apvo-10q_20190930.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, 2019

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbols(s)

 

Name of Exchange on Which Registered

Common Stock, $0.001 par value per share

 

APVO

 

The Nasdaq Stock Market LLC

(The Nasdaq Capital Market)

 

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

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

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act).      

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

As of November 6, 2019, the number of shares of the registrant’s common stock outstanding was 45,279,244.

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Comprehensive Loss

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity

7

 

Notes to Condensed Consolidated Financial Statements

8

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

Item 3.

Defaults Upon Senior Securities

52

Item 4.

Mine Safety Disclosures

52

Item 5.

Other Information

52

Item 6.

Exhibits

53

Signatures

54

 

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.

 

 

2


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

 

 

September 30, 2019

 

 

December 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,683

 

 

$

30,635

 

Accounts receivable, net

 

 

7,918

 

 

 

5,220

 

Inventories

 

 

7,482

 

 

 

1,785

 

Prepaid expenses

 

 

2,215

 

 

 

6,907

 

Other current assets

 

 

1,491

 

 

 

4,142

 

Total current assets

 

 

36,789

 

 

 

48,689

 

Restricted cash

 

 

7,498

 

 

 

7,448

 

Property and equipment, net

 

 

4,271

 

 

 

5,202

 

Intangible assets, net

 

 

4,628

 

 

 

5,250

 

Operating lease right-of-use asset

 

 

3,981

 

 

 

 

Other assets

 

 

3,389

 

 

 

905

 

Total assets

 

$

60,556

 

 

$

67,494

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

12,073

 

 

$

11,671

 

Accrued compensation

 

 

3,483

 

 

 

3,898

 

Sales rebates and discounts payable

 

 

868

 

 

 

1,245

 

Loan payable, net

 

 

19,707

 

 

 

 

Other short-term liabilities

 

 

1,121

 

 

 

796

 

Total current liabilities

 

 

37,252

 

 

 

17,610

 

Long-term debt, net

 

 

 

 

 

19,278

 

Operating lease liability, net of current portion

 

 

3,547

 

 

 

 

Other liabilities

 

 

12

 

 

 

200

 

Total liabilities

 

 

40,811

 

 

 

37,088

 

 

 

 

 

 

 

 

 

 

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; 45,279,244

   and 22,808,416 shares issued and outstanding at September 30, 2019 and

   December 31, 2018, respectively

 

 

45

 

 

 

23

 

Additional paid-in capital

 

 

179,382

 

 

 

157,791

 

Accumulated deficit

 

 

(159,682

)

 

 

(127,408

)

Total stockholders' equity

 

 

19,745

 

 

 

30,406

 

Total liabilities and stockholders' equity

 

$

60,556

 

 

$

67,494

 

 

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

 

3


 

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,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

9,011

 

 

$

5,824

 

 

$

23,393

 

 

$

16,721

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

3,959

 

 

 

2,437

 

 

 

13,791

 

 

 

6,752

 

Research and development

 

 

9,125

 

 

 

8,574

 

 

 

24,143

 

 

 

26,486

 

Selling, general and administrative

 

 

6,476

 

 

 

6,940

 

 

 

20,344

 

 

 

21,556

 

Loss from operations

 

 

(10,549

)

 

 

(12,127

)

 

 

(34,885

)

 

 

(38,073

)

Other expense from continuing operations

 

 

(625

)

 

 

(435

)

 

 

(1,639

)

 

 

(1,488

)

Loss before income tax

 

 

(11,174

)

 

 

(12,562

)

 

 

(36,524

)

 

 

(39,561

)

Benefit from income tax

 

 

999

 

 

 

 

 

 

999

 

 

 

 

Net loss from continuing operations

 

 

(10,175

)

 

 

(12,562

)

 

 

(35,525

)

 

 

(39,561

)

Discontinued operations (Note 11):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, before income taxes

 

 

4,250

 

 

 

 

 

 

4,250

 

 

 

 

Income tax expense

 

 

(999

)

 

 

 

 

 

(999

)

 

 

 

Income from discontinued operations

 

 

3,251

 

 

 

 

 

 

3,251

 

 

 

 

Net loss

 

$

(6,924

)

