apvo-10q_20200630.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 June 30, 2020

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 August 14, 2020, the number of shares of the registrant’s common stock outstanding was 3,232,811.

 

 

 

 


 

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 Cash Flows

5

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3.

Defaults Upon Senior Securities

45

Item 4.

Mine Safety Disclosures

45

Item 5.

Other Information

45

Item 6.

Exhibits

46

Signatures

 

47

 

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)

 

 

 

June 30, 2020

 

 

December 31, 2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,599

 

 

$

12,448

 

Restricted cash - current

 

 

1,862

 

 

 

 

Royalty receivable

 

 

288

 

 

 

 

Prepaid expenses

 

 

641

 

 

 

1,078

 

Held for sale assets - current

 

 

 

 

 

16,309

 

Other current assets

 

 

98

 

 

 

160

 

Total current assets

 

 

10,488

 

 

 

29,995

 

Restricted cash - non-current

 

 

693

 

 

 

7,498

 

Property and equipment, net

 

 

3,320

 

 

 

3,946

 

Operating lease right-of-use asset

 

 

3,251

 

 

 

3,747

 

Held for sale assets - non-current

 

 

 

 

 

7,465

 

Other assets

 

 

757

 

 

 

757

 

Total assets

 

$

18,509

 

 

$

53,408

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,662

 

 

$

6,427

 

Accrued compensation

 

 

1,419

 

 

 

2,870

 

Current portion of long-term debt

 

 

 

 

 

19,863

 

Held for sale liabilities - current

 

 

 

 

 

8,135

 

Other current liabilities

 

 

921

 

 

 

944

 

Total current liabilities

 

 

7,002

 

 

 

38,239

 

Operating lease liability

 

 

2,857

 

 

 

3,327

 

Total liabilities

 

 

9,859

 

 

 

41,566

 

 

 

 

 

 

 

 

 

 

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; 3,232,811

   and 3,234,232 shares issued and outstanding at June 30, 2020 and

   December 31, 2019, respectively

 

 

45

 

 

 

45

 

Additional paid-in capital

 

 

180,367

 

 

 

179,653

 

Accumulated deficit

 

 

(171,762

)

 

 

(167,856

)

Total stockholders' equity

 

 

8,650

 

 

 

11,842

 

Total liabilities and stockholders' equity

 

$

18,509

 

 

$

53,408

 

 

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 June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Royalty revenue

 

 

473

 

 

 

 

 

 

473

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

(4,440

)

 

 

(6,125

)

 

 

(8,446

)

 

 

(12,759

)

General and administrative

 

 

(2,840

)

 

 

(4,279

)

 

 

(6,456

)

 

 

(8,807

)

Total operating expenses:

 

 

(7,280

)

 

 

(10,404

)

 

 

(14,902

)

 

 

(21,566

)

Other income (expense), net

 

 

4

 

 

 

(436

)

 

 

(271

)

 

 

(1,015

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

(2,104

)

 

 

 

Net loss from continuing operations

 

$

(6,803

)

 

$

(10,840

)

 

$

(16,804

)

 

$

(22,581

)

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

$

 

 

$

(2,492

)

 

$

12,898

 

 

$

(2,769

)

Net income (loss)

 

$

(6,803

)

 

$

(13,332

)

 

$

(3,906

)

 

$

(25,350

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations per share

 

$

(2.10

)

 

$

(3.37

)

 

$

(5.14

)

 

$

(8.69

)

Net income (loss) from discontinued operations per share

 

$

 

 

$

(0.77

)

 

$

3.95

 

 

$

(1.07

)

Basic and diluted net loss per basic share

 

$

(2.10

)

 

$

(4.14

)

 

$

(1.19

)

 

$

(9.76

)

Weighted-average shares used to compute per share

   calculations

 

 

3,232,811

 

 

 

3,221,074

 

 

 

3,269,410

 

 

 

2,598,552

 

 

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 Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(3,906

)

 

$

(25,350

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

714

 

 

 

995

 

Depreciation and amortization

 

 

764

 

 

 

1,156

 

Gain on sale of Aptevo BioTherapeutics

 

 

(14,338

)

 

 

 

Loss on extinguishment of debt

 

 

2,104

 

 

 

 

Non-cash interest expense and other

 

 

137

 

 

 

310

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Royalty receivable

 

 

(288

)

 

 

 

Accounts receivable

 

 

 

 

 

(2,158

)

Inventories

 

 

 

 

 

(5,182

)

Prepaid expenses and other current assets

 

 

499

 

 

 

2,270

 

Operating lease right of use asset

 

 

496

 

 

 

428

 

Accounts payable, accrued compensation and other liabilities

 

 

(3,239

)

 

 

(1,246

)

Long-term operating lease liability

 

 

(470

)

 

 

(607

)

Changes in assets and liabilities held for sale

 

 

1,719

 

 

 

 

Sales rebates and discounts

 

 

 

 

 

(351

)

Net cash used in operating activities

 

 

(15,808

)

 

 

(29,735

)

Investing Activities

 

 

 

 

 

 

 

 

Cash received from sale of Aptevo BioTherapeutics

 

 

28,120

 

 

 

 

Purchases of property and equipment

 

 

 

 

 

(153

)

Net cash (used in) provided by investing activities

 

 

28,120

 

 

 

(153

)

Financing Activities

 

 

 

 

 

 

 

 

Payment of long-term debt, including exit and other fees

 

 

(22,104

)

 

 

 

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

 

 

 

 

 

20,297

 

Proceeds from the exercise of pre-funded warrants

 

 

 

 

 

21

 

Payment of tax liability for vested equity awards

 

 

 

 

 

(58

)

Net cash provided by (used in) financing activities

 

 

(22,104

)

 

 

20,260

 

Decrease in cash, cash equivalents, and restricted cash

 

 

(9,792

)

 

 

(9,628

)

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

 

 

19,946

 

 

 

38,083

 

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

 

$

10,154

 

 

$

28,455

 

 

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

 

5


 

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share amounts, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at March 31, 2020

 

 

3,232,811

 

 

$

45

 

 

$

180,066

 

 

$

(164,959

)

 

$

15,152

 

Stock-based compensation

 

 

 

 

 

 

 

 

301

 

 

 

 

 

 

301

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

(6,803

)

 

 

(6,803

)

Balance at June 30, 2020

 

 

3,232,811

 

 

$

45

 

 

$

180,367

 

 

$

(171,762

)

 

$

8,650

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at March 31, 2019

 

 

3,220,730

 

 

$

45

 

 

$

178,511

 

 

$

(139,426

)

 

$

39,130

 

Common stock issued upon

   vesting of restricted stock units

 

 

616

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

401

 

 

 

 

 

 

401

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

(13,332

)

 

 

(13,332

)

Balance at June 30, 2019

 

 

3,221,346

 

 

$

45

 

 

$

178,912

 

 

$

(152,758

)

 

$

26,199

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2019

 

 

3,234,232

 

 

$

45

 

 

$

179,653

 

 

$

(167,856

)

 

$

11,842

 

Cancellation of fractional shares

   arising from reverse stock split

 

 

(1,421

)

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

714

 

 

 

 

 

 

714

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

(3,906

)

 

 

(3,906

)

Balance at June 30, 2020

 

 

3,232,811

 

 

$

45

 

 

$

180,367

 

 

$

(171,762

)

 

$

8,650

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

 

1,629,173

 

 

$

23

 

 

$

157,791

 

 

$

(127,408

)

 

$

30,406

 

Issuance of common stock, pre-

   funded warrants and warrants,

   net

 

 

1,571,429

 

 

 

22

 

 

 

20,184

 

 

 

 

 

 

20,206

 

Issuance of commitment shares

   of common stock, non-cash

   transaction

 

 

13,991

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued upon

   vesting of restricted stock units

   (net of shares withheld for payment

   of tax liability)

 

 

6,753

 

 

 

 

 

 

(58

)

 

 

 

 

 

(58

)

Stock-based compensation

 

 

 

 

 

 

 

 

995

 

 

 

 

 

 

995

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

(25,350

)

 

 

(25,350

)

Balance at June 30, 2019

 

 

3,221,346

 

 

$

45

 

 

$

178,912

 

 

$

(152,758

)

 

$

26,199

 

 

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

 

6


 

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 research and development and clinical-stage biotechnology company focused on developing novel immunotherapies for the treatment of cancer. Our lead clinical candidate, APVO436, and preclinical candidates, ALG.APV-527 and APVO603 were developed based on the Company’s versatile and robust ADAPTIR™ modular protein technology platform. The ADAPTIR platform is capable of generating highly differentiated bispecific antibodies with unique mechanisms of action for the treatment of different types of cancer.

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

On February 28, 2020, we entered into an LLC Purchase Agreement with Medexus Pharma Inc. (“Medexus”), pursuant to which we sold all of the issued and outstanding limited liability company interests of Aptevo BioTherapeutics LLC (“Aptevo BioTherapeutics”), a wholly owned subsidiary of Aptevo. As a result of the transaction, Medexus obtained all right, title and interest to the IXINITY product and the related Hemophilia B business and intellectual property. In addition, Aptevo BioTherapeutics personnel responsible for the sale and marketing of IXINITY also transitioned to Medexus as part of the transaction. Aptevo BioTherapeutics met all the conditions to be classified as a discontinued operation since the sale of Aptevo BioTherapeutics represented a strategic shift that will have a major effect on the Company’s operations and financial results. Aptevo will not have further significant involvement in the operations of the discontinued Aptevo BioTherapeutics business. The operating results of Aptevo BioTherapeutics are reported as income (loss) from discontinued operations, in the condensed consolidated statements of operations for all periods presented. The gain recognized on the sale of  Aptevo BioTherapeutics is presented in income (loss) from discontinued operations in the condensed consolidated statement of operations. In addition, on the consolidated balance sheet as of December 31, 2019, the assets and liabilities held for sale have been presented separately. See Note 2 - Sale of Aptevo BioTherapeutics for additional information.

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. When considered in aggregate, these factors raised substantial doubt about our ability to continue as a going concern in prior periods. We believe that our existing cash resources, the cash to be generated from future royalty and deferred payments, and the new Credit Agreement of $25 million with Midcap Financial Trust, will be sufficient to meet our projected operating requirements and debt service for at least twelve months from the date of issuance of these financial statements. We expect to raise additional funds to support our operating and capital needs in 2021.

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) changes we may make to the business that affect ongoing operating expenses; (b) changes we may make in our business strategy; (c) changes we may make in our research and development spending plans; (d) potential decreases in our expected milestone and deferred payments from Medexus with respect to IXINITY; (e) potential decreases in our expected royalty payments from Pfizer with respect to RUXIENCE; 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 Sandler & Co (Piper Sandler), or other public or private financing, collaborative arrangements with strategic partners, or through 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 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. Given the global economic climate and additional or unforeseen effects from the COVID-19 pandemic, we may experience delays or difficulties to the financing environment and raising capital due to economic uncertainty.

7


 

Basis of Presentation

 

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

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 condensed consolidated financial statements include the accounts of the company and its wholly owned subsidiaries: Aptevo Research and Development LLC and Aptevo BioTherapeutics LLC (for the period prior to the sale to Medexus). All intercompany balances and transactions have been eliminated.

In March 2020, we effected a 1-for-14 reverse stock split (the “Reverse Split”) of our common stock pursuant to which every 14 shares of our common stock issued and outstanding as of March 26, 2020 were automatically combined into one issued and outstanding share of common stock.  No fractional shares were issued as a result of the reverse stock split. Stockholders of record who would otherwise have been entitled to receive a fractional share received a cash payment in lieu thereof.  All share and per share information with respect to our common stock have been restated to reflect the effect of the Reverse Split for all periods presented. Refer to Note 8 for additional information.

Significant Accounting Policies

Revenue Recognition - Royalties, Deferred Payments and Milestones

We are entitled to receive royalty revenue from Pfizer related to sales of a rituximab biosimilar product, RUXIENCE®. The payment from Pfizer relates to an agreement acquired by Aptevo as part of its spin-off from Emergent BioSolutions in 2016, which applies a fixed royalty rate of 2.5% on net sales in the United StatesEuropean Union, and Japan. The agreement was originally executed by Trubion Pharmaceuticals (which was subsequently acquired by Emergent BioSolutions Inc.,) and Wyeth (a wholly-owned subsidiary of Pfizer). The royalty term runs until the seventh anniversary of the first commercial sale of the CD20 biosimilar. CD20 biosimilar product payments to Aptevo are due within 60 days after the end of each quarter. We do not have future performance obligations under this agreement. We apply the royalty recognition constraint required under the guidance for sales-based royalties which requires a sales-based royalty to be recorded no sooner than the underlying sale. Therefore, royalties on sales of products commercialized by Pfizer are recognized in the quarter the product is sold. Pfizer generally reports sales information to us within 60 days of quarter end.  Unless we receive finalized sales information for the respective quarter, we estimate the expected royalty proceeds based on an analysis of historical experience, analyst expectations, interim data provided by Pfizer, including their publicly announced sales, and other publicly available information. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter.

We are entitled to receive future deferred payments and future milestone payments from Medexus.  The payments from Medexus constitute contingent consideration related to our sale of IXINITY in 2020, which is treated as a discontinued operation in the accompanying statement of operations.  We treat contingent consideration arising from discontinued operations as gain contingencies in accordance with ASC 450-30, whereby such gain contingencies usually are not recognized in the financial statements until the period in which all contingencies are resolved and the gain is realized or realizable. As Medexus communicates payment amounts and sales details subsequent to quarter-end and there is uncertainty as to the amount of the payment before quarter-end, we record deferred payments in the quarter the payment is received.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, useful lives of equipment, commitments and contingencies, stock-based compensation forfeiture rates, and collectability of receivables. Given the global economic climate and additional or unforeseen effects from the COVID-19 pandemic, these estimates are becoming more challenging, and actual results could differ materially from those estimates.

8


 

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, 2019 that was filed with the SEC on March 25, 2020. Our other significant accounting policies have not changed materially from the policies previously reported.

Recently Adopted Accounting Pronouncements

On December 18, 2019 we adopted ASU No. 2019-12, Income Taxes (Topic 740), which amended the existing standards for income tax accounting, eliminating the legacy exception on how to allocate income tax expense or benefit for the year to continuing operations, discontinued operations, other comprehensive income, and other charges or credits recorded directly to shareholder’s equity.  We did not adjust comparative periods in our financial statements prior to that period.

Adoption of the new standard resulted in determining the tax effect of income or loss from continuing operations using a computation that does not consider the tax effects of items that are not included in continuing operations. As such, we did not record a tax expense or benefit in the first or second quarter of 2020. Refer to Note 2 for additional information.

Note 2. Sale of Aptevo BioTherapeutics

On February 28, 2020, we entered into an LLC Purchase Agreement with Medexus, pursuant to which Aptevo sold all of the issued and outstanding limited liability company interests of Aptevo BioTherapeutics, a wholly owned subsidiary of Aptevo. As a result of the transaction, Medexus obtained all right, title and interest to the IXINITY product and the related Hemophilia B business and intellectual property.

From the $30 million payment at closing, Medexus withheld $0.8 million, which we collected in full on June 29, 2020, from the escrow account for working capital adjustments.  In addition to the payment received at closing, Aptevo may also earn milestone and deferred payments from Medexus in the future. We used $22.1 million of the $30 million in proceeds to repay in full our term debt facility with MidCap Financial Trust, including $20 million of principal and $2.1 million in an end of facility fee, accrued interest, legal fees and prepayment fees. We recorded a $2.1 million loss on extinguishment of debt in the first quarter of 2020.

The net gain on sale of Aptevo BioTherapeutics, totaling $14.3 million, was calculated as the difference between the fair value of the consideration received for Aptevo BioTherapeutics, less the net carrying value of the assets transferred to Medexus, less the transaction costs incurred and a working capital adjustment.

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

 

Cash payment received

 

$

29,250

 

Escrow receivable

 

 

750

 

Total consideration

 

 

30,000

 

Less:

 

 

 

 

Net carrying value of assets transferred to Saol

 

 

13,376

 

Transaction costs

 

 

1,880

 

Minimum Transition Services Agreement ("TSA") fund

 

 

406

 

Net gain on sale of business

 

$

14,338

 

 

The purchase agreement included a target net working capital of $9.5 million compared to preliminary net working capital sold of $9.1 million. The difference between the target net working capital and the preliminary working capital was due to Medexus. The parties agreed to defer payment of this amount for a period of six months, during which time, the amount will be reduced by the cost of certain transition services performed by Aptevo during the transition service period, as agreed to by both parties (the “Minimum TSA Fund”). At June 30, 2020, we no longer have a future obligation to Medexus related to working capital and the amount due from Medexus in the Minimum TSA Fund was $0.1 million, which we have included in other current assets in the accompanying balance sheet.

9


 

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

 

ASSETS

December 31, 2019

 

Accounts receivable, net

$

7,022

 

Inventories

 

6,140

 

Prepaid expenses

 

3,147

 

Total current assets, held for sale

 

16,309

 

 

 

 

 

Intangible assets, net

 

4,420

 

VAT receivable and deposit

 

3,045

 

Total assets held for sale

$

23,774

 

LIABILITIES

 

 

 

Accounts payable and other accrued liabilities

$

5,043

 

Royalties payable

 

2,018

 

Accrued payroll

 

654

 

Other current liabilities

 

420

 

Total current liabilities

$

8,135

 

 

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

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Loss from operations

 

$

 

 

$

(2,492

)

 

$

(1,580

)

 

$

(2,769

)

Gain on sale of Aptevo BioTherapeutics

 

 

 

 

 

 

 

 

14,338

 

 

 

 

Deferred payment from Medexus

 

 

 

 

 

 

 

 

140

 

 

 

 

Income (loss) from discontinued operations

 

$

 

 

$

(2,492

)

 

$

12,898

 

 

$

(2,769

)

 

Medexus communicated their second quarter 2020 net IXINITY sales to Aptevo in July and expects to make a deferred payment, within 45 days after quarter-end per the LLC Purchase Agreement, to Aptevo of approximately $0.2 million. As such, we will record the deferred payment amount related to Medexus’ second quarter sales of IXINITY as a gain when collected.    

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.

 

Alligator and Aptevo have initiated discussions with potential partners for the clinical development and commercialization of ALG.APV-527. The parties, Alligator and Aptevo, have delayed moving ALG.APV-527 into the clinic to focus on partnering efforts.

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. ASU 2018-18, under ASC 808, clarifies the interactions between Topic 808 and 606. ASU 2018-18 is a targeted amendment to ASC 808 that requires that if the counterparty in a collaborative arrangement is a customer for goods and services that is a distinct unit, the transaction should be considered as revenues from customers. We concluded that because the Collaboration Agreement with Alligator is a cost sharing agreement, there is no revenue and therefore ASU 2018-18 is not applicable to the Collaboration Agreement with Alligator.

10


 

For the three and six months ended June 30, 2020, we recorded an immaterial increase in research and development expense. For the three and six months ended June 30, 2019, we recorded a decrease in our research and development expense of $0.1 million and $0.5 million, respectively, related to the collaboration arrangement.

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.

 

At June 30, 2020 and December 31, 2019, we had $5.6 million and $12.5 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 June 30, 2020, and December 31, 2019, we did not have any level two or level three assets.

 

 

Note 5. 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 includes $2.6 million securing letters of credit. $1.9 million of the $2.6 million restricted cash balance mature by the end of the second quarter of 2021, therefore, we have classified them as restricted cash, current on the balance sheet.

The following table shows our cash, cash equivalents and long-term restricted cash as of June 30, 2020 and December 31, 2019:

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2020

 

 

2019

 

Cash

 

$

2,025

 

 

$

4,954

 

Cash equivalents

 

 

5,574

 

 

 

7,494

 

Restricted cash, current

 

 

1,862

 

 

 

 

Restricted cash, long-term

 

 

693

 

 

 

7,498

 

Total cash, cash equivalents, and restricted cash

 

$

10,154

 

 

$

19,946

 

 

Note 6. Debt

 

On February 28, 2020, we repaid the entire amount outstanding under the Credit and Security Agreement with MidCap Financial Trust from the proceeds of the sale of Aptevo BioTherapeutics to Medexus.  In addition to the outstanding principal of $20 million, we paid $2.1 million in an end of facility fee, accrued interest, legal fees and prepayment fees. We recorded an adjustment of $0.1 million related to unamortized loan initiation fees and a $2.1 million loss on extinguishment of debt in the first quarter of 2020.

 

On August 5, 2020, we entered into a Credit and Security Agreement (Credit Agreement) with MidCap Financial Trust. The Credit Agreement provided us with $25 million of available borrowing capacity. Refer to Note 12 – Subsequent Events for further details.

 

11


 

Note 7. 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. The lease was further amended effective August 2019 to reduce the square footage of our rented area.  

 

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.

 

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.

 

For the three and six months ended June 30, 2020, we recorded $0.2 million and $0.3 million, respectively, related to variable expenses.

Equipment Leases - Operating

As of June 30, 2020, we have operating leases for one piece of lab equipment and four copiers in our Seattle, Washington headquarters. The future expense for these leases will be straight-line and will include any variable expenses that arise.

Equipment Lease – Financing

As of June 30, 2020, 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 four months and has a remaining expense obligation of less than $0.1 million. There were no financing lease payments in the three months or six months ended June 30, 2020.  

 

Components of lease expense:

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

For the Three

Months

Ended June 30,

 

 

For the Six

Months

Ended June 30,

 

(in thousands)

 

2020

 

 

2020

 

 

2019

 

 

2019

 

Operating lease cost

 

$

395

 

 

$

790

 

 

$

399

 

 

$

734

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

 

2

 

 

 

3

 

 

 

2

 

 

 

3

 

Interest on lease liabilities

 

 

 

 

 

 

 

 

 

 

 

1

 

Total lease cost

 

$

397

 

 

$

793

 

 

$

401

 

 

$

738

 

 

Right of use assets acquired under operating leases:

 

 

 

As of June 30,

 

 

As of June 30,

 

(in thousands)

 

2020

 

 

2019

 

Operating leases, excluding Seattle office lease

 

$

349

 

 

$

345

 

Seattle office lease, including amendment

 

 

3,067

 

 

 

4,347

 

Total operating leases

 

$

3,416

 

 

$

4,692

 

 

The long term portion of the lease liabilities included in the amounts above is $2.9 million and the remainder of our lease liabilities are included in other current liabilities on our condensed consolidated balance sheets.

 

12


 

Lease payments:

 

 

 

For the Six Months Ended June 30,

 

 

For the Six Months

Ended June 30,

 

(in thousands)

 

2020

 

 

2019

 

For operating leases

 

$

788

 

 

$

868

 

 

 

As of June 30, 2020, the weighted average remaining lease term and weighted discount rate for operating leases was 2.8 years and 14.54%.

 

Note 8. Reverse Stock Split

 

On March 11, 2020, we held a Special Meeting of Stockholders at which our stockholders approved a series of alternate amendments to the Amended and Restated Certificate of Incorporation to effect, at the option of our Board of Directors, a reverse split of Aptevo’s common stock at a ratio ranging from 1-for-2 to 1-for-20, inclusive, with the effectiveness of one of such amendments and the abandonment of the other amendments, or the abandonment of all amendments, to be determined by the Board in its sole discretion following the Special Meeting. The specific 1-for-14 reverse split ratio was subsequently approved by the Board on March 23, 2020. On March 26, 2020, the Company filed a Certificate of Amendment of Amended and Restated Certificate of Incorporation (the “Amendment”) with the Secretary of State of the State of Delaware to effect a 1-for-14 reverse stock split of the Company’s outstanding common stock.

 

No fractional shares were issued as a result of the reverse stock split. Stockholders of record who would otherwise be entitled to receive a fractional share received a cash payment in lieu thereof. 

 

We have adjusted all common stock and stock equivalent figures retroactively in this Form 10-Q for all periods presented to reflect the reverse stock split.

Note 9. Net Income (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.

We utilize the control number concept in the computation of diluted earnings per share to determine whether potential common stock instruments are dilutive. The control number used is loss from continuing operations or income from discontinued operations. The control number concept requires that the same number of potentially dilutive securities applied in computing diluted earnings per share from continuing operations be applied to all other categories of income or loss, regardless of their anti-dilutive effect on such categories. Therefore, no dilutive effect has been recognized in the calculation of income from discontinued operations per share.

 

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

 

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

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net loss from continuing operations

 

$

(6,803

)

 

$

(10,840

)

 

$

(16,804

)

 

$

(22,581

)

Income (loss) from discontinued operations

 

 

-

 

 

 

(2,492

)

 

 

12,898

 

 

 

(2,769

)

Net loss

 

$

(6,803

)

 

$

(13,332

)

 

$

(3,906

)

 

$

(25,350

)

Basic and diluted net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations

 

$

(2.10

)

 

$

(3.37

)

 

$

(5.14

)

 

$

(8.69

)

Net income (loss) from discontinued operations

 

$

 

 

$

(0.77

)

 

$

3.95

 

 

$

(1.07

)

Basic and diluted net loss per basic share

 

$

(2.10

)

 

$

(4.14

)

 

$

(1.19

)

 

$

(9.76

)

Weighted-average shares used to compute per

   share calculations

 

 

3,232,811

 

 

 

3,221,074

 

 

 

3,269,410

 

 

 

2,598,552

 

 

13


 

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  June 30,

 

(in thousands)

 

2020

 

 

2019

 

Warrants

 

 

1,571

 

 

 

1,571

 

Outstanding options to purchase common stock

 

 

340

 

 

 

294

 

Unvested RSUs

 

 

12

 

 

 

 

 

Note 10. 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 $14.00 per share of common stock and related warrants, 1,417,857 shares of common stock and related warrants with a 5-year life to purchase up to 1,417,857 shares of common stock at an exercise price of $18.20 per share,

 

 

for a combined public offering price of $13.86 per pre-funded warrant and related warrant, pre-funded warrants with a 10-year life to purchase up to 153,571 shares of common stock at an exercise price of $0.14 per share and related warrants with a 5-year life to purchase up to 153,571 shares of common stock at an exercise price of $18.20 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 three months ended March 31, 2019, we issued 6,138 shares of common stock due to the vesting of RSUs. In addition, pursuant to our purchase agreement with Lincoln Park, we issued 13,991 of commitment shares in a non-cash transaction during the three months ended March 31, 2019.

 

Equity Distribution Agreement

 

On November 9, 2017, we entered into an Equity Distribution Agreement (the Equity Distribution Agreement) with Piper Sandler. The Equity Distribution Agreement provides that, upon the terms and subject to the conditions set forth therein, we may issue and sell through Piper Sandler, acting as sales agent, shares of our common stock, $0.001 par value per share having an aggregate offering price of up to $17.5 million. We have no obligation to sell any such shares under the Equity Distribution Agreement. The sale of such shares of common stock by Piper Sandler will be effected pursuant to a Registration Statement on Form S-3 which we filed on November 9, 2017. We issued no shares under the Equity Distribution Agreement in the first or second quarter of 2020.

 

 

Converted Equity Awards Incentive Plan

In connection with the spin-off from Emergent BioSolutions Inc. (Emergent) in August 2016, we adopted the Converted Equity Awards Incentive Plan (Converted Plan) and outstanding equity awards of Emergent held by Aptevo employees were converted into or replaced with equity awards of Aptevo (Conversion Awards) under the Converted Plan and were adjusted to maