apvo-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2017

OR

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

 

For the transition period from               to               

 

Commission File Number: 001-37746

 

APTEVO THERAPEUTICS INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

81-1567056

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

2401 4th Avenue, Suite 1050

Seattle, Washington

98121

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (206) 838-0500

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act ).    Yes      No  

 

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

As of November 6, 2017, the number of shares of Registrant’s common stock outstanding was 21,428,468.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations

3

 

Consolidated Statements of Comprehensive Loss

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

Item 3.

Defaults Upon Senior Securities

60

Item 4.

Mine Safety Disclosures

60

Item 5.

Other Information

60

Item 6.

Exhibits

61

Signatures

62

 

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Aptevo,” and “the Company” refer to Aptevo Therapeutics Inc. and, where appropriate, its consolidated subsidiaries.

 

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts, unaudited)

 

 

 

 

 

 

 

 

 

 

ASSETS

 

September 30, 2017

 

 

December 31, 2016

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

75,830

 

 

$

9,676

 

Restricted cash

 

 

10,400

 

 

 

400

 

Short-term investments

 

 

20,946

 

 

 

44,849

 

Accounts receivable

 

 

528

 

 

 

307

 

Inventories

 

 

1,237

 

 

 

461

 

Current assets held for sale

 

 

 

 

 

10,155

 

Prepaid expenses and other current assets

 

 

6,381

 

 

 

5,566

 

Total current assets

 

 

115,322

 

 

 

71,414

 

Property and equipment, net

 

 

6,163

 

 

 

5,910

 

Intangible assets, net

 

 

6,287

 

 

 

6,910

 

Long-term assets held for sale

 

 

 

 

 

7,624

 

Other long-term assets

 

 

3,250

 

 

 

 

Total assets

 

$

131,022

 

 

$

91,858

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and other accrued liabilities

 

$

7,512

 

 

$

10,518

 

Accrued compensation

 

 

3,815

 

 

 

4,009

 

Sales rebates and discounts

 

 

378

 

 

 

278

 

Due to acquirer of  discontinued operations

 

 

878

 

 

 

 

Deferred revenue, current portion

 

 

 

 

 

811

 

Other short-term liabilities

 

 

2,287

 

 

 

 

Current liabilities held for sale

 

 

 

 

 

3,928

 

Total current liabilities

 

 

14,870

 

 

 

19,544

 

Deferred revenue, net of current portion

 

 

 

 

 

2,896

 

Long-term debt, net

 

 

17,484

 

 

 

18,383

 

Other liabilities

 

 

8,358

 

 

 

469

 

Total liabilities

 

 

40,712

 

 

 

41,292

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock: $0.001 par value; 15,000,000 shares authorized, zero shares

   issued or outstanding

 

 

 

 

 

 

Common stock: $0.001 par value; 500,000,000 shares authorized; 21,426,731

   and 20,271,737 shares issued and outstanding at September 30, 2017 and

   December 31, 2016, respectively

 

 

21

 

 

 

20

 

Additional paid-in capital

 

 

154,257

 

 

 

151,271

 

Accumulated other comprehensive loss

 

 

(10

)

 

 

(33

)

Contribution receivable from former parent

 

 

 

 

 

(20,000

)

Accumulated deficit

 

 

(63,958

)

 

 

(80,692

)

Total stockholders' equity

 

 

90,310

 

 

 

50,566

 

Total liabilities and stockholders' equity

 

$

131,022

 

 

$

91,858

 

 

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

 

2


 

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts, unaudited)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

Restated

 

 

2017

 

 

2016

Restated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

2,506

 

 

$

2,816

 

 

$

8,131

 

 

$

7,050

 

Collaborations

 

 

3,666

 

 

 

 

 

 

3,709

 

 

 

153

 

Total revenues

 

 

6,172

 

 

 

2,816

 

 

 

11,840

 

 

 

7,203

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

1,872

 

 

 

4,110

 

 

 

3,114

 

 

 

7,387

 

Research and development

 

 

7,175

 

 

 

7,077

 

 

 

19,835

 

 

 

22,759

 

Selling, general and administrative

 

 

7,473

 

 

 

11,141

 

 

 

26,019

 

 

 

27,950

 

Impairment of goodwill and intangible assets

 

 

 

 

 

71,013

 

 

 

 

 

 

71,013

 

Loss from operations

 

 

(10,348

)

 

 

(90,525

)

 

 

(37,128

)

 

 

(121,906

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense, net

 

 

(436

)

 

 

(492

)

 

 

(1,356

)

 

 

(417

)

Total other expense, net

 

 

(436

)

 

 

(492

)

 

 

(1,356

)

 

 

(417

)

Loss before income taxes

 

 

(10,784

)

 

 

(91,017

)

 

 

(38,484

)

 

 

(122,323

)

Benefit from income taxes

 

 

13,768

 

 

 

17,608

 

 

 

15,587

 

 

 

18,590

 

Net income (loss) from continuing operations

 

 

2,984

 

 

 

(73,409

)

 

 

(22,897

)

 

 

(103,733

)

Discontinued operations (Note 2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, before income taxes

 

 

56,140

 

 

 

3,959

 

 

 

62,706

 

 

 

9,514

 

Income tax expense

 

 

(21,257

)

 

 

(2,291

)

 

 

(23,076

)

 

 

(3,250

)

Income from discontinued operations

 

 

34,883

 

 

 

1,668

 

 

 

39,630

 

 

 

6,264

 

Net income (loss)

 

$

37,867

 

 

$

(71,741

)

 

$

16,733

 

 

$

(97,469

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations

 

$

0.14

 

 

$

(3.63

)

 

$

(1.08

)

 

$

(5.13

)

Net income from discontinued operations

 

$

1.63

 

 

$

0.08

 

 

$

1.87

 

 

$

0.31

 

Net income (loss)

 

$

1.77

 

 

$

(3.55

)

 

$

0.79

 

 

$

(4.82

)

Weighted-average shares used to compute per share

   calculation

 

 

21,385,381

 

 

 

20,235,987

 

 

 

21,138,332

 

 

 

20,231,910

 

 

 

Diluted net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations

 

$

0.14

 

 

$

(3.63

)

 

$

(1.08

)

 

$

(5.13

)

Net income from discontinued operations

 

$

1.61

 

 

$

0.08

 

 

$

1.87

 

 

$

0.31

 

Net income (loss)

 

$

1.75

 

 

$

(3.55

)

 

$

0.79

 

 

$

(4.82

)

Weighted-average shares used to compute per share

   calculation

 

 

21,672,269

 

 

 

20,235,987

 

 

 

21,138,332

 

 

 

20,231,910

 

 

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

 

 

3


 

Aptevo Therapeutics Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, unaudited)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income (loss)

 

$

37,867

 

 

$

(71,741

)

 

$

16,733

 

 

$

(97,469

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on available-for-sale investments, net

 

 

(24

)

 

 

(17

)

 

 

(10

)

 

 

(17

)

Total comprehensive income (loss)

 

$

37,843

 

 

$

(71,758

)

 

$

16,723

 

 

$

(97,486

)

 

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

 

 

4


 

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Operating Activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

16,733

 

 

$

(97,469

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

3,829

 

 

 

2,067

 

Depreciation and amortization

 

 

2,991

 

 

 

2,912

 

Gain on sale of Hyperimmune Business

 

 

(52,538

)

 

 

 

Impairment of goodwill and intangible assets

 

 

 

 

 

55,702

 

Income taxes

 

 

7,489

 

 

 

(506

)

Change in fair value of contingent consideration

 

 

 

 

 

(261

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(221

)

 

 

3,497

 

Inventories

 

 

(776

)

 

 

8,748

 

Income taxes

 

 

 

 

 

1,376

 

Prepaid expenses and other current assets

 

 

(815

)

 

 

(1,475

)

Accounts payable, accrued compensation and other liabilities

 

 

(1,941

)

 

 

(1,155

)

Change in assets and liabilities held for sale

 

 

2,700

 

 

 

 

Due to Soal

 

 

4

 

 

 

 

Sales rebates and discounts

 

 

100

 

 

 

(208

)

Deferred revenue

 

 

(3,707

)

 

 

(3,425

)

Net cash used in operating activities

 

 

(26,152

)

 

 

(30,197

)

Investing Activities

 

 

 

 

 

 

 

 

Cash proceeds from sale of Hyperimmune Business

 

 

60,477

 

 

 

 

Proceeds from the maturity of investments

 

 

53,218

 

 

 

 

Purchases of property and equipment

 

 

(1,105

)

 

 

(1,933

)

Purchases of investments

 

 

(29,291

)

 

 

(49,802

)

Net cash provided by (used in) investing activities

 

 

83,299

 

 

 

(51,735

)

Financing Activities

 

 

 

 

 

 

 

 

Transfer from former parent, prior to spin-off

 

 

 

 

 

45,000

 

Settlement of contribution receivable from former parent

 

 

20,000

 

 

 

25,549

 

Proceeds from long-term debt, net of issuance costs

 

 

 

 

 

18,038

 

Debt issuance costs

 

 

(150

)

 

 

 

Proceeds from the exercise of stock options

 

 

 

 

 

2

 

Payments for taxes related to net share settlement of equity awards

 

 

(843

)

 

 

 

Restricted cash

 

 

(10,000

)

 

 

(400

)

Net cash provided by financing activities

 

 

9,007

 

 

 

88,189

 

Increase cash and cash equivalents

 

 

66,154

 

 

 

6,257

 

Cash and cash equivalents at beginning of period

 

 

9,676

 

 

 

4,637

 

Cash and cash equivalents at end of period

 

$

75,830

 

 

$

10,894

 

 

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

 

 

5


 

Aptevo Therapeutics Inc.

Notes to Unaudited Consolidated Financial Statements

 

 

Note 1. Nature of Business and Significant Accounting Policies

Organization and Basis of Presentation

Aptevo Therapeutics Inc. (Aptevo, or the Company) is a biotechnology company focused on novel oncology (cancer) and hematology (blood disease) therapeutics to meaningfully improve patients’ lives. Our core technology is the ADAPTIR™ (modular protein technology) platform. We currently have one revenue-generating product in the area of hematology, as well as various investigational stage product candidates in the area of immuno-oncology.

On September 28, 2017, Aptevo completed the sale of its hyperimmune business which consisted of the following products: WinRho® SDF for autoimmune platelet disorder and hemolytic disease of the newborn; HepaGam B® for the prevention of Hepatitis B following liver transplantation and for treatment following hepatitis B exposure; and VARIZIG® for treatment following exposure to varicella zoster virus for individuals with compromised immune systems (Hyperimmune Business). As of September 30, 2017, the Hyperimmune Business met all the conditions to be classified as a discontinued operation since the sale of Hyperimmune Business represented a strategic shift that will have a major effect on the Company’s operations and financial results. The Company will not have further significant involvement in the operations of the discontinued Hyperimmune Business. The operating results of the Hyperimmune Business are reported as income from the discontinued operations, both pre-tax and net of tax, in the condensed consolidated statements of operations for all periods presented. The gain recognized on the sale of the Hyperimmune Business is presented in income (loss) from discontinued operations, both pre-tax and net of tax, in the condensed consolidated statement of operations. In addition, the consolidated and condensed balance sheets as of December 31, 2016, the assets and liabilities held for sale have been presented separately. See Note 2 - Sale of Hyperimmune Business for additional information.

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include normal recurring adjustments, necessary for the fair presentation of the Company’s financial position.

On August 6, 2015, Emergent BioSolutions Inc., (Emergent or former parent), announced a plan to separate into two independent publicly traded companies. To accomplish this separation, Emergent created Aptevo Therapeutics Inc. or Aptevo, to be the parent company for the development-based biotechnology business focused on novel oncology and hematology therapeutics. Aptevo was incorporated in Delaware in February 2016 as a wholly owned subsidiary of Emergent. To effect the separation, Emergent made a pro rata distribution of Aptevo’s common stock to Emergent’s stockholders on August 1, 2016. We are currently trading on the NASDAQ Global Market under the symbol “APVO.”

Prior to August 1, 2016, the consolidated financial statements were prepared on a “carve-out” basis for the purpose of presenting Aptevo’s financial position, results of operations, and cash flows, and were derived from Emergent’s consolidated financial statements and accounting records. Aptevo did not operate as a standalone entity in the past and accordingly the selected financial data presented herein is not necessarily indicative of Aptevo’s future performance and does not reflect what Aptevo’s performance would have been had Aptevo operated as an independent publicly-traded company prior to August 1, 2016. The consolidated financial statements reflect Aptevo’s financial position, results of operations, and cash flows as a separately operated business in conformity with GAAP post the August 1, 2016 spin-off.

Prior to August 1, 2016, the consolidated financial statements included an allocation of certain assets and liabilities that have historically been held at the Emergent corporate level but which were specifically identifiable or allocable to Aptevo. All Aptevo intracompany transactions and accounts have been eliminated. All intercompany transactions between Aptevo and Emergent are considered to be effectively settled in the consolidated financial statements at the time the transaction was recorded. The total net effect of the settlement of these intercompany transactions is reflected in the consolidated statement of cash flows as a financing activity and in the consolidated balance sheet as a net investment from Emergent. As of August 1, 2016, in connection with the separation and distribution, Emergent’s investment in the Company’s business was redesignated as stockholder’s equity and allocated between common stock and additional paid-in capital based on the number of shares issued at the distribution date.

Prior to August 1, 2016, Aptevo’s consolidated financial statements included an allocation of expenses related to certain Emergent corporate functions, including senior management, legal, human resources, finance, information technology, and quality assurance. These expenses were allocated to Aptevo based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of expenses, headcount, square footage, or other measures. Aptevo considers the expense allocation methodology and results to be reasonable for all periods presented. However, the allocations may not be indicative of the actual expense that would have been incurred had Aptevo operated as an independent, publicly-traded company for the periods presented.

6


 

Prior to August 1, 2016, the income tax amounts in these consolidated financial statements were calculated based on a separate return methodology and presented as if Aptevo’s operations were a standalone taxpayer in each of its tax jurisdictions.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Accounts Receivable

Aptevo records accounts receivable net of an allowance for doubtful accounts based upon its assessment of collectability, and of applicable discounts. Aptevo performs ongoing credit evaluations of its customers and generally does not require collateral. As a result of its sale of its Hyperimmune Business in September 2017, accounts receivable net of an allowance for doubtful accounts has been revised to reflect the removal of its allowance for doubtful accounts, as the prior balance solely related to the Hyperimmune Business. See Note 2, Sale of Hyperimmune Business for additional information on the divestiture.

Revenue Recognition

We recognize revenue if four basic criteria have been met: (1) there is persuasive evidence of an arrangement, (2) delivery has occurred or services have been rendered, (3) the fee is fixed or determinable, and (4) collectability is reasonably assured. Where the revenue recognition criteria are not met, we defer the recognition of revenue by recording deferred revenue until such time as all criteria are met.

Income Taxes

Aptevo recognized a tax impact due to the restatement of our tax liability (see Note 10 – Restatement), as well as the exception to the Intraperiod Tax Allocation rules in accordance with ASC 740-20-45-7. The exception required that all items (including discontinued operations) be considered in determining the amount of the tax benefit resulting from the loss in continuing operations.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), an updated standard on revenue recognition. ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported by companies while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards or GAAP. The main purpose of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date. Accordingly, the updated standard is effective for Aptevo in the first quarter of fiscal 2018. Aptevo has assembled a cross functional team to identify the population of contracts with customers and evaluate them under the provisions of ASU No. 2014-09. Aptevo intends to adopt the new standard on a modified retrospective basis. Under this implementation method, Aptevo will recognize the cumulative effect of initially applying the new guidance as an adjustment to the opening retained earnings balance for the annual reporting period of initial application. While Aptevo is continuing its assessment of all the potential impacts of the new standard, it does not expect the implementation of the standard to have a material impact on Aptevo’s consolidated financial position, results of operations or cash flow.

In August 2014, the FASB issued ASU No.2014-15 Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under the new guidance, management is required to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The provisions of this standard are effective for annual periods ending after December 31, 2016, and for annual and interim periods thereafter. Aptevo adopted this guidance for the year ended December 31, 2016 and management believes that Aptevo’s existing cash, cash equivalents and short-term investments will be sufficient to fund its operations for twelve months from the date of this filing. Aptevo is required to reassess this position on a quarterly basis and future facts and circumstances may yield a different conclusion.

7


 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short term leases) at the commencement date. Lessor accounting under ASU 2016-02 is largely unchanged. ASU 2016-02 is effective for annual and interim periods beginning on or after December 15, 2018 and early adoption is permitted. Under ASU 2016-02, lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Lessees and lessors may not apply a full retrospective transition approach. The ASU will be effective for the Company starting on January 1, 2019. Aptevo is continuing to evaluate the impact of the application of this ASU on our consolidated financial statements and disclosures. We expect to recognize right of use assets and lease liabilities.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies the accounting for share-based payment award transactions including the financial statement presentation of excess tax benefits and deficiencies, classification of awards as either equity or liabilities, accounting for forfeitures and classification on the statement of cash flows. Aptevo adopted this standard effective January 1, 2017. Upon adoption of the standard, excess tax benefits and deficiencies resulting from stock-based compensation awards vesting and exercises are now recognized as discrete items in the statement of operations. Aptevo has elected to maintain its current forfeitures policy and will continue to include an estimate of forfeitures when recognizing stock-based compensation expense. Additionally, cash paid by Aptevo when directly withholding shares for tax withholding purposes will continue to be classified as a financing activity in the condensed consolidated statement of cash flows as required by the standard. The adoption of this standard did not have a material impact on Aptevo’s consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which clarifies the classification and presentation of eight specific cash flow issues in the statement of cash flows. This standard is effective beginning January 1, 2018, with early adoption permitted. The new standard requires a retrospective transition. Aptevo is aware the adoption of this standard will have an impact for restricted cash, and evaluating further impacts on its consolidated financial statements.

Note 2. Sale of Hyperimmune Business

 

On August 31, 2017, Aptevo entered into a sale agreement with Saol International Limited (Saol) whereby Aptevo agreed to sell its Hyperimmune Business. The sale was completed on September 28, 2017.

 

At the closing of the sale, Saol paid an amount equal to $65.0 million, including $3.3 million which was deposited in an escrow account for the purposes of satisfying any indemnification claims brought by Saol pursuant to the LLC sale agreement. In addition, Aptevo may receive (1) an additional potential milestone payment totaling up to $7.5 million related to the achievement of certain gross profit milestones and (2) up to $2.0 million related to collection of certain accounts receivable after the closing.

 

The net gain on sale of the Hyperimmune Business totaling, $52.5 million, was calculated as the difference between the fair value of the consideration received for the Hyperimmune Business, the carrying value of the net assets transferred to Saol, less the transaction costs incurred and a working capital adjustment. The net gain on sale of the business may be adjusted in future periods by the contingent consideration based upon the achievement of certain gross profit milestones and collection of certain outstanding accounts receivable.

 

The following table summarizes the gain on sale (in thousands):

 

Cash payment received

 

$

61,750

 

Escrow receivable

 

 

3,250

 

Total consideration

 

 

65,000

 

Less:

 

 

 

 

Net carrying value of assets transferred to Saol

 

 

10,315

 

Transaction costs

 

 

1,273

 

Working capital adjustment

 

 

874

 

Net gain on sale of business

 

$

52,538

 

 

8


 

As a result of Aptevo’s decision to sell the Hyperimmune Business, the condensed consolidated balance sheets for the year ended December 31, 2016, the condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and September 30, 2017, have been revised to reflect the results from the sale of the Hyperimmune Business, and related assets and liabilities, as discontinued operations. The amounts calculated for the discontinued operations include certain allocations that management believes fairly reflect the Hyperimmune Business operations.

 

The following table presents a reconciliation of the carrying amounts of assets and liabilities of the hyperimmune assets held for sale, net in the unaudited condensed consolidated balance sheet (in thousands):

 

ASSETS

December 31, 2016

 

Accounts receivable

$

3,977

 

Inventories

 

6,178

 

Total current assets, held for sale

 

10,155

 

 

 

 

 

Intangible assets, net

 

7,624

 

Total assets held for sale

$

17,779

 

LIABILITIES

 

 

 

Accounts payable and other accrued liabilities

$

3,928

 

Total current liabilities

$

3,928

 

The following table represents the components attributable to the Hyperimmune Business presented as income from discontinued operations in the unaudited condensed consolidated statements of operations (in thousands):

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

Product sales

 

$

6,380

 

 

$

6,589

 

 

$

18,886

 

 

$

20,462

 

Total revenues

 

 

6,380

 

 

 

6,589

 

 

 

18,886

 

 

 

20,462

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

2,586

 

 

 

2,053

 

 

 

7,730

 

 

 

8,848

 

Research and development

 

 

3

 

 

 

37

 

 

 

44

 

 

 

92

 

Selling, general and administrative

 

 

189

 

 

 

540

 

 

 

944

 

 

 

2,008

 

Income from operations

 

 

3,602

 

 

 

3,959

 

 

 

10,168

 

 

 

9,514

 

Gain on sale of Hyperimmune Business

 

 

52,538

 

 

 

 

 

 

52,538

 

 

 

 

Income from discontinued operations, before income taxes

 

 

56,140

 

 

 

3,959

 

 

 

62,706

 

 

 

9,514

 

Income tax expense

 

 

(21,257

)

 

 

(2,291

)

 

 

(23,076

)

 

 

(3,250

)

Income from discontinued operations

 

$

34,883

 

 

$

1,668

 

 

$

39,630

 

 

$

6,264

 

 

Amortization for the Hyperimmune Business was $0.3 million and $0.9 million for the three and nine months ended September 30, 2017 and September 30, 2016, respectively. There was no depreciation, capital expenditures or other significant operating or investing non-cash items for the three and nine months ended September 30, 2017 and 2016.

 

Note 3. Collaboration Agreements

Alligator

On July 20, 2017, our wholly owned subsidiary Aptevo Research and Development LLC (Aptevo R&D), entered into a collaboration and option agreement (Collaboration Agreement) with Alligator Bioscience AB, (Alligator), pursuant to which Aptevo and Alligator will collaboratively develop ALG.APV-527, a lead bispecific antibody candidate simultaneously targeting 4-1BB (CD137), a member of the TNFR superfamily of a costimulatory receptor found on activated T cells, and 5T4 a tumor antigen widely overexpressed in a number of different types of cancer. This product candidate is built on our novel ADAPTIR platform, which is designed to expand on the utility and effectiveness of therapeutic antibodies. Under this Collaboration Agreement, Alligator also granted to Aptevo a time-limited option to enter into a second agreement with Alligator for the joint development of a separate bispecific antibody candidate simultaneously targeting 4-1BB (CD137) and 5T4 a tumor antigen that Aptevo R&D and Alligator will collaboratively select.

 

9


 

In accordance with the terms of the Collaboration Agreement, the parties intend to develop the lead bispecific antibody candidate targeting 4-1BB (CD137) and 5T4 through the completion of Phase II clinical trials in accordance with an agreed upon development plan and budget. Subject to certain exceptions for Aptevo’s manufacturing and platform technologies, the parties will jointly own intellectual property generated in the performance of the development activities under the Collaboration Agreement.

 

Following the completion of the anticipated development activities under the Collaboration Agreement, the parties intend to seek a third-party commercialization partner for this product candidate, or, in certain circumstances, may elect to enter into a second agreement granting rights to either Aptevo R&D or Alligator to allow such party to continue the development and commercialization of this product candidate. Under the terms of this Collaboration Agreement, the parties intend to share revenue received from a third-party commercialization partner equally, or, if the development costs are not equally shared under this Collaboration Agreement, in proportion to the development costs borne by each party.

 

The Collaboration Agreement also contains several points in development at which either party may elect to “opt-out” (i.e., terminate without cause) and, following a termination notice period, cease paying development costs for this product candidate, which would be borne fully by the continuing party. Following an opt-out by a party, the continuing party will be granted exclusive rights to continue the development and commercialization of the product candidate, subject to a requirement to pay a percentage of revenue received from any future commercialization partner for this product, or, if the continuing party elects to self-commercialize, tiered royalties on the net sales of the product by the continuing party ranging from the low to mid-single digits, based on the point in development at which the ‘opt-out’ occurs. The parties have also agreed on certain technical criteria or ‘stage gates’ related to the development of this product candidate that, if not met, will cause an automatic termination and wind-down of this Collaboration Agreement and the activities thereunder, provided that the parties do not agree to continue.

 

The Collaboration Agreement contains industry standard termination rights, including for material breach following a specified cure period, and in the case of a party’s insolvency.

MorphoSys

In August 2014, Aptevo entered into a collaboration agreement with MorphoSys AG (MorphoSys Agreement) for the joint development of MOR209/ES414, a targeted immunotherapeutics protein, which activates host T-cell immunity specifically against cancer cells expressing prostate specific membrane antigen, an antigen commonly overexpressed on prostate cancer cells. Effective August 31, 2017, MorphoSys terminated the MorphoSys Agreement. As a result of the termination, Aptevo has no ongoing obligation related to this agreement and therefore recognized the total remaining deferred revenue balance of $3.7 million as Collaborations revenue in the third quarter of 2017.

 

Note 4. Fair Value Measurements

The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the fair value accounting guidance hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions. The level in the fair value hierarchy within which the fair value measurement is reported is based on the lowest level input that is significant to the measurement in its entirety. The three levels of the hierarchy are as follows:

Level 1— Quoted prices in active markets for identical assets and liabilities;

Level 2— Inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Level 3— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

10


 

The Company’s financial assets measured at fair value consisted of the following as of September 30, 2017 and December 31, 2016:

 

 

 

September 30, 2017

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

16,778

 

 

$

 

 

$

 

 

$

16,778

 

Corporate bonds

 

 

 

 

 

8,973

 

 

 

 

 

 

8,973

 

US government and agency debt securities

 

 

 

 

 

11,973

 

 

 

 

 

 

11,973

 

Total assets

 

$

16,778

 

 

$

20,946

 

 

$

 

 

$

37,724

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

5,215

 

 

$

 

 

$

 

 

$

5,215

 

Corporate bonds

 

 

 

 

 

9,951

 

 

 

 

 

 

9,951

 

US government and agency debt securities

 

 

 

 

 

34,898

 

 

 

 

 

 

34,898

 

Total assets

 

$

5,215

 

 

$

44,849

 

 

$

 

 

$

50,064

 

 

If quoted market prices in active markets for identical assets are not available to determine fair value, then the Company uses quoted prices of similar instruments and other significant inputs derived from observable market data obtained from third-party data providers. These investments are included in Level 2 and consist of debt securities of U.S government agencies and corporate bonds. There were no transfers between Levels 1 and 2 during the three and nine months ended September 30, 2017.

Cash held in demand deposit accounts of $69.1 million and $4.4 million is excluded from our fair-value hierarchy disclosure as of September 30, 2017 and December 31, 2016, respectively. The carrying amounts for receivables, accounts payable and other current monetary assets and liabilities approximate fair value because of the immediate or short-term maturity of these financial instruments.

11


 

Note 5. Investments

Investments are classified as available-for-sale securities and are carried at fair value with unrealized temporary holding gains and losses excluded from net income or loss and reported in other comprehensive income or loss and also as a net amount in accumulated other comprehensive income or loss until realized. Available-for-sale securities are written down to fair value through income whenever it is necessary to reflect other than temporary impairments. The Company determined that the unrealized losses on its investments as of September 30, 2017 and December 31, 2016 were temporary in nature. The Company currently has the ability but does not intend to sell these investments before recovery of their amortized cost basis. All short-term investments are limited to a final maturity of less than one year from the reporting date.

 

 

 

September 30, 2017

 

(in thousands)

 

Amortized

Cost

 

 

Gross Unrealized

Holding Gains

 

 

Gross Unrealized

Holding (Losses)

 

 

Estimated Fair

Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market fund

 

$

16,778

 

 

$

 

 

$

 

 

$

16,778

 

Total cash equivalents

 

$

16,778

 

 

$

 

 

$

 

 

$

16,778

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

8,978

 

 

$

 

 

$

(5

)

 

$

8,973

 

US government and agency debt securities

 

 

11,978

 

 

 

 

 

 

(5

)

 

 

11,973

 

Total short-term investments

 

$

20,956

 

 

$

 

 

$

(10

)

 

$

20,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

(in thousands)

 

Amortized

Cost

 

 

Gross Unrealized

Holding Gains

 

 

Gross Unrealized

Holding (Losses)

 

 

Estimated Fair

Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market fund

 

$

5,215

 

 

$

 

 

$

 

 

$

5,215

 

Total cash equivalents

 

$

5,215

 

 

$

 

 

$

 

 

$

5,215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

9,959

 

 

$

1

 

 

$

(9

)

 

$

9,951

 

US government and agency debt securities

 

 

34,923

 

 

 

 

 

 

(25

)

 

 

34,898

 

Total short-term investments

 

$

44,882

 

 

$

1

 

 

$

(34

)

 

$

44,849

 

 

 

Note 6. Inventories

Inventories consist of the following:

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

2017

 

 

2016(1)

 

Raw materials and supplies

 

$

240

 

 

$

260

 

Work-in-process

 

 

57

 

 

 

4

 

Finished goods

 

 

940

 

 

 

197

 

Total inventories

 

$

1,237

 

 

$

461

 

(1) The 2016 inventory balances have been updated to reflect the impact of the sale of the Hyperimmune Business. See Note 2 -Sale of Hyperimmune Business

Due to the sale of Aptevo’s Hyperimmune Business, the remaining inventory is solely related to IXINITY. CMC ICOS Biologics, Inc. (CMC) is the sole manufacturer of the bulk drug substance for our IXINITY product. During 2015, we ordered nine manufacturing lots of bulk drug substance from CMC and only one of those lots was successfully manufactured and released in 2015. On October 4, 2016, we provided a Notice of Interruption in Manufacturing, or Notice, to the U.S. Food and Drug Administration (FDA), notifying the FDA of a potential interruption in the supply of IXINITY due to the ongoing manufacturing challenges with the manufacturer of the bulk drug substance. On March 15, 2017, we announced the successful manufacture of a new bulk drug substance batch of IXINITY, providing new supply of IXINITY for the commercial market in May 2017.

 

12


 

On June 17, 2017, the Company and CMC entered into a new non-exclusive Amended and Restated Commercial Supply, or Restated Supply Agreement, for the commercial development and manufacture of IXINITY. Pursuant to the terms of the Restated Supply Agreement, CMC agreed to manufacture IXINITY in the quantity of batches provided to CMC on a twenty-four month rolling forecast. Beginning 2018, the minimum and maximum batches will be four and ten, respectively, in a calendar year. Multiple batches ordered in succession with no changeover to another product between batches, or a campaign, shall receive an incremental discounted price.

 

In accordance with the Restated Supply Agreement, a $7.0 million reserve held by CMC will be applied to, at a minimum, the next seven batches manufactured through the end of 2017 as a price concession. As a result, at least the next seven batches will have reduced raw materials or other related CMC costs associated with the inventory. Aptevo will also see an impact on the Company’s statement of operations due to a lower costs of goods sold associated with this inventory, which will also result in higher gross margins as sales are recognized. Any portion of the $7.0 million reserve held by CMC that remains unutilized as of December 25, 2017 shall be paid to the Company in cash on or before December 31, 2017. As of September 30, 2017, $2.6 million has been applied against the reserve and recorded as a reduced cost to inventory. The Restated Supply Agreement has a five-year term renewable with twenty-four months’ prior notice before the expiry of the term for successive two-year terms.

Note 7. Debt

Credit Facility

On August 4, 2016, we entered into a $35.0 million Credit and Security Agreement (the Credit Agreement) with MidCap Financial Trust. The Credit Agreement, prior to the amendments described below, provided us with up to $35.0 million of available borrowing capacity, available (subject to certain conditions) in two tranches of $20.0 million and $15.0 million. Amounts drawn under the Credit Agreement bear interest at a rate of LIBOR plus 7.60% per annum. The first tranche of $20.0 million was funded on the closing date of the Credit Agreement with the second tranche of $15.0 million to become available (subject to certain conditions) following the date Aptevo and its subsidiaries: (1) achieve net commercial product revenue of $40.0 million on a trailing twelve-month basis, and (2) receive an additional $20.0 million in cash from Emergent. Emergent made this payment on January 13, 2017.We paid debt issuance costs of $1.9 million of which $1.5 million remains unamortized at September 30, 2017. The loan repayment included interest (no principal) through August 2018 and was set to transition to principal and interest as of August 2018 and to be repaid in full on February 1, 2021 (54 months). Amounts drawn under the Credit Agreement bear interest at a rate of LIBOR plus 7.60% per annum.

 

The Credit Agreement contained financial covenants that require us and our subsidiaries to maintain increasing minimum net commercial product revenue for each twelve-month period ending on the last day of each calendar quarter, commencing with the twelve-month period ending September 30, 2016. As of March 31, 2017, the Company’s net minimum revenue did not meet the required minimum for the twelve months ended March 31, 2017.

 

As a result, on May 11, 2017, we and MidCap Financial Trust entered into an amendment to the Credit Agreement to, among other things, waive the existing event of default and revise the financial covenants pertaining to the minimum required commercial product revenue for the twelve months ended March 31, 2017 and future rolling twelve month periods. As a result of the amendment, the Company was in compliance with the modified minimum net revenue covenant for the three and six months ended June 30, 2017. As such, amounts owed under the Credit Facility are classified based on their contractual maturities.

 

This first amendment revised the provisions of the Credit Agreement to: (1) extend the time period through which the Company could draw the second tranche from August 2017 to March 2018, (2) increase the exit fee of 5.75% of the aggregate principal amount under the Credit Agreement for repayment or prepayment other than scheduled amortization payments and the final payment of principal to 6.75% and (3) permit MidCap Financial Trust to obtain an affirmative lien on the intellectual property of the Company, upon the earlier of (i) the Company’s draw down of the second tranche or (ii) the Company’s cash, cash equivalents, and short-term investments balance descend below a minimum cash threshold of $25 million.

 

On September 28, 2017, the Company entered into a second amendment of the Credit Agreement (Amendment No. 2) in order to permit the sale under the LLC purchase agreement described in Note 2 Sale of Hyperimmune Business, and to reflect changes in the remaining business as a result of such sale.

 

Pursuant to the Amendment No. 2, the agent and the lenders consented to the LLC purchase agreement and the consummation of the sale transaction, released the agent’s liens on the assets transferred to Venus Bio Therapeutics Sub LLC (Venus) prior to the sale, and agreed that no prepayment of the term loans under the credit agreement would be required as a result the sale.

 

13


 

In addition, as part of the Amendment No. 2, the agent and the lenders agreed that: (i) the commitments of the lenders to make the remaining $15 million tranche of loans under the credit agreement were terminated, (ii) the covenant levels set forth in the minimum net commercial product revenue covenant were revised, (iii) a new covenant was added requiring the Company to maintain a minimum $10.0 million unrestricted cash balance, and (iv) the date on which the term loans begin to amortize will be extended to February 1, 2019 if the Company achieves net commercial product revenues of $16 million for the twelve month period ending June 30, 2018 and maintains such level of net commercial product revenues for each quarter prior to February 1, 2019 thereafter.

 

Note 8. Net Income (Loss) per Share

Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common share equivalents outstanding for the period using the as-if converted method. For the purpose of this calculation, stock options and restricted stock units are only included in the calculation of diluted net income per share when their effect is dilutive.

Prior to the spin-off, Aptevo did not operate as a separate entity and as a result did not have any common stock outstanding other than 1,000 shares held by Emergent. The calculation of basic and diluted net loss per share assumes that the 20,229,849 ordinary shares issued to Aptevo stockholders in connection with the spin-off were outstanding from the beginning of the periods presented.

Common stock equivalents include stock options and unvested RSUs.

The following table presents the computation of basic and diluted net income (loss) per share (in thousands, except share and per share amounts):

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,