 

$

(12,562

)

 

$

(32,274

)

 

$

(39,561

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations

 

$

(0.23

)

 

$

(0.55

)

 

$

(0.90

)

 

$

(1.76

)

Income from discontinued operations

 

$

0.07

 

 

$

 

 

$

0.08

 

 

$

 

Net loss per basic share

 

$

(0.16

)

 

$

(0.55

)

 

$

(0.82

)

 

$

(1.76

)

Weighted-average shares used to compute per share

   calculations

 

 

45,169,864

 

 

 

22,672,721

 

 

 

39,341,974

 

 

 

22,431,146

 

 

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

 

 

4


 

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, unaudited)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss

 

$

(6,924

)

 

$

(12,562

)

 

$

(32,274

)

 

$

(39,561

)

Other comprehensive gain:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale investments,

   net

 

 

 

 

 

34

 

 

 

 

 

 

103

 

Total comprehensive loss

 

$

(6,924

)

 

$

(12,528

)

 

$

(32,274

)

 

$

(39,458

)

 

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

 

 

5


 

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(32,274

)

 

$

(39,561

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

1,329

 

 

 

1,647

 

Depreciation and amortization

 

 

1,702

 

 

 

1,784

 

Non-cash interest expense and other

 

 

564

 

 

 

691

 

Gain on sale of Hyperimmune Business

 

 

(4,250

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,698

)

 

 

(4,061

)

Inventories

 

 

(5,697

)

 

 

(2,941

)

Prepaid expenses and other assets

 

 

4,688

 

 

 

(1,570

)

Operating lease right of use asset

 

 

711

 

 

 

 

Accounts payable, accrued compensation and other liabilities

 

 

(162

)

 

 

(432

)

Long-term operating lease liability

 

 

(819

)

 

 

 

Sales rebates and discounts

 

 

(377

)

 

 

313

 

Net cash used in operating activities

 

 

(37,283

)

 

 

(44,130

)

Investing Activities

 

 

 

 

 

 

 

 

Proceeds from the maturity of investments

 

 

 

 

 

81,152

 

Cash received from sale of Hyperimmune Business

 

 

4,250

 

 

 

65

 

Purchases of property and equipment

 

 

(153

)

 

 

(927

)

Purchases of investments

 

 

 

 

 

(16,534

)

Net cash provided by investing activities

 

 

4,097

 

 

 

63,756

 

Financing Activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, warrants, and pre-funded warrants, net

 

 

20,321

 

 

 

 

Proceeds from exercise of common stock options

 

 

 

 

 

572

 

Proceeds from the exercise of pre-funded warrants

 

 

21

 

 

 

 

Payment of tax liability for vested equity awards

 

 

(58

)

 

 

(797

)

Debt issuance costs

 

 

 

 

 

(601

)

Net cash provided by (used in) financing activities

 

 

20,284

 

 

 

(826

)

(Decrease) Increase in cash, cash equivalents, and restricted cash

 

 

(12,902

)

 

 

18,800

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

38,083

 

 

 

17,495

 

Cash, cash equivalents, and restricted cash at end of period

 

$

25,181

 

 

$

36,295

 

 

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

 

 

6


 

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share amounts, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance at June 30, 2019

 

 

45,098,823

 

 

$

45

 

 

$

178,912

 

 

$

(152,758

)

 

$

 

 

$

26,199

 

Issuance of common stock, net

 

 

180,421

 

 

 

 

 

 

136

 

 

 

 

 

 

 

 

 

136

 

Stock-based compensation

 

 

 

 

 

 

 

 

334

 

 

 

 

 

 

 

 

 

334

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

(6,924

)

 

 

 

 

 

(6,924

)

Balance at September 30, 2019

 

 

45,279,244

 

 

$

45

 

 

$

179,382

 

 

$

(159,682

)

 

$

 

 

$

19,745

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance at June 30, 2018

 

 

22,667,873

 

 

$

23

 

 

$

156,759

 

 

$

(100,717

)

 

$

(36

)

 

$

56,029

 

Unrealized gain on available-

   for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34

 

 

 

34

 

Common stock issued upon

   exercise of stock options

 

 

3,464

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

8

 

Common stock issued upon

   vesting of restricted stock units

 

 

5,933

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

10

 

Stock-based compensation

 

 

 

 

 

 

 

 

481

 

 

 

 

 

 

 

 

 

481

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

(12,562

)

 

 

 

 

 

(12,562

)

Balance at September 30, 2018

 

 

22,677,270

 

 

$

23

 

 

$

157,258

 

 

$

(113,279

)

 

$

(2

)

 

$

44,000

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance at December 31, 2018

 

 

22,808,416

 

 

$

23

 

 

$

157,791

 

 

$

(127,408

)

 

$

 

 

$

30,406

 

Issuance of common stock, pre-

   funded warrants and warrants,

   net

 

 

22,180,421

 

 

 

22

 

 

 

20,320

 

 

 

 

 

 

 

 

 

20,342

 

Issuance of commitment shares

   of common stock, non-cash

   transaction

 

 

195,867

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued upon

   vesting of restricted stock units

 

 

94,540

 

 

 

 

 

 

(58

)

 

 

 

 

 

 

 

 

(58

)

Stock-based compensation

 

 

 

 

 

 

 

 

1,329

 

 

 

 

 

 

 

 

 

1,329

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

(32,274

)

 

 

 

 

 

(32,274

)

Balance at September 30, 2019

 

 

45,279,244

 

 

$

45

 

 

$

179,382

 

 

$

(159,682

)

 

$

 

 

$

19,745

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance at December 31, 2017

 

 

21,605,716

 

 

$

22

 

 

$

155,836

 

 

$

(73,718

)

 

$

(105

)

 

$

82,035

 

Unrealized gain on available-

   for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

103

 

 

 

103

 

Common stock issued upon

   exercise of stock options

 

 

257,550

 

 

 

 

 

 

572

 

 

 

 

 

 

 

 

 

572

 

Common stock issued upon

   vesting of restricted stock units

 

 

814,004

 

 

 

1

 

 

 

(797

)

 

 

 

 

 

 

 

 

(796

)

Stock-based compensation

 

 

 

 

 

 

 

 

1,647

 

 

 

 

 

 

 

 

 

1,647

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

(39,561

)

 

 

 

 

 

(39,561

)

Balance at September 30, 2018

 

 

22,677,270

 

 

$

23

 

 

$

157,258

 

 

$

(113,279

)

 

$

(2

)

 

$

44,000

 

 

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

7


 

Aptevo Therapeutics Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Note 1. Nature of Business and Significant Accounting Policies

Organization

Aptevo Therapeutics Inc. (Aptevo, we, us, 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, IXINITY, as well as various investigational stage product candidates in the area of immuno-oncology.

We are currently trading on the Nasdaq Capital Market under the symbol “APVO.”

 

Basis of Presentation

 

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: Aptevo Research and Development LLC; Aptevo BioTherapeutics LLC; and Aptevo Europe Limited. All intercompany balances and transactions have been eliminated and we have determined that we operate in one segment.

 

The accompanying condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (GAAP) for unaudited interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for audited annual financial statements. These condensed consolidated financial statements include all adjustments, which include normal recurring adjustments, necessary for the fair presentation of the Company’s financial position.

These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in our Form 10-K for the year ended December 31, 2018, which was filed with the SEC on March 18, 2019.

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.

The accompanying financial statements have been prepared on a basis that assumes we will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. We have suffered recurring losses from operations and negative cash flows from operating activities. At September 30, 2019, we had cash, cash equivalents, short-term investments, and restricted cash totaling $25.2 million and an accumulated deficit of $159.7 million. While we continue to generate cash inflows from the sale of IXINITY, we expect to continue spending significantly on research and development and in marketing IXINITY.  When considered in aggregate, these factors raise substantial doubt about our ability to continue as a going concern for the one-year period from the date of issuance of these financial statements. We will need to raise additional funds to support our operating and capital needs in 2020.

We continue to face significant challenges and uncertainties and, as a result, our available capital resources may be consumed more rapidly than currently expected due to: (a) potential decreases in sales of IXINITY, our sole marketed product, and the uncertainty of future revenues; (b) changes we may make to the business that affect ongoing operating expenses; (c) changes we may make in our business strategy; (d) regulatory developments affecting IXINITY; (e) changes we may make in our research and development spending plans; and (f) other items affecting our forecasted level of expenditures and use of cash resources. We may attempt to obtain additional funding through our existing equity sales agreement with Lincoln Park Financial LLC or our Equity Distribution Agreement with Piper Jaffray, or other public or private financing, collaborative arrangements with strategic partners, or through additional credit lines or other debt financing sources to increase the funds available to fund operations. However, we may not be able to secure such funding in a timely manner or on favorable terms, if at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our potential products or proprietary technologies, or grant licenses on terms that are not favorable to us. Without additional funds, we may be forced to delay, scale back or eliminate some of our sales and marketing efforts, research and development activities, or other operations and potentially delay product development in an effort to provide sufficient funds to continue our operations. If any of these events occurs, our ability to achieve our development and commercialization goals may be adversely affected.

 

8


 

Significant Accounting Policies

Leases

 

On January 1, 2019 we adopted ASU No. 2016-02, Leases (ASC 842), which amended the existing standards for lease accounting, requiring lessees to recognize most leases on their balance sheets and disclose key information about leasing arrangements. We adopted the new standard using a modified retrospective transition approach at the beginning of the current fiscal year, January 1, 2019. We did not adjust comparative periods in our financial statements prior to that period.

 

For transition leases, entities were permitted to make an election to apply a package of practical expedients that allows entities not to reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases, and (iii) whether initial direct costs for any expired or existing leases qualify for capitalization under ASC 842. In addition, entities were also permitted to make an election to use hindsight when determining lease terms and when assessing the impairment of right-of-use assets. We have chosen to elect the package of practical expedients but did not elect the hindsight practical expedient for our transition leases.

 

We determine if an arrangement is a lease at inception date. Leases are to be classified as finance or operating at the lease commencement date, which affects the classification of expense recognition in the income statement. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments, as agreed to in the lease. Operating lease liabilities and the corresponding right-of-use assets are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. An operating right-of-use asset is measured as the amount of the initial measurement of the lease liability, adjusted for prepaid or accrued lease payments, the remaining balance of any lease incentive received, unamortized initial direct costs, and any impairment of the right-of-use asset. The initial measurement of the lease liabilities and right-to-use assets of finance leases is the same as for operating leases. We include options to extend the lease and certain termination options in our lease liability and right-of-use asset when it is reasonably certain that we will exercise those options.

 

As our existing leases do not contain an implicit interest rate, we estimate our incremental borrowing rate (IBR) based on information available at commencement date in determining the present value of future payments. Due to the significant judgment involved and the complex analysis needed to determine this discount rate, we engaged a third-party valuation specialist to advise us in our determination of our IBR for the initial adoption of the standard.

 

Lease expense for operating leases is recognized on a straight-line basis over the lease term as part of our selling, general and administrative expenses and our research and development expenses on our consolidated statement of operations. Lease expense for financing leases consists of amortization of the right-of-use asset and interest on the lease liability as part of our research and development expenses on our consolidated statement of operations.

 

Adoption of the new standard resulted in the recognition of a right-to-use asset of $1.5 million, an operating lease liability of $2.2 million dollars, and a related decrease in deferred rent liability of $0.7 million at January 1, 2019. Refer to Note 6 for additional information.

 

Stock-Based Compensation

Stock-based compensation expense is recognized for all share-based payments made to employees, directors and non-employees based on estimated fair values as of the date of grant. The fair value of our stock options is calculated using the Black-Scholes option-pricing model which requires judgmental assumptions including volatility, risk-free rates and expected option life. We recognize stock-based compensation expense on a straight-line basis over the requisite service period, net of an estimated forfeiture rate.

Other Significant Accounting Policies

Our other significant accounting policies were reported in our Annual Report on Form 10-K for the year ended December 31, 2018 that was filed with the SEC on March 18, 2019. Our other significant accounting policies have not changed materially from the policies previously reported.

9


 

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses, (Topic 326) which changes how entities account for credit losses on most financial assets and certain other instruments, and expands disclosures. The standard is effective for annual and interim periods beginning after December 15, 2022, with early adoption permitted, for Aptevo, as we meet the definition of a smaller reporting company (SRC). We expect to adopt the standard on January 1, 2020 and are still in the process of evaluating the effect of adoption on our consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements for fair value measurements. The new standard is effective for the Company on January 1, 2020. Early adoption is permitted. We are evaluating the impact the adoption of ASU 2018-13 may have on our disclosures.

 

Note 2. 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. 

 

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. 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.

 

Aptevo and Alligator have made a joint decision to delay submission of the clinical trial authorization (CTA) for ALG-APV.527 previously planned for the fourth quarter of 2019. Alligator and Aptevo have made a joint decision to focus efforts on partnering ALG.APV-527 prior to phase 1 clinical development.  The adjustment to the development plan for ALG.APV -527 will allow both Aptevo and Alligator to align their resources with their respective ongoing clinical programs. The companies are initiating discussions with potential partners for the upcoming clinical development of ALG.APV-527.

 

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.

We assessed the arrangement in accordance with ASC 606 and concluded that the contract counterparty, Alligator, is not a customer. As such the arrangement is not in the scope of ASC 606 and is instead treated as a collaborative agreement under ASC 808. For the three and nine months ended September 30, 2019, we recorded a reduction in our research and development expense of $1.0 million and $1.6 million, respectively, and for the three and nine months ended September 30, 2018, we recorded a decrease in our research and development expense of $0.2 million and $0.4 million, respectively, related to the collaboration arrangement.

10


 

Note 3. 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.

 

At September 30, 2019 and December 31, 2018, we had $10.4 million and $29.0 million in money market funds, respectively. Money market funds are level one balances as they are valued at fair value, which is the closing price reported by the fund sponsor from an actively traded exchange. At September 30, 2019 and December 31, 2018, we did not have any level two or level three assets or liabilities.

 

 

Note 4. Cash, Cash Equivalents, and Restricted Cash

 

The Company’s cash equivalents are highly liquid investments with a maturity of 90 days or less at the date of purchase and include time deposits and investments in money market funds. Restricted cash, long-term includes $5.0 million related to the minimum cash covenant included in the Company’s Credit and Security Agreement (the Credit Agreement) with MidCap Financial Trust, and $2.5 million securing letters of credit, which will be released between March and September 2021.

The following table shows our cash, cash equivalents and long-term restricted cash as of September 30, 2019 and December 31, 2018:

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

2019

 

 

2018

 

Cash

 

$

7,262

 

 

$

6,588

 

Cash equivalents

 

 

10,421

 

 

 

24,047

 

Restricted cash

 

 

7,498

 

 

 

7,448

 

Total cash, cash equivalents, and restricted cash

 

$

25,181

 

 

$

38,083

 

 

 

Note 5. Inventories

Inventories consist of the following:

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

2019

 

 

2018

 

Raw materials and supplies

 

$

640

 

 

$

194

 

Work-in-process

 

 

5,469

 

 

 

916

 

Finished goods

 

 

1,373

 

 

 

675

 

Total inventories

 

$

7,482

 

 

$

1,785

 

 

 

11


 

Note 6. Leases

 

Office Space Lease – Operating

 

We have an operating lease related to our office and laboratory space in Seattle, Washington. This lease was amended and extended in March 2019. The term of the amended lease is through April 2030 and we have two options to extend the lease term, each by five years, as well as a one-time option to terminate the lease in April 2023.

We recorded a right-of-use asset for this lease on January 1, 2019 of $1.2 million which reflects the amount of the remaining lease liability, less the balance of accrued and deferred rent, and net of the unamortized balance of tenant incentives. We also recorded a lease liability of $1.9 million, which reflects the present value of the remaining lease payments, discounted using our incremental borrowing rate of 16.95% for the remaining term of the lease. The future expense for this lease will be recorded as a straight-line expense, less the unamortized tenant incentive portion, plus any variable expenses due to true-ups of operating costs or real estate taxes. In August of 2019, we amended the lease to reduce the space included in the original lease to equal the space in the renewed lease. As a result, we recorded an adjustment of $0.1 million to the right-of-use asset and lease liability.

 

As a result of the lease amendment in March 2019, we recorded an increase to our right-of-use asset for this lease amendment of $3.2 million which reflects the amount of the remaining lease liability through April 30, 2023, less the balance of accrued and deferred rent, and net of the unamortized balance of tenant incentives. In March 2019, we also recorded an increase to our lease liability for this lease amendment of $3.2 million which reflects the present value of the remaining lease payments through April 30, 2023, discounted using our incremental borrowing rate of 14.45% for the remaining term of the lease on the date of amendment.

 

The amended lease has a renewal option of two five-year renewals at fair market value as determined at the time of renewal, and a termination option after month thirty-six with nine months written notice. The termination option also requires a penalty equal to the unamortized tenant improvement allowance at 8% interest, the unamortized real estate taxes at 8% interest, and the equivalent of four-months’ rent at the base rent price at the time of termination. The estimated termination penalty has been recorded in our lease payments. We determined we should not include any periods after the termination option when evaluating this amendment as we are not reasonably certain to not exercise the option, therefore we are recording our liability through April 30, 2023.

 

For the three and nine months ended September 30, 2019, we recorded $0.1 million and $0.4 million, respectively, related to variable expenses.

Equipment Leases - Operating

As of January 1, 2019, we have operating leases for one piece of lab equipment and four copiers in our Seattle, Washington headquarters. We recorded a right-of-use asset of $0.3 million on January 1, 2019 which reflects the remaining liability of the leases, less the balance of accrued and deferred rent. We also recorded a lease liability of $0.3 million which reflects the present value of the remaining payment for the leases, discounted using our incremental borrowing rate for the lab equipment lease is 16.53% and for the copier leases it is 16.19%, for the remaining term of the leases. The future expense for these leases will be straight-line and will include any variable expenses that arise.

Equipment Lease – Financing

As of January 1, 2019, we had one equipment lease classified as a financing lease as the lease transfers ownership of the underlying asset to us at the end of the lease term. The remaining term of this lease is eleven months and has a remaining expense obligation of less than $0.1 million. There were no financing lease payments in the nine months ended September 30, 2019.

 

Components of lease expense:

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

(in thousands)

 

2019

 

 

2019

 

Operating lease cost

 

$

398

 

 

$

1,131

 

Finance lease cost:

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

 

0

 

 

 

3

 

Interest on lease liabilities

 

 

0

 

 

 

1

 

Total lease cost

 

$

398

 

 

$

1,135

 

 

 

12


 

Right of use assets acquired under operating leases:

 

 

 

For the Nine Months Ended September 30,

 

(in thousands)

 

2019

 

Operating leases, excluding Seattle office lease

 

$

345

 

Seattle office lease, including amendment

 

 

4,347

 

Total operating leases

 

$

4,692

 

 

Lease payments:

 

 

 

For the Nine Months Ended September 30,

 

(in thousands)

 

2019

 

For operating leases

 

$

1,296

 

 

 

Future minimum payments as of September 30, 2019 are as follows:

 

(in thousands)

 

 

 

 

2019 (remainder of year)

 

$

418

 

2020

 

 

1,480

 

2021

 

 

1,387

 

2022

 

 

1,294

 

2023

 

 

1,399

 

Total Future minimum lease payments

 

 

5,978

 

Less: imputed interest

 

 

(1,467

)

Total

 

$

4,511

 

 

The long-term portion of the lease liabilities included in the amounts above is $3.5 million and the remainder of our lease liabilities are included in other current liabilities on our condensed consolidated balance sheets.

As of September 30, 2019, the weighted average remaining lease term and weighted discount rate for operating leases was 3.5 years and 14.56%.

Note 7. Debt

 

Credit Agreement

 

On August 4, 2016, we entered into a Credit and Security Agreement (Credit Agreement), with MidCap Financial Trust. The original Credit Agreement provided us with up to $35.0 million of available borrowing capacity composed of two tranches of $20.0 million and $15.0 million. The first tranche of $20.0 million was made available to us, and drawn, on the closing date of the Credit Agreement. On September 28, 2017, we and MidCap Financial Trust entered into a second amendment to the Credit Agreement in order to accommodate the sale of our hyperimmune business under the LLC purchase agreement, and to reflect changes in the remaining business as a result of such sale.

 

Pursuant to the second Amendment, 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 one of our subsidiaries 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. As part of the second amendment, the agent and the lenders agreed that: (i) the commitments of the lenders to make the remaining $15.0 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 requiring us to maintain a minimum $10.0 million unrestricted cash balance..

 

On February 23, 2018, we entered into a third Amendment with the agent and lenders to amend certain provisions of the Credit Agreement in order to permit us to maintain a cash collateral account as security for our reimbursement obligations, in respect of certain letters of credit to be issued for our account.

 

13


 

On August 6, 2018, we entered into an Amended and Restated Credit and Security Agreement (Amended Credit Agreement) amending the terms of our original $20 million term loan agreement with MidCap. Under the Amended Credit Agreement, the timeline for us to begin making principal repayments has been extended to February 1, 2020, with an opportunity for further deferral through August 1, 2020. The amount of restricted cash that we are required to maintain on our balance sheet has been reduced from $10 million to $5 million.

In January 2019, our unrestricted cash level fell below $25.0 million which triggered the effectiveness of a security agreement in favor of MidCap with respect to our registered intellectual property to secure our obligations under the Amended Credit Agreement. MidCap now holds a security interest in our registered intellectual property and may take ownership of such intellectual property if we do not satisfy our obligations under the Amended Credit Agreement.

This facility is subject to a subjective acceleration clause that could be invoked by the lender upon the occurrence of any event the lender deems to have a material adverse effect on our ability to repay the lender. As a result of the uncertainty related to our ability to continue as a going concern and the assessment that the material adverse change clause under the Amended Credit agreement is not within the Company’s control, the long-term portion of our outstanding debt has been reclassified to current in these financial statements as of September 30, 2019. We have not been notified of an event of default by MidCap as of the date of the filing of this Quarterly Report on Form 10-Q.

 

The obligations under the Amended Credit Agreement will mature on February 1, 2023. Amounts drawn under the Amended Credit Agreement continue to accrue interest at a rate of LIBOR plus 7.60% per annum.

 

 

Note 8. Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net 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, warrants, stock options and restricted stock units (RSUs) are only included in the calculation of diluted net income per share when their effect is dilutive.

 

Common stock equivalents include warrants, stock options and unvested RSUs.

The following table represents all potentially dilutive shares, which were all anti-dilutive and therefore excluded from the calculation of diluted net loss per share:

 

 

 

As of  September 30,

 

(in thousands)

 

2019

 

 

2018

 

Warrants

 

 

22,000

 

 

 

 

Outstanding options to purchase common stock

 

 

4,015

 

 

 

3,358

 

Unvested RSUs

 

 

 

 

 

139

 

 

Note 9. Equity

 

Common Stock

 

On March 11, 2019, we completed a public offering of common stock and warrants, as follows:

 

 

for a combined public offering price of $1.00 per share of common stock and related warrants, 19,850,000 shares of common stock and related warrants with a 5-year life to purchase up to 19,850,000 shares of common stock at an exercise price of $1.30 per share,

 

 

for a combined public offering price of $0.99 per pre-funded warrant and related warrant, pre-funded warrants with a 10-year life to purchase up to 2,150,000 shares of common stock at an exercise price of $0.01 per share and related warrants with a 5-year life to purchase up to 2,150,000 shares of common stock at an exercise price of $1.30 per share. These pre-funded warrants were exercised on March 21, 2019.

 

We received net proceeds of $20.2 million, net of transaction costs, as a result of this offering.

 

For the nine months ended September 30, 2019, we issued 94,540 shares of common stock due to the vesting of RSUs.

14


 

During the nine months ended September 30, 2018, we received proceeds of $0.6 million upon the exercise of stock options which resulted in the issuance of 257,550 shares of common stock and issued 814,004 shares of common stock due to the vesting of restricted stock units.

 

Purchase Agreement

 

On December 20, 2018, we entered into the Purchase Agreement, and a registration rights agreement, with Lincoln Park, pursuant to this agreement Lincoln Park has committed to purchase up to $35.0 million worth of our common stock over a 36-month period commencing on