 and $2,083 related to the term loan and the revolving credit facility, respectively, were classified as current portion – loans payable.

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 ~~$6,000,~~$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.

~~The Company achieved a $3,000 milestone during the six months ended June 30, 2017, which was paid and capitalized as an intangible asset in the first quarter of 2017.~~ As of ~~June 30, 2017,~~March 31, 2018, the Company had paid ~~$8,500~~$11,500 in milestone payments since execution of the RaQualia ~~Agreements.~~ Agreements, and no milestone payments were accrued. No milestones were achieved during the three months ended March 31, 2018. It is possible that ~~multiple additional milestones~~a milestone related to the RaQualia Agreements ~~are~~will be achieved within the next 12twelve months totaling ~~$3,000.~~$2,000.

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

Under the terms of the Collaboration Agreement, the Company received a non-refundable, non-creditable upfront payment of $45,000. The Company is entitled to a $4,000 milestone payment upon European approval of a Grapiprant Product for the treatment of pain and inflammation, another $4,000 payment upon achievement of a development milestone related to the manufacturing of a Grapiprant Product from an alternate supply source, and payments up to $75,000 upon the achievement of certain sales milestones. 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 iswas 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.~~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 ~~the~~ Grapiprant Products, provided that the Company’s contribution to such development fees and expenses is capped at $7,000, ~~(“R&D Cap”),~~ which was recorded as licensing and collaboration commitment liability in the consolidated balance sheets at ~~June 30, 2017 and~~ December 31, ~~2016. The~~2017. Upon adoption of ASC 606 (Note 2), the Company ~~classified the~~relieved $6,800 of its licensing and collaboration commitment liability asleaving a ~~current liability due to the Company having no control over when R&D Cap expenses will be incurred and the expected timing~~balance of ~~R&D Cap expenses being unknown~~$200 as of ~~June 30, 2017.~~March 31, 2018. The licensing and collaboration commitment liability ~~will be reduced~~balance in future periods ~~as the related expenses are incurred by Elanco~~will be updated at each future reporting date to reflect current facts and ~~paid for by the Company.~~circumstances. Any remaining balance ~~not paid to Elanco~~ will be recognized as licensing and collaboration revenue on December 31, 2018, when the Company’s obligation to fund 25% of Elanco’s development efforts expires.

Commencing on the effective date of the Collaboration Agreement, the Company iswas responsible for the manufacture and supply of all of Elanco’s reasonable requirements of active pharmaceutical ingredient (“API”) and/or finished Grapiprant Products under the supply terms agreed upon pursuant to the Collaboration Agreement. However, Elanco ~~retains~~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 ~~has~~ agreed to submit binding purchase orders to the Company, within 15 days of the effective date of the Amendment, for certain finished Grapiprant Products to be produced from certain batches of API the Company ~~has~~ agreed to purchase from its third-party manufacturer (the “API Batches”). In addition, Elanco ~~has~~ agreed to pay the Company for the API Batches within 30 days after the Company provides Elanco with proof of payment to the manufacturer for such API Batches. The Amendment provides that, in the event Elanco ~~provides~~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. ~~The~~In September 2017, the Company ~~believes~~and Elanco finalized the ~~transfers~~transfer of ~~manufacturing responsibility and such~~the applicable regulatory approvals in the United States ~~will be completed by December 31, 2017.~~ 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.

March 31, 2018, the Company had not earned any milestone payments since execution of the Collaboration Agreement, and no milestone payments were accrued. The Company will recognize revenue from the milestones if and when they are achieved by Elanco.

On April 22, 2016, in connection with the Collaboration Agreement, the Company entered into athe Co-Promotion Agreement ~~(the “Co-Promotion Agreement”) with Elanco~~ to co-promote Grapiprant Products in the United States.

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

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 (“AT-016”).

In January 2018, the Company exercised its right to terminate the VetStem Agreement, and on April 19, 2018, the termination became effective. During the three months ended March 31, 2018, the Company did not incur any development expenses or milestones. As a result of the termination of the VetStem Agreement, the Company does not anticipate having to reimburse any further development expenses or make milestone payments to VetStem.

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. As of March 31, 2018, the initial upfront license fee was included in the accounts payable in the consolidated balance sheets.

The Company will be required to pay remaining milestone payments of up to $15,500 upon the Company’s achievement of $3,000 of certain development/regulatory 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 March 31, 2018, the Company had not accrued or paid any milestone or royalty payments since execution of the AskAt Agreement. The Company does not expect to achieve any milestones related to the AskAt Agreement in the next twelve months.

On February 28, 2018, in connection with the AskAt Agreement, the Company entered into Collaboration and Option Agreement (the “COA”) with AskAt for animal health research, including a right of first negotiation agreement for multiple therapeutic candidates with potential in pain, allergy and cancer. During the three months ended March 31, 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.

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

As of March 31, 2018, and December 31, 2017 there were ~~42,402,677~~46,033,850 and 42,532,725 shares of the Company’s common stock outstanding, net of ~~584,591~~ 809,684 and 491,861 shares of unvested restricted common ~~stock.~~stock, respectively.

As of March 31, 2018 and December 31, 2017, there were 89,604 and 80,916 shares of the Company’s common stock held as treasury stock at a cost of $1,149 and $1,107, respectively. During the three months ended March 31, 2018 and 2017, 8,688 and 1,342 shares of restricted stock at a cost of $4.90 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”).

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.

On ~~October 16, 2015,~~December 18, 2017, the Company entered into a Sales Agreement (“Cowen Sales Agreement”) with ~~Barclays Capital, Inc.~~Cowen and Company, LLC (“~~Barclays”~~Cowen”) pursuant to which the Company ~~could~~may sell from time to time, at its option, up to an aggregate of ~~$52,000~~$50,000 of shares of its common stock ~~(the “Shares”)~~ through ~~Barclays,~~Cowen, as sales ~~agent (“ATM Program”). Sales~~agent. Any sales of the ~~Shares were~~shares of common stock would be made under the Company’s ~~previously filed and then~~ effective ~~registration statement~~Registration Statement on Form S-3 (Reg. No. ~~333-197414)~~333-219681), by means of ordinary brokers’ transactions on the ~~NASDAQ~~Nasdaq Global Market or otherwise. Additionally, under the terms of the Cowen Sales Agreement, the ~~Shares could~~shares of common stock may be sold at market prices, at negotiated prices or at prices related to the prevailing market price. The Company ~~paid Barclays~~has agreed to pay Cowen a commission of ~~2.75%~~3% of the gross proceeds from the sale of ~~the Shares.~~such shares of common stock.

During the three ~~and six~~ months ended ~~June 30, 2017,~~March 31, 2018, the Company sold ~~305,372 and 546,926 Shares~~3,383,963 shares of common stock for aggregate net proceeds of ~~$1,565~~$15,498, after deducting commission fees of $483 and ~~$2,788, respectively.~~

~~On April 28, 2017, the Company terminated its Sales Agreement. Prior to termination, the Company sold approximately $18,000~~issuance costs of $117. As of the $52,000 available to be sold under the Sales Agreement. The Company terminated the Sales Agreement because it did not intend to raise additional capital through the ATM Program, and no additional sharesdate of ~~the Company’s common stock were sold pursuant to the Sales Agreement. The Company did not incur any termination penalties as a result of its termination of the Sales Agreement.~~

~~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~~this filing, approximately $33,900 of shares of common ~~stock. In conjunction with~~stock remained available for sale under the ~~PAA, on May 3, 2017, the Company also entered into a Securities Purchase Agreement with certain investors for the sale by the Company~~Cowen Sales Agreement.

Activity related to stock options under the 2010 Equity Incentive Plan (the “2010 Plan”) for the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, was as follows:

No stock options have been granted under the 2010 Plan since the effective date of the 2013 ~~Incentive Award Plan (the “2013 Plan”).~~ ~~For the six months ended June 30, 2017, the total intrinsic value of options exercised was $53 and the total received from stock option~~

On January 1, ~~2017,~~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 ~~June 30, 2017,~~March 31, 2018, there were ~~1,609,078~~1,728,761 shares available for future grant under the 2013 Plan.

Activity related to stock options under the 2013 Plan for the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, was as follows:

For the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, the weighted average grant date fair value of stock options granted was ~~$5.18.~~$3.17. For the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, the total intrinsic value of options exercised was ~~$114~~$3 and the total received from stock option exercises was ~~$149.~~$5.

Activity related to restricted stock under the 2013 Plan for the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, was as follows:

For the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, the total fair value of restricted common stock vested was ~~$1,418.~~$608. The Company did not receive cash proceeds for any of the restricted common stock issued during the ~~six~~three months ended ~~June 30, 2017.~~March 31, 2018.

~~Upon adoption of ASU 2016-09 (Compensation – Stock Compensation)~~ ~~on January 1, 2017~~, the Company elected to change its accounting policy to account for forfeitures as they occur. The change was applied on a modified retrospective basis with a cumulative-effect adjustment to accumulated deficit of $213 (which increased the accumulated deficit) as of January 1, 2017. Prior to adoption of this guidance the Company estimated forfeitures.

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

As of ~~June 30, 2017,~~March 31, 2018, the Company had an aggregate of ~~$6,634~~$5,808 and ~~$3,582~~$3,939 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 ~~2.32~~2.71 years and ~~1.95~~2.22 years, respectively.

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

Three Months Ended

Six Months Ended

June 30,

June 30,


2017

2016

2017

2016
Basic net income (loss) per share attributable to common stockholders:

Numerator:

Net income (loss)

$
(10,380)

$
21,196

$
(22,992)

$
3,129
Net income attributable to participating securities

—

(20)

—

(3)
   Net income (loss) attributable to common stockholders

$
(10,380)

$
21,176

$
(22,992)

$
3,126

Denominator:

Weighted average shares outstanding – basic

40,206,042

34,762,533

38,486,329

34,708,006

Net income (loss) per share attributable to common stockholders – basic

$
(0.26)

$
0.61

$
(0.60)

$
0.09

Diluted net income (loss) per share attributable to common stockholders:

Numerator:

Net income (loss)

$
(10,380)

$
21,196

$
(22,992)

$
3,129
Net income attributable to participating securities

—

(20)

—

(3)
   Net income (loss) attributable to common stockholders

$
(10,380)

$
21,176

$
(22,992)

$
3,126

Denominator:

Weighted average shares outstanding – basic

40,206,042

34,762,533

38,486,329

34,708,006
Dilutive effect of outstanding stock awards

—

175,922

—

71,780
Weighted average shares outstanding – diluted

40,206,042

34,938,455

38,486,329

34,779,786

Net income (loss) per share attributable to common stockholders – diluted

$
(0.26)

$
0.61

$
(0.60)

$
0.09



	Three Months Ended
	March 31,
	2018		2017
Numerator:
Net loss	$	(8,548)	$	(12,612)
Denominator:
Weighted average shares outstanding, basic and diluted		44,788,068		36,711,601
Net loss per share, basic and diluted	$	(0.19)	$	(0.34)

The Company’s participating securities consisted of unvested restricted common stock issued from early exercised stock options and restricted common stock awards granted under the 2010 Plan as these shares have non-forfeitable dividend rights.

Stock options for the purchase of ~~2,652,792~~ 3,254,139 and 2,653,163 shares of common stock were excluded from the computation of diluted net loss per share attributable to common stockholders for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, respectively, because those options had an anti-dilutive impact due to the net loss attributable to common stockholders incurred for the period. Stock options for the purchase of 1,705,396 and 1,941,521 weighted average shares of common stock and 551,709 and 557,149 of unvested restricted stock awards were excluded from the computation of diluted net income per share attributable to common stockholders for the three and six months ended June 30, 2016, respectively, because those awards had an anti-dilutive impact on the net income attributable to common stockholders.

The Company recorded no income tax expense or benefit during the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ 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 March 31, 2018, the Company has not recorded incremental accounting adjustments related to the TCJA as it continues to consider interpretations of its application, however, we expect to complete the accounting by December 2018.

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

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

In February 2017, two purported class action lawsuits were filed in the United States District Court for the Southern District of New York against the Company and two of its current officers. Those cases have been consolidated into one purported class action lawsuit under the caption, In re Aratana Therapeutics, Inc. Securities Litigation, Case No. 1:17-cv-00880. The consolidated lawsuit, which was amended in August 2017, asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and is premised on allegedly false and/or misleading statements, and alleged non-disclosure of material facts, regarding the Company’s business, operations, prospects and performance during the proposed class period of March 16, 2015 to ~~February 3,~~March 13, 2017. The Company ~~intends to~~is vigorously ~~defend~~defending all claims ~~asserted.~~asserted, including by filing a motion to dismiss. Given the early stage of the litigation, at this time a loss is not probable or reasonably estimable.

The Company currently is not a party to any threatened or pending litigation related to intellectual property. However, third parties might allege that the Company or its licensors are infringing their patent rights or that the Company is otherwise violating their intellectual property rights. Such third parties may resort to litigation against the Company or its licensors, which the Company has agreed to indemnify. With respect to some of these patents, the Company expects that it will be required to obtain licenses and could be required to pay license fees or royalties, or both. These licenses may not be available on acceptable terms, or at all. A costly license, or inability to obtain a necessary license, could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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 ~~in preparation for~~regarding the commercialization of therapeutic candidates, beliefs regarding market opportunities for our products and potential success of our therapeutic ~~candidates; Elanco’s intent to assume manufacturing responsibility for GALLIPRANT under the Collaboration Agreement;~~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 BLONTRESS, TACTRESS, AT-007 and AT-011;~~assets; effects of stockholder class action lawsuits; unstable market and economic conditions; restrictions on our financial flexibility due to the terms of our credit facility; our substantial dependence upon the commercial success of our therapeutics GALLIPRANT, ENTYCE and NOCITA; development of our biologic therapeutic candidates is dependent upon relatively novel technologies and uncertain regulatory pathways, and biologics may not be commercially viable; denial or delay of regulatory approval for our existing or future therapeutic candidates; failure of our therapeutics, and our current or future therapeutic candidates that may obtain regulatory approval to achieve market acceptance or commercial success; effects of product liability lawsuits; failure to realize anticipated benefits of our acquisitions and difficulties associated with integrating the acquired businesses; development of pet therapeutics is a lengthy and expensive process with an uncertain outcome; competition in the pet therapeutics market, including from generic alternatives to our therapeutic candidates, and failure to compete effectively; failure to identify, license or acquire, develop and commercialize additional therapeutic candidates; failure to attract and retain senior management and key scientific personnel; our reliance on third-party manufacturers, suppliers and collaborators; regulatory restrictions on the marketing of our approved therapeutics and therapeutic candidates; our small commercial sales organization, and any failure to create a sales force or collaborate with third-parties to commercialize our approved therapeutics and therapeutic candidates; difficulties in managing the growth of our company; significant costs of being a public company; risks related to the ~~restatement~~effectiveness of our ~~financial statements for the year ended December 31, 2013, and the identification of a material weakness in our~~ internal ~~control over financial reporting;~~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, ~~2016,~~2017, filed with the Securities and Exchange Commission (the “SEC”) on March 14, ~~2017,~~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.

~~We are~~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 ~~operate in one business segment: p~~etwork with companion animal veterinarians to bring new therapeutics. ~~Our current portfolio includes multiple therapeutics~~ to market that support the needs of pets and therapeutic candidates in development consisting of both small molecule pharmaceuticals and biologics. We intend for our portfolio to capture opportunities in unmet or underserved medical conditions in dogs and cats.their owners.

We have three ~~United States Food and Drug Administration (“FDA”) approved~~marketed therapeutics, including ~~GALLIPRANT~~ ® ~~(grapiprant tablets) for the control of pain and inflammation associated with osteoarthritis in dogs;~~ ENTYCE® (capromorelin oral solution) for appetite stimulation in dogs; ~~and~~ NOCITA®~~(bupivacaine~~ (bupivacaine liposome injectable suspension) as a local post-operative analgesia for cranial cruciate ligament surgery in ~~dogs. BLONTRESS~~dogs; and GALLIPRANT® (grapiprant tablets) for the control of pain and ~~TACTRESS~~® ~~are our~~inflammation associated with osteoarthritis in dogs, which we co-promote under an agreement with Elanco Animal Health, Inc., a division of Eli Lilly & Co. (“Elanco”). Our Canine Osteosarcoma Vaccine, Live Listeria Vector (AT-014) is conditionally licensed and is being made available at approximately two ~~canine-specific monoclonal antibody (MAb) therapies that are fully licensed by~~dozen study sites across the United ~~States Department of Agriculture (“USDA”) to aid in the treatment of dogs with B-cell~~

~~and T-cell lymphoma, respectively.~~States. Our pipeline has multiple therapeutic candidates in development for the potential treatment of pain, ~~management of weight loss,~~allergy, viral ~~diseases, allergy~~disease and cancer for dogs and cats.

We have incurred significant net losses since our inception. These losses have resulted principally from costs incurred in connection with in-licensing our therapeutic candidates, research and development activities, and selling, general and administrative costs associated with our operations. As of ~~June 30, 2017,~~March 31, 2018, we had a deficit accumulated since inception of ~~$208.8~~$235.1 million and cash, cash equivalents, restricted cash and short-term investments of ~~$80.7~~$67.3 million.

During the three months ended ~~June 30, 2017, we~~March 31, 2018, our three Food and Drug Administration (“FDA”) approved and marketed therapeutics continued to ~~grow our commercial presence by gaining access~~gain awareness and we recorded $4.0 million in net revenues. In the first quarter 2018, we recorded $0.8 million in ENTYCE net product sales, which was an anticipated decrease compared to ~~target clinics and driving re-orders for existing accounts. The second~~the fourth quarter of 2017 ~~was~~when distributors were building their inventory. ENTYCE continues to have strong clinic penetration and as of March 31, 2018, approximately one-third of the approximately 25,000 veterinary clinics in the United States have ordered ENTYCE and more than half of those accounts re-ordered in the first ~~full~~quarter. For the quarter ~~of sales of GALLIPRANT, which~~ended March 31, 2018, we ~~are selling~~recorded approximately $1.5 million in ~~collaboration with Eli Lilly and Company, operating on behalf of its Elanco Animal Health division (“Elanco”), and total GALLIPRANT revenues which included~~NOCITA net product sales, for supply sold to Elanco and GALLIPRANT licensing and collaboration revenue increased sequentially during the quarter. Additionally, we continued to leverage our relationships with veterinary surgeons to increase the number ofwhich was driven by new accounts and ~~drive existing account re-orders~~strong re-order rates of ~~NOCITA. NOCITA sales~~approximately 60 percent. We also ~~increased sequentially during~~recorded $1.7 million in licensing and collaboration revenue from Elanco for GALLIPRANT in the ~~second~~first quarter of ~~2017.~~2018 and based on market research conducted by Elanco, GALLIPRANT continues to gain market share.

We ~~continued~~continue to ~~advance~~make progress on our late-stage pipeline of therapeutic candidates, ~~for dogs~~specifically AT-003 (bupivacaine liposome injectable suspension) and ~~cats. Specifically, in June 2017,~~Canine Osteosarcoma Vaccine, Live Listeria Vector (AT-014). In April 2018, we ~~submitted final pivotal field safety study data from an evaluation of AT-014 to the USDA and we filed the target animal safety~~received a technical section complete letter for ~~AT-003 in cats with~~ effectiveness from the FDA’s Center for Veterinary Medicine (“CVM”)~~. In July 2017,~~ for AT-003 and in the coming weeks, we ~~demonstrated positive results from~~plan on filing a supplemental New Animal Drug Application (“NADA”) to expand the ~~AT-003 pivotal field effectiveness study~~NOCITA label to include its use as a peripheral nerve block to provide regional post-operative analgesia following onychectomy in cats. The United States Department of Agriculture (“USDA”) granted conditional licensure of Canine Osteosarcoma Vaccine in December 2017 and as of March 31, 2018, we initiated the extended field study sites and started enrollment at approximately two dozen veterinarian oncology practice groups across the United States. Additionally, in the first quarter of 2018, we grew our therapeutic candidate pipeline with the addition of AT-019, an EP4 receptor antagonist with potential in pain, inflammation and other indications.

~~In July~~Now that our initial FDA-approved therapeutics have been launched, we have been exploring a wider set of business opportunities and outcomes given the dynamic and attractive nature of the companion animal health industry. While our operational priority remains on execution of the business, we anticipate discussing this on-going review over the coming quarters.

We reported $4.0 million in net revenues in the first quarter of 2018 related to ENTYCE sales, NOCITA sales, and GALLIPRANT licensing and collaboration revenues, which compares to $3.8 million in net revenues in the first quarter of 2017. Revenues in the first quarter of 2017 ~~pursuant~~were primarily related to product sales of GALLIPRANT sold to Elanco prior to the ~~Collaboration, License, Development and Commercialization Agreement with Elanco (the “Collaboration Agreement”), Elanco provided us with notice of its intent to assume responsibility for the~~ manufacturing of the Company’s products based on licensed grapiprant rights and technology, including GALLIPRANT (collectively, “Grapiprant Products”) and its intent to assume applicable regulatory approvals. We believe the transfers of manufacturing responsibility and such regulatory approvals in the United States to Elanco will be completed by December 31, 2017. Additionally, in late-June 2017, we re-submitted the ~~prior-approval supplement (“PAS”) to CVM for the manufacturing transfer of ENTYCE.~~

The following table identifies the most advanced therapeutic candidates being developed under CVM or the USDA’s Center for Veterinary Biologics (“CVB”) regulations and their current regulatory status:transfer.

~~ENTYCE was approved by the FDA for~~ appetite stimulation in ~~dogs in 2016.~~ dogs.~~We continue to anticipate that ENTYCE will be commercially available by the fall of 2017, depending on the timing of CVM’s approval, if any, of the PAS. See~~ ~~“Manufacturing and Supply Chain”~~ ~~below for additional information.~~

NOCITA® (bupivacaine liposome injectable suspension) to provide local postoperative analgesia for cranial cruciate ligament surgery in dogs.

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

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

In December 2017, the USDA’s Center for Veterinary Biologics granted conditional licensure for Canine Osteosarcoma Vaccine. As of the first quarter of 2018, we made the therapeutic available to 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 our goal is to gain more experience with the therapeutic. The therapeutic is initially commercially available to those veterinarians participating in the study and while the study is on-going, any product purchased for use in the clinical study will offset research and development expenses.

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

cats.
In ~~June 2017, we filed the target animal safety technical section with CVM for review and in~~ July 2017, we ~~completed an FDA-concurred~~announced positive results of a pivotal field effectiveness study evaluating ~~bupivacaine liposome injectable suspension for post-operative pain management~~AT-003 (in-licensed from Pacira Pharmaceuticals, Inc. (“Pacira”) in ~~cats.~~

~~The multi-center, placebo-controlled, randomized and masked pivotal field effectiveness study evaluated approximately~~more than 200 client-owned cats undergoing an elective onychectomy. ~~Results from the study~~Data showed ~~bupivacaine liposome injectable suspension~~AT-003 met protocol-defined efficacy success criteria, which were statistically significant (p<0.05)~~. The therapeutic candidate was well-tolerated. Data from~~ and the ~~study will be used as part of~~data were submitted to CVM in October. In April 2018, we received the effectiveness technical section ~~submission~~complete letter from CVM and we plan to ~~CVM to support~~file a supplemental NADA in the ~~intended~~coming weeks. Approximately two months after the filing, we anticipate the NOCITA label, ~~expansion~~if approved, will be expanded to include its use as a peripheral nerve block to provide regional post-operative analgesia following onychectomy in cats.

Canine Osteosarcoma Vaccine, Live Listeria Vector (AT-014) for dogs.
Canine Osteosarcoma Vaccine is a novel listeria antigen delivery system based immunotherapy in-licensed from Advaxis, Inc. We have developed a lyophilized formulation of a modified live, attenuated strain of listeria that activates cytotoxic T-cells. In December 2017, the USDA granted Aratana conditional licensure and as is required by USDA to progress from conditional licensure to full licensure, Aratana has initiated an extended field study at approximately two dozen veterinarian oncology practice groups across the United States and the sites have started enrolling dogs.

~~VetStem BioPharma Inc.,~~dogs.
In December 2017, our ~~exclusive~~ license partner responsible for the development of AT-016, ~~an adipose-derived allogeneic stem cell~~VetStem BioPharma (“VetStem”), shared results of a pivotal study, that did not achieve protocol-defined efficacy success criteria. We are not committing future resources to the program and in January 2018, we exercised our right to terminate the license agreement with VetStem, which was effective mid-April 2018.

In February 2018, we licensed exclusive, worldwide rights to develop and commercialize AT-019 from AskAt Inc. (“AskAt”). AT-019 is a potent and innovative EP4 receptor antagonist therapeutic candidate ~~for osteoarthritis~~with potential in pain, ~~in dogs, has on-going FDA-concurred target animal safety~~inflammation and ~~target animal efficacy studies with results anticipated from both~~other indications. We started early development work in ~~2017.~~

Regulatory and development advances in the ~~pivotal field safety study evaluating AT-014~~first quarter of 2018 for the treatment of canine osteosarcoma in dogs and in June 2017, we submitted the safety data to the USDA. We continue to anticipate conditional licensure in the second half of 2017. We are finalizing our plans with respect to commercializing AT-014, assuming conditional licensure, which may include making AT-014 available to a group of veterinary oncologists as we complete the additional work required by the USDA for full licensure.

~~In addition to United States regulatory and development activities, we also have regulatory and development efforts~~therapeutic candidates outside the United States:

Grapiprant Products.
Under the Elanco Collaboration, License, Development and Commercialization Agreement (as amended, the “Collaboration Agreement”), Elanco has exclusive rights to ~~our products based on licensed grapiprant rights and technology, including GALLIPRANT (collectively, “Grapiprant Products”),~~Grapiprant Products globally outside the United ~~States. We are~~States for development, manufacturing, marketing and commercialization in additional species and/or indications. Aratana was responsible under the Collaboration Agreement for all development activities required to obtain the first regulatory approval for grapiprant for use in dogs in the European Union (“EU”) and Elanco is responsible for all other development ~~activities.~~activities going forward. In ~~February 2016, we filed a~~January 2018, Elanco and Aratana announced that the European Commission had adopted the decision to grant marketing authorization ~~application with the European Medicines Agency (“EMA”) for grapiprant in dogs~~of GALLIPRANT in the EU. ~~In cooperation with~~If Elanco successfully expands the EU label for GALLIPRANT to include inflammation, we ~~have generated additional data and responses~~are eligible to ~~questions~~receive a $4.0 million milestone payment, which ~~we plan to submit to the EMA. We believe that the filing and other interactions with the EMA will support a positive opinion in late-2017 and marketing authorization in the first half of 2018.~~may occur after 2019.

~~We continue~~Europe.
In the first quarter of 2018, we started to ~~make progress with~~develop a dossier for EMA regulatory authorities on bupivacaine liposome injectable suspension in ~~Europe~~Europe. Separately, based on conversations with ~~respect to certain of our other therapeutic candidates.~~the EMA, we believe the path forward for capromorelin may be informed by studies investigating weight gain in cats.

We manage third-party manufacturers to supply ~~active~~active pharmaceutical ingredient (“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 (“~~CMO”~~CMOs”) rather than devote resources toward developing or acquiring internal manufacturing facilities.

~~GALLIPRANT~~ENTYCE® (capromorelin oral solution).
During the first quarter of 2018, we paid approximately $7.2 million for ENTYCE API. Given these and 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. We are responsible for the labeling, packaging and shipping of NOCITA. Based on strong demand trends, we are currently working to balance appropriate inventory levels to maintain continuous commercial supply of NOCITA.

GALLIPRANT® (grapiprant tablets).
GALLIPRANT has been available to customers since January 2017, and as ~~part~~of September 2017, Elanco assumed ownership of the ~~Collaboration Agreement, we have agreed to provide the initial commercial supply of GALLIPRANT. On April 28, 2017, we~~NADA and Elanco entered into an amendment (the “Amendment”) to the Collaboration Agreement. Under the Amendment, Elanco has agreed to submit binding purchase orders to us, within 15 days of the effective date of the Amendment, for certain finished Grapiprant Products to be produced from certain batches of API we have agreed to purchase from our third-party manufacturer (the “API Batches”). In addition, Elanco has agreed to pay us for the API Batches within 30 days after we provide Elanco with proof of payment to the manufacturer for such API Batches. The Amendment provides that, in the event Elanco provides notice of its intent to assumemanufacturing responsibility for ~~manufacturing,~~GALLIPRANT. Elanco ~~would assume all of our responsibilities with respect~~is also working on a technology transfer at its expense to ~~any undelivered API, including paying the third-party manufacturer~~secure redundant supply and capture process improvements. If Elanco successfully establishes this alternate supply source, we are eligible for such undelivered API. In July 2017, Elanco provided us with notice of its intent to assume responsibility for manufacturing of the Grapiprant Products and its intent to assume the regulatory approvals. We believe the transfers of manufacturing responsibility and the regulatory approvals in the United States to Elanco will be completed by December 31, 2017. The companies are currently formulating a ~~plan for the transfer of manufacturing responsibilities and the New Animal Drug Application (“NADA”).~~

$4.0 million milestone payment, which may occur after 2019. GALLIPRANT is currently available in 20 mg and 60 mg tablets in a variety of packaging ~~configurations, which we believe provide appropriate treatment options for the majority of dogs.~~configurations. The 100 mg tablets of GALLIPRANT remain on backorder due to isolated reports of 100 mg tablets breaking in the bottle. With the transfer of manufacturing responsibility, Elanco is responsible for the timing and availability of the 100 mg tablets.

In late-June 2017, we re-submitted the PAS for the transfer and commercial scale-up of the API of ENTYCE to a different manufacturer from the manufacturer included in our NADA. As part of the PAS re-submission~~, we~~ provided what we believe was the appropriate information related to a raw material and its vendor. However, the CVM may request additional information which could result in the need for us to amend our filing or make additional filings. If we are unable to resolve any questions from CVM, we may be required to switch commercial manufacturers, or our manufacturer may be required to source the raw material from a different vendor. We continue to anticipate that ENTYCE will be commercially available by the fall of 2017, depending on the timing of CVM’s approval, if any, of the PAS. Subsequent to the re-submission of the PAS, we resumed manufacturing additional commercial inventory of ENTYCE, including API from the manufacturer for which we are seeking approval from CVM.

~~Effective as of July 31, 2017, we amended our Loan Agreement. See“Financial Condition, Liquidity and Capital Resources~~ ~~- Indebtedness”~~ ~~below for additional information.~~

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

~~There~~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 ~~June 30, 2017,~~March 31, 2018, from those discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016,~~2017, filed with the SEC on March 14, ~~2017.~~ 2018.

Comparison of the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~



	Three Months Ended						Six Months Ended						Three Months Ended
	June 30,						June 30,						March 31,
	2017		2016		% Change		2017		2016		% Change		2018		2017		% Change
	(Dollars in thousands)						(Dollars in thousands)						(Dollars in thousands)
Revenues:
Licensing and collaboration revenue	$	804	$	38,000	(97.9)	%	$	1,707	$	38,151	(95.5)	%	$	1,706	$	903	88.9	%
Product sales		4,354		47	>100.0	%		7,246		68	>100.0	%		2,337		2,892	(19.2)	%
Total revenues		5,158		38,047	(86.4)	%		8,953		38,219	(76.6)	%		4,043		3,795	6.5	%
Costs and expenses:
Cost of product sales		3,691		1,741	>100.0	%		6,785		1,760	>100.0	%		536		3,094	(82.7)	%
Royalty expense		353		20	>100.0	%		676		38	>100.0	%		806		323	>100.0	%
Research and development		3,700		5,303	(30.2)	%		8,354		16,052	(48.0)	%		2,205		4,654	(52.6)	%
Selling, general and administrative		6,918		6,148	12.5	%		14,413		12,699	13.5	%		7,699		7,495	2.7	%
Amortization of intangible assets		86		95	(9.5)	%		150		190	(21.1)	%		130		64	>100.0	%
Impairment of intangible assets		—		2,780	(100.0)	%		—		2,780	(100.0)	%
In-process research and development														500		—	NA
Other income (expense):
Interest income		88		83	6.0	%		173		160	8.1	%		141		85	65.9	%
Interest expense		(871)		(846)	3.0	%		(1,731)		(1,695)	2.1	%		(853)		(860)	(0.8)	%
Other expense, net		(7)		(1)	>100.0	%		(9)		(36)	(75.0)	%		(3)		(2)	50.0	%

During the three ~~and six~~ months ended ~~June 30, 2017,~~March 31, 2018, total revenues ~~decreased~~increased by ~~$32.9~~$0.2 million ~~and $29.3 million, respectively,~~ as compared to the corresponding ~~2016 periods.~~2017 period. The ~~decreases~~increase in total revenues ~~during the three and six months ended June 30, 2017, were~~was due to ~~decreases~~an increase of ~~$37.2~~$0.8 million ~~and $36.4 million, respectively,~~ in licensing and collaboration revenuerecognized from the Collaboration Agreement and the Co-Promotion Agreement with Elanco (collectively, the “Elanco ~~GALLIPRANT~~ Agreements”), partially offset by ~~increases~~a decrease of ~~$4.3 million and $7.2~~$0.6 million in net product sales. During the three months ended March 31, 2018, product sales ~~primarily due to~~consisted of net sales of ~~GALLIPRANT~~NOCITA and ~~NOCITA. Total revenues for the three and six months ended June 30, 2016, included $38.0 million of licensing and collaboration revenue recognized~~

~~from the Elanco GALLIPRANT Agreements.~~ENTYCE. During the three ~~and six~~ months ended ~~June 30,~~March 31, 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. GALLIPRANT product sales during the three and six months ended June 30, 2017, consisted of net sales of finished goods to Elanco under the supply terms of the Collaboration Agreement. NOCITA net sales were $0.6 million and $1.0 million during the three and six months ended June 30, 2017, respectively, as compared to $0 for the corresponding 2016 periods. We believe that the growth in NOCITA product sales is primarily a result of continued growth of new accounts, as well as strong re-order rates, which accounted for more than 75% of NOCITA revenue within the three months ended June 30, 2017.

We believe that product sales for ~~2017~~the remainder of 2018 will be ~~composed primarily~~a combination of ~~product~~ sales of ~~NOCITA, GALLIPRANT,~~ENTYCE and ~~ENTYCE, for which sales are still anticipated to begin by the fall of 2017, depending on the timing of CVM’s approval, if any, of the PAS. We believe NO~~CITA future product sales in 2017 will be dependent on our continuing efforts to commercialize the product. With respect to GALLIPRANT, in July 2017, Elanco gave us notice of its intent to assume all manufacturing responsibilities for GALLIPRANT under the Collaboration Agreement, which we believe will be completed by December 31, 2017. See “~~Manufacturing and Supply Chain”~~ above for additional information. The amount of any future product sales under the supply terms of the Collaboration Agreement will depend on how long Elanco utilizes us to supply GALLIPRANT. At this time, we believe customer demand does not justify manufacturing additional BLONTRESS or TACTRESS. Hence, we anticipate both therapeutics will no longer be commercially available when the current inventories are exhausted by late-2017. We believe any futureNOCITA. Any licensing and collaboration revenue in ~~2017~~2018 will be substantially dependent on Elanco’s ability to successfully commercialize GALLIPRANT in accordance with the Elanco Agreements and the amount of research and development expenditures we incur towards the licensing and collaboration commitment in accordance with the Collaboration Agreement. Assuming GALLIPRANT ~~Agreements.~~quarterly sales for the remainder of the year remain consistent with the first quarter 2018 sales, we expect to achieve a $15.0 million commercial milestone in 2018.

During the three ~~and six~~ months ended ~~June 30, 2017,~~March 31, 2018, cost of product sales ~~increased~~decreased by ~~$2.0~~$2.6 million ~~and $5.0 million, respectively,~~ as compared to the corresponding ~~2016 periods. These increases were~~2017 period. The decrease was primarily due to cost of product sales of GALLIPRANT, ~~and NOCITA.~~ ~~Cost~~which we sold to Elanco during 2017, partially offset by an increase in cost of product sales ~~is anticipated to increase in the second half~~ of ~~2017 due to the anticipated full period sales of NOCITA~~ENTYCE and ~~GALLIPRANT, and anticipated second half year sales of ENTYCE.~~ NOCITA.

We ~~believe the~~anticipate cost of product sales as a percentage of ~~overall~~ product ~~revenues~~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 ~~move GALLIPRANT, NOCITA~~replenish inventories and ~~ENTYCE to full commercial manufacturing scale over time.~~deplete the residual process validation batches that were previously expensed throughout the course of 2018.

During the three ~~and six~~ months ended ~~June 30, 2017,~~March 31, 2018, royalty expense increased by ~~$0.3~~$0.5 million ~~and $0.6 million, respectively,~~ as compared to the corresponding ~~2016 periods.~~2017 period. The ~~increases were~~increase was primarily a result of sales of our product sales of NOCITA and ENTYCE, and GALLIPRANT product sales by Elanco. 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 ~~NOCITA.~~ our continuing efforts to commercialize NOCITA and ENTYCE.

During the three ~~and six~~ months ended ~~June 30, 2017,~~March 31, 2018, research and development expense decreased by ~~$1.6~~$2.4 million ~~and $7.7 million, respectively,~~ as compared to the corresponding ~~2016 periods.~~ 2017 period. The decrease ~~during the three months ended June 30, 2017,~~ was due primarily to a decrease of ~~$1.2 million in milestone payments and~~ ~~a decrease of $0.4~~ million in personnel costs related to a lower headcount in 2017. The decrease during the six months ended June 30, 2017, was due primarily to a decrease of $6.2 million in milestone payments, a decrease of $0.3$2.9 million in contracted development costs due to ~~the prioritization~~fewer ongoing pivotal programs, partially offset by an increase of ~~spending for ongoing programs, a $1.0~~$0.5 million ~~decrease in personnel costs related to a lower headcount in 2017, and a $0.2 million decrease~~ in other ~~costs.~~costs primarily from an initial upfront option fee of $0.5 million pursuant to the collaboration and option agreement with AskAt.

WeSince we have completed several of our pivotal studies and achieved several development milestones for GALLIPRANT, ENTYCE and NOCITA, we expect ~~that,~~ in ~~2017,~~the remainder of 2018 our research and development expenses ~~will~~to be lower than in 2017. Research and development expenses in 2018 are expected to be primarily related to expanding the label of our approved therapeutics for additional indications and/or species and advancing our ~~AT-016 and AT-018 programs.~~development portfolio.

During the three ~~and six~~ months ended ~~June 30, 2017,~~March 31, 2018, selling, general and administrative expense increased by ~~$0.8~~$0.2 million ~~and $1.7 million, respectively,~~ as compared to the corresponding ~~2016 periods.~~2017 period. The increase ~~during the three months ended June 30, 2017,~~ was primarily due to ~~an increase of~~ expanded adoption and awareness efforts for the Company’s marketed therapeutics. W$1.1 million in personnel expenses primarily as a result of higher sales and marketing headcount, partially offset by a decrease of $0.3 million in other expenses. The increase during the six months ended June 30, 2017, was due to an increase of ~~$2.4~~ ~~million in personnel expenses primarily as a result of higher sales and marketing headcount, partially offset by a decrease of~~ ~~$0.7~~ ~~million in other expenses. We~~e expect ~~that, in 2017, our~~ selling, general and administrative expense ~~will~~to remain relatively ~~constant~~consistent throughout 2018 as we have substantially completed the build out of our sales organization and corporate infrastructure in ~~the~~ support of the ~~continued~~commercialization of NOCITA and ENTYCE, and our co-promotion of GALLIPRANT, with a slight increase to support further adoption and awareness for our marketed brands.

During the three months ended March 31, 2018, in-process research and development expense increased by $0.5 million as compared to the corresponding 2017 period. The increase was solely due to an initial upfront license fee of $0.5 million pursuant to the exclusive license agreement with AskAt.

~~commercialization of NOCITA and GALLIPRANT and expected commercialization of ENTYCE.~~

During both the three and six months ended June 30, 2017, impairment of intangible assets decreased by $2.8 million, as compared to the corresponding 2016 periods as there were no intangible asset impairment charges recognized during the three and six months ended June 30, 2017. The impairment of intangible assets in 2016 was related to impairment charges of TACTRESS ($0.6 million) and AT-007 ($2.2 million).

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 ~~June 30, 2017,~~March 31, 2018, we had an accumulated deficit of ~~$208.8~~$235.1 million and cash, cash equivalents and short-term investments of ~~$80.3~~$66.9 million.

We expect to continue to incur operating losses for the ~~next several years~~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, ~~as well~~or other sources such as public or private equity offerings orand further debt (re)financings. If we are not able to raise additional capital on terms acceptable to us, or at all, as and when needed, we ~~may~~would be ~~required~~forced to ~~curtail our operations~~ ~~which could include delaying the commercial launch of our therapeutics, discontinuing therapeutic~~delay, reduce, or eliminate certain research and development programs, reduce or ~~granting~~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.~~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 78 to our consolidated financial statements, we have a term loan and a revolving credit facility with an aggregate principal balance of ~~$37.7~~$33.5 million as of ~~June 30, 2017.~~March 31, 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 ~~June 30, 2017,~~March 31, 2018, was approximately ~~$22.5~~$27.0 million. If the minimum liquidity is not met, we may be required to repay the loans prior to their scheduled maturity dates. At ~~June 30, 2017,~~March 31, 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 ~~$80.3~~ $66.9million ~~as of June 30, 2017,~~at March 31, 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. Based on our current operating plan, ~~which contemplates the launch of ENTYCE by the fall of 2017,~~ we believe that our cash, cash equivalents and short-term investments will be sufficient to fund our operations and debt obligations ~~through~~ at least ~~2018. Our current operating plan also contemplates continued growth in sales of GALLIPRANT, which we believe will result in the achievement of certain milestones under the Collaboration Agreement.~~through June 30, 2019.

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.

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 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.

On ~~October 16, 2015,~~December 18, 2017, we entered into ~~the~~a Sales Agreement (“Cowen Sales Agreement”) with ~~Barclays Capital, Inc.~~Cowen and Company, LLC (“~~Barclays”~~Cowen”), pursuant to which we ~~could~~may sell from time to time, at our option, up to an aggregate of ~~$52.0~~$50.0 million of shares of ~~its~~our common stock ~~(the “Shares”)~~ through ~~Barclays,~~Cowen, as sales ~~agent (“ATM Program”). Sales~~agent. Any sales of the ~~Shares were~~shares of common stock would be made under our ~~previously filed and then~~ effective ~~registration statement~~Registration Statement on Form S-3 (Reg. No. ~~333-197414)~~333-219681), by means of ordinary brokers’ transactions on the ~~NASDAQ~~Nasdaq Global Market or otherwise. Additionally, under the terms of the Cowen Sales Agreement, the ~~Shares could~~shares of common stock may be sold at market prices, at negotiated prices or at prices related to the prevailing market price. We ~~paid Barclays~~have agreed to pay Cowen a commission of ~~2.75%~~3% of the gross proceeds from the sale of ~~the Shares.~~such shares of common stock.

During the three ~~and six~~ months ended ~~June 30, 2017,~~2018, we sold ~~305,372 and 546,926 Shares~~3,383,963 shares of common stock for aggregate net proceeds of ~~$1.6~~$15.5 million, after deducting commission fees of $0.5 million and ~~$2.8 million, respectively.~~

~~On April 28, 2017, we terminated our Sales Agreement. Prior to termination, we sold approximately $18.0 million~~issuances costs of $0.1 million. As of the ~~$52.0~~date of this filing, approximately $33.9 million available to be sold under the Sales Agreement. We terminated the Sales Agreement because we did not intend to raise additional capital through the ATM Program, and no additional shares of our common stock were sold pursuant to the Sales Agreement. We did not incur any termination penalties as a result of our termination of the Sales Agreement.

~~On May 3, 2017, we entered into a Placement Agency Agreement (“PAA”) with Barclays, pursuant to which Barclays agreed to serve as placement agent for an offering~~ of shares of common ~~stock. In conjunction with~~stock remained available for sale under the PAA, on May 3, 2017, we also entered into a Securities Purchase Agreement with certain investors for the sale by us of 5,000,000 shares of common stock at a purchase price of $5.25 per share (the “Offering”). The shares of common stock were offered and sold pursuant to our previously filed and then effective registration statement on Form S-3 (File No. 333-197414) and a related prospectus supplement. We agreed to pay Barclays an aggregate fee equal to 6.0% of the gross proceeds received by us from the Offering. The Offering closed on May 9, 2017. We received aggregate net proceeds from the Offering of approximately $24.4 million, after deducting placement agent fees of $1.6 million and estimated offering expenses of $0.3 million.Cowen Sales Agreement.

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 Borrowers were required to make interest-only payments on the Term Loan for 18 months, and beginning on May 1, 2017, began to make payments of principal and accrued interest on the Term Loan in equal monthly installments over a term of 30 months. The Term Loan and the Revolving Line bear interest per annum at the greater of (i) 6.91% or (ii) 3.66% plus the prime rate, which is customarily defined. Under the Loan Agreement, all principal and accrued interest on the Term Loan ~~were~~is due on October 16, 2019 (the “Term Loan Maturity Date”), and all principal and accrued interest on the Revolving Line ~~were~~was due on October 16, 2017 (the ~~“Revolving~~“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, extend the maturity of the Revolving Line to October 16, 2019 (the “Revolving Line Maturity Date”), with amortized equal repayments of the principal outstanding under the Revolving Line beginning November 1, 2018, and provide a six (6) month interest only period for the Term Loan, starting on the date of the Second Amendment.

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

~~Upon execution of the Loan Agreement, the~~The Borrowers ~~were obligated to pay a facility fee to the Lenders of $0.2 million and an agency fee to the Collateral Agent of $0.1 million. In addition, the Borrowers~~ are ~~or will be~~ obligated to pay a final payment fee equal to 3.30% of 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 the Term Loan Maturity Date, the acceleration of any Term Loan or the prepayment of a Term Loan. The Borrowers ~~will also be~~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 ~~June 30, 2017,~~March 31, 2018, was approximately ~~$22.5~~$27.0 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 ~~June 30, 2017,~~March 31, 2018, the Borrowers were in compliance with all financial covenants, including the minimum liquidity covenant.

We define working capital as current assets less current liabilities. The increase in working capital at ~~June 30, 2017,~~March 31, 2018, from December 31, ~~2016,~~2017, reflects a decrease in total current assets of ~~$2.8~~$0.7 million and a decrease in total current liabilities of ~~$11.4~~$10.4 million. The decrease in total current assets was primarily driven by a decrease in cash and cash equivalents due to payments for our research and development activities related to our programs, payments for inventories, ~~milestones and~~ selling, general and administrative expenses, and payments of debt principal and interest, partially offset by proceeds from the at-the-market offering and customer payments. The decrease in total current liabilities was primarily a result of payments for ~~GALLIPRANT~~ENTYCE inventories and a decrease in the current portion of loans payable due to ~~amending payment terms under our Loan Agreement on July 31, 2017.~~payments of principal balance.

A summary of our cash flows for the ~~six~~three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ is as follows:

During the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, net cash used in operating activities was ~~$29.9~~$13.2 million. We had a net loss of ~~$23.0~~$8.5 million which includes a non-cash expense for stock-based compensation of ~~$3.7~~$1.4 million, a non-cash depreciation and amortization expense of ~~$0.6~~$0.2 million and a non-cash interest expense of ~~$0.2~~$0.1 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. Net cash used in operating assets and liabilities was primarily due to a decrease in accounts payable of $5.6 million, a decrease in accrued expenses and other liabilities of $0.8 million and an increase in inventories of $0.4 million, partially offset by a decrease in prepaid expenses and other current assets of $0.4 million. The decrease in accounts payable was primarily related to payments for ENTYCE inventories and trade payables.

During the three months ended March 31, 2017, net cash used in operating activities was $18.4 million. We had a net loss of $12.6 million which includes an adjustment of a non-cash expense for stock-based compensation of $1.8 million, a non-cash depreciation and amortization expense of $0.4 million and a non-cash interest expense of $0.1 million. Our net loss was primarily attributed to our research and development activities related to our programs and our selling, general and administrative expenses, partially offset by licensing and collaboration revenues ~~of $1.7 million~~ from the Collaboration Agreement and product ~~sales of $7.2 million.~~sales. Net cash used in operating assets and liabilities ~~was~~consisted primarily ~~due to~~of a decrease in accounts payable of ~~$5.5~~$6.2 million, a decrease in accrued expenses and other liabilities of ~~$0.7~~$1.3 million, an increase in account receivable, net of ~~$4.8~~$3.5 million, ~~an increase~~partially offset by a decrease in prepaid expenses and other current assets of ~~$4.6~~$0.7 million and a decrease in inventories of ~~$4.2~~$2.1 million. The decrease in accounts payable was primarily related to payments for GALLIPRANT inventories and trade payables. The increase in accounts receivable, net and decrease in inventories were primarily related to GALLIPRANT sales. Also, accounts receivable, net increased due to receivables from the Elanco GALLIPRANT Agreements.

During the six months ended June 30, 2016, net cash provided by operating activities was $23.3 million. We had a net income of $3.1 million which includes a non-cash expense for stock-based compensation of $4.5 million, a non-cash depreciation and amortization expense of $0.5 million, a non-cash impairment of acquired intangible assets expense of $2.8 million, and a lower of cost or market adjustment to inventories of $1.6 million. Our net income was primarily attributed to licensing and collaboration revenues of $38.0 million from the Collaboration Agreement, research and development activities related to our programs and our selling, general and administrative expenses. Net cash provided by operating assets and liabilities consisted primarily of an increase in accounts payable of $5.9 million, an increase of $7.0 million in licensing and collaboration commitment under the Collaboration Agreement and an increase in accrued expenses and other liabilities of $0.6 million, partially offset by an increase in prepaid expenses of $0.1 million and an increase in inventories of $2.8 million. The increase in inventories was primarily related to GALLIPRANT pre-launch inventories. The increase in accounts payable was primarily related to the achieved milestones relating to GALLIPRANT, ENTYCE and NOCITA. The increase in accrued expenses and other current liabilities was primarily due to the licensing and collaboration commitment related to the Collaboration Agreement.

During the ~~six~~three months ended ~~June 30,~~March 31, 2018, net cash provided by investing activities was $0.2 million, which primarily consisted of the proceeds from the maturities and sales of investments of $0.7 million, partially offset by the purchases of investments of $0.5 million.

During the three months ended March 31, 2017, net cash used in investing activities was ~~$3.5~~$2.5 million, which primarily consisted of a $3.0 million milestone payment for intangible assets for currently marketed products and the purchases of investments of ~~$2.0~~$0.5 million,

partially offset by proceeds from the maturities and sales of investments of ~~$1.5~~$1.0 million.

During the six months ended June 30, 2016, net cash provided by investing activities was $58.7 million, which primarily consisted of the proceeds from the maturities and sales of marketable securities of $286.0 million, partially offset by the purchases of investments of $227.3 million.

During the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, net cash provided by financing activities was ~~$24.9~~$12.5 million. Net cash provided by financing activities consisted of the proceeds, net ~~proceeds~~of commission, from the issuance of common stock of ~~$27.5~~$15.6 million, partially offset by ~~$2.3~~$3.0 million of payments on loans payable and ~~$0.3~~less than $0.1 million of payments for common stock issuance costs.

During the ~~six~~three months ended ~~June 30, 2016,~~March 31, 2017, net cash provided by financing activities was $1.2 million. Net cash provided by financing activities consisted ~~solely~~ of the proceeds, net of commission, from the issuance of common stock ~~option exercises~~ of ~~$1,000.~~$1.2 million, partially offset by less than $0.1 million of payments for common stock issuance costs.

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 ~~June 30, 2017,~~March 31, 2018, there were no material changes in our contractual obligations since December 31, ~~2016,~~2017, except for the contract manufacturer commitments described below.

As of ~~June 30, 2017,~~March 31, 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.

Based on our development plans as of ~~June 30, 2017,~~March 31, 2018, we have committed to make potential future milestone payments to third parties of up to approximately ~~$108.6~~$116.9 million, of which ~~$77.4~~$86.4 million are for commercial milestones, as part of our various collaborations, including licensing and development programs. Approximately ~~$68.9~~$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 ~~June 30, 2017,~~March 31, 2018, such contingencies have not been recorded in our consolidated financial ~~statements, except for $0.5 million due to our former commercial licensee of BLONTRESS.~~statements.

We anticipate that we may pay approximately ~~$0.6~~$0.0 million and ~~$4.0~~$2.0 million of milestone payments during the remainder of ~~2017,~~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.

Our independent CMOs manufacture our products and product components based on our forecasts. These forecasts are based on estimates of future demand for our products, which are in turn based on available historical trends and an analysis from sales and product marketing organizations, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate supply, we may issue forecasts and orders for components and products that are non-cancelable. As of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, we had non-cancellable open orders for the purchase of inventories of ~~$27.7~~$2.7 million and ~~$17.8~~$7.1 million, respectively.

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

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.

Our market risks, and the ways we manage them are summarized in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016,~~2017, filed with the SEC on March 14, ~~2017.~~2018. As of ~~June 30, 2017~~March 31, 2018, there were no material changes to our market risks or management of such risks since December 31, ~~2016.~~2017.

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.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of ~~June 30, 2017.~~March 31, 2018.

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) identified in connection with the evaluation of our internal control performed during the fiscal quarter ended ~~June 30, 2017,~~March 31, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

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

There have been no material changes in the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, 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, ~~2016.~~2017.

~~None.~~The repurchase activity for the three months ended March 31, 2018, was as follows:

(1) 8,688 shares of restricted stock were withheld to satisfy employee tax withholding obligations arising in conjunction with the vesting of restricted stock pursuant to our 2013 Incentive Award Plan.

On July 31, 2017, we and Vet Therapeutics, Inc. (“the Borrowers”) entered into a Second Amendment (the “Second Amendment”) to the Loan and Security Agreement dated as of October 16, 2015, as previously amended (the “Loan Agreement”) with Pacific Western Bank, in its capacity as collateral agent (in such capacity, “Collateral Agent”), and the Lenders party thereto.

The terms of the Second Amendment, among other things, extend the maturity of the existing revolving credit facility (the “Revolving Line”) to October 16, 2019 (the “Revolving Line Maturity Date”), with amortized equal repayments of the principal outstanding under the revolving credit facility beginning November 1, 2018, and provide a six (6) month interest only period for the term loans, starting on the date of the Second Amendment.

We are not subject to any new financial covenants as a result of the Second Amendment. At the closing of the Second Amendment, we paid the Lenders an amendment fee of $150,000 and a facility fee of $60,000. We will also be obligated to pay a new termination fee equal to $165,000 upon the earliest to occur of the Revolving Line Maturity Date, the acceleration of the revolving credit facility or the termination of the revolving credit facility. The existing termination fee of $165,000 will continue to be payable upon the earliest to occur of the original revolving maturity date (October 16, 2017), the acceleration of the revolving credit facility or the termination of the revolving credit facility.

The foregoing description of the Second Amendment is a summary, and is qualified in its entirety by reference to the Second Amendment, which is filed herewith as Exhibit 10.4, and is incorporated herein by reference.

~~A list of exhibits is set forth on the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.~~None.

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

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.

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

~~+ Confidential treatment has been requested with respect to certain portions of this exhibit, which portions have been filed separately with the Securities and Exchange Commission.~~



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


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



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Net income (loss)	$	(10,380)	$	21,196	$	(22,992)	$	3,129
Other comprehensive income (loss):
Foreign currency translation adjustment		1,422		(704)		1,721		473
Other comprehensive income (loss)		1,422		(704)		1,721		473
Comprehensive income (loss)	$	(8,958)	$	20,492	$	(21,271)	$	3,602



	Three Months Ended
	March 31,
	2018		2017
Net loss	$	(8,548)	$	(12,612)
Other comprehensive income:
Foreign currency translation adjustment		405		299
Other comprehensive income		405		299
Comprehensive loss	$	(8,143)	$	(12,313)



	Six Months Ended				Three Months Ended
	June 30,				March 31,
	2017		2016		2018		2017
Cash flows from operating activities
Net income (loss)	$	(22,992)	$	3,129
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Net loss					$	(8,548)	$	(12,612)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		3,658		4,449		1,384		1,814
Depreciation and amortization expense		605		493		249		392
Impairment of intangible assets		—		2,780
Non-cash interest expense		237		239		140		119
Market value adjustments to inventories		—		1,552
Changes in operating assets and liabilities:
Accounts receivable, net		(4,806)		43		(32)		(3,452)
Inventories		4,169		(2,812)		(376)		2,075
Prepaid expenses and other current assets		(4,582)		(101)		360		706
Other assets		33		17		10		33
Accounts payable		(5,535)		5,874		(5,561)		(6,222)
Accrued expenses and other liabilities		(709)		624		(840)		(1,289)
Licensing and collaboration commitment		—		7,000
Net cash provided by (used in) operating activities		(29,922)		23,287
Net cash used in operating activities						(13,214)		(18,436)
Cash flows from investing activities
Milestone payments for intangible assets		(3,000)		—		—		(3,000)
Purchases of property and equipment, net		(11)		(19)
Purchase of investments		(1,988)		(227,346)		(498)		(494)
Proceeds from maturities of investments		1,490		286,046
Proceeds from maturities and sales of investments						747		996
Net cash provided by (used in) investing activities		(3,509)		58,681		249		(2,498)
Cash flows from financing activities
Taxes paid for awards vested under equity incentive plans		(11)		—		(42)		(11)
Proceeds from stock option exercises		152		1		5		6
Proceeds from issuance of common stock, net of commission		27,462		—		15,614		1,223
Payments for common stock issuance costs		(345)		—		(57)		(67)
Payments on loans payable		(2,332)		—		(3,000)		—
Net cash provided by financing activities		24,926		1		12,520		1,151
Effect of exchange rate on cash		21		35		4		5
Net increase (decrease) in cash and cash equivalents		(8,484)		82,004
Net decrease in cash, cash equivalents and restricted cash						(441)		(19,778)
Cash, cash equivalents and restricted cash, beginning of period		87,657		27,105		67,218		87,657
Cash, cash equivalents and restricted cash, end of period	$	79,173	$	109,109	$	66,777	$	67,879
Supplemental disclosure of cash flow information
Cash paid for interest	$	1,499	$	1,447	$	728	$	733
Supplemental disclosure of noncash investing and financing activities:
Unpaid common stock issuance costs included in accounts payable					$	38	$	—


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


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



			Fair Value Measurements as of
	Carrying		June 30, 2017 Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Certificates of deposit	$	7,221	$	—	$	7,221	$	—	$	7,221
Short-term investments:
Short-term marketable securities - certificates of deposit		1,494		—		1,494		—		1,494
	$	8,715	$	—	$	8,715	$	—	$	8,715



			Fair Value Measurements as of
	Carrying		December 31, 2016 Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Certificates of deposit	$	7,719	$	—	$	7,719	$	—	$	7,719
Short-term investments:
Short-term marketable securities - certificates of deposit		996		—		996		—		996
	$	8,715	$	—	$	8,715	$	—	$	8,715



	June 30, 2017								March 31, 2018
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
	Cost		Losses		Losses		Value		Cost		Losses		Losses		Value
Short-term marketable securities:
Certificates of deposit	$	1,494	$	—	$	—	$	1,494	$	498	$	—	$	—	$	498
Total	$	1,494	$	—	$	—	$	1,494	$	498	$	—	$	—	$	498



	Gross		Impairment		Net
	Carrying Value		Losses		Carrying Value
Goodwill	$	40,500	$	—	$	40,500



	~~2017~~2018
As of January 1,	$	~~39,382~~41,295
Effect of foreign currency exchange		~~1,118~~388
As of the end of the period,	$	~~40,500~~41,683



	~~2017~~2018
As of January 1,	$	~~7,639~~
~~Additions (Note 9)~~		~~3,000~~6,616
Amortization expense		~~(150)~~
~~Effect of foreign currency exchange~~		~~544~~ (130)
As of the end of the period,	$	~~11,033~~6,486



	~~Net~~
	~~Carrying~~
	~~Value~~
~~Intellectual property rights acquired for in-process research and development~~	$	~~7,217~~


	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


~~Principal amounts~~
~~Term loan, 7.91%, principal payments from May 1, 2017 through October 16, 2019~~	$	~~32,667~~
~~Revolving credit facility, 7.91%, due October 16, 2017~~		~~5,000~~
~~Add: accretion of final payment and termination fees~~		~~631~~
~~Less: unamortized debt issuance costs~~		~~(205)~~
~~As of the end of the period~~	$	~~38,093~~



	June 30, 2017		December 31, 2016
Accrued expenses:
Payroll and related expenses	$	1,489	$	2,321
Professional fees		236		219
Royalty expense		370		71
Interest expense		240		247
Research and development costs		511		364
Unbilled inventories		—		465
Accrued loss on a firm purchase commitment		1,983		1,983
Milestone		481		17
Other		292		140
Total	$	5,602	$	5,827


Principal amounts
Term loan, 8.41%, principal payments from February 1, 2018 through October 1, 2019	$	28,500
Revolving credit facility, 8.41%, principal payments from November 1, 2018 through October 1, 2019		5,000
Add: accretion of final payment and termination fees		748
Less: unamortized debt issuance costs		(283)
As of the end of the period	$	33,965



				Weighted						Weighted
	Shares	Weighted		Average			Shares	Weighted		Average
	Issuable	Average		Remaining	Aggregate		Issuable	Average		Remaining	Aggregate
	Under	Exercise		Contractual	Intrinsic		Under	Exercise		Contractual	Intrinsic
	Options	Price		Term	Value		Options	Price		Term	Value
				(In Years)						(In Years)

Outstanding as of December 31, 2016	65,931	$	3.73	6.09	$	228
Outstanding as of December 31, 2017							57,394	$	4.22	5.11	$	73
Granted	—		—				—		—
Exercised	(8,537)		0.40				—		—
Forfeited	—		—				—		—
Expired	—		—				—		—
Outstanding as of June 30, 2017	57,394	$	4.22	5.62	$	173
Outstanding as of March 31, 2018							57,394	$	4.22	4.86	$	60



				Weighed						Weighted
	Shares	Weighted		Average			Shares	Weighted		Average
	Issuable	Average		Remaining	Aggregate		Issuable	Average		Remaining	Aggregate
	Under	Exercise		Contractual	Intrinsic		Under	Exercise		Contractual	Intrinsic
	Options	Price		Term	Value		Options	Price		Term	Value
				(in years)						(in Years)

Outstanding as of December 31, 2016	2,251,518	$	12.43	7.78	$	2,261
Outstanding as of December 31, 2017							2,557,143	$	11.45	7.41	$	794
Granted	503,400		7.82				672,500		4.83
Exercised	(47,416)		3.14				(1,708)		3.14
Forfeited	(28,351)		10.91				(9,835)		8.89
Expired	(83,753)		19.15				(21,355)		25.45
Outstanding as of June 30, 2017	2,595,398	$	11.50	7.85	$	2,115
Outstanding as of March 31, 2018							3,196,745	$	9.97	7.74	$	470



		Weighted			Weighted
		Average Grant			Average Grant
	Shares	Date Fair Value		Shares	Date Fair Value
Unvested restricted common stock as of December 31, 2016	461,463	$	8.30
Unvested restricted common stock as of December 31, 2017				491,861	$	7.59
Issued	326,700		7.89	444,500		4.83
Vested	(192,780)		10.12	(124,142)		10.48
Forfeited	(10,792)		7.32	(2,535)		4.77
Unvested restricted common stock as of June 30, 2017	584,591	$	7.49
Unvested restricted common stock as of March 31, 2018				809,684	$	5.64



	Foreign		Accumulated
	Currency		Other
	Translation		Comprehensive
	Adjustment		Loss
As of December 31, 2016	$	(9,862)	$	(9,862)
Foreign currency translation adjustment		1,721		1,721
As of June 30, 2017	$	(8,141)	$	(8,141)


ENTYCE is commercially available to veterinarians in the United States through our direct sales organization and our network of national and regional distributors. Approximately five months after its launch, in the first quarter of 2018, we recorded $0.8 million in ENTYCE net product sales. As previously communicated, approximately half of the $1.3 million in revenues recorded in fourth quarter of 2017 were initial stocking orders from distributors building their inventory. According to clinic level sales data provided by distributors, move-out of ENTYCE to veterinary clinics was higher in the first quarter of 2018 as compared to the previous quarter.
As we get further into 2018, we anticipate inventory levels across the sales channels will stabilize and we believe we will see growth and a tighter correlation between shipments to distributors and move-out to veterinary clinics. ENTYCE continues to have strong clinic penetration and as of March 31, 2018, approximately one-third of the approximately 25,000 veterinary clinics in the United States have ordered ENTYCE. We believe that clinic penetration is an early indicator that veterinarians are pleased to have a new tool with which to manage the frustrating and common symptom of inappetence in dogs. ENTYCE penetration continues to exceed internal expectations and we anticipate achieving our objective of placement in approximately 40% of clinics by December 31, 2018. Additionally, more than half of ENTYCE customers have re-ordered in the first quarter of 2018. While we have secured initial orders, as we continue into 2018, we are focused on increasing the frequency with which a veterinarian reaches for ENTYCE and increasing the average days of therapy. We believe frequency and duration of therapy have the potential to increase as veterinarians become increasingly comfortable with the use of ENTYCE in all cases of inappetence. We anticipate as the therapeutic establishes itself in clinical practice, we will see a shift toward extended use and increased sales per clinic.


NOCITA is commercially available to veterinarians in the United States through our direct sales organization. In the first quarter of 2018, we recorded $1.5 million in NOCITA net product sales as compared to $0.3 million in the first quarter of 2017. We believe the quarter-over-quarter sequential increase in sales since launch is primarily driven from new accounts and strong re-order rates of approximately 60% in the first quarter of 2018.
Corporate account penetration accounted for more than 30% of revenues in the first quarter of 2018. In 2018, we will continue to market NOCITA as the standard of care for cranial cruciate ligament surgeries and anticipate filing for a label expansion to include its use as a peripheral nerve block to provide regional post-operative analgesia following onychectomy in cats.




	June 30, 2017		December 31, 2016		Change %		March 31, 2018		December 31, 2017		Change %
	(Dollars in thousands)						(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	78,823	$	87,307	(9.7)	%	$	66,427	$	66,868	(0.7)	%
Marketable securities - short-term		1,494		996	50.0	%		498		747	(33.3)	%
Total cash, cash equivalents and marketable securities	$	80,317	$	88,303	(9.0)	%	$	66,925	$	67,615	(1.0)	%
Borrowings:
Loans payable, net	$	38,093	$	40,188	(5.2)	%	$	33,965	$	36,825	(7.8)	%
Working capital:
Current assets	$	98,776	$	101,542	(2.7)	%	$	84,578	$	85,239	(0.8)	%
Current liabilities		23,301		34,688	(32.8)	%		25,087		35,496	(29.3)	%
Total working capital	$	75,475	$	66,854	12.9	%	$	59,491	$	49,743	19.6	%



					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
January 1, 2018 - January 31, 2018	8,688	(1)	$	4.90	—	N/A
February 1, 2018 - February 28, 2018	—			—	—	N/A
March 1, 2018 - March 31, 2018	—			—	—	N/A



		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
10.1	Form of Confidentiality Agreement for Non-Employee Directors								*
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



	ARATANA THERAPEUTICS, INC.

Date: ~~August~~May 4, ~~2017~~2018	By:	/s/ Steven St. Peter
		Steven St. Peter, M.D.
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: ~~August~~May 4, ~~2017~~2018	By:	/s/ Craig Tooman
		Craig Tooman
		Chief Financial Officer
		(Principal Financial and Accounting Officer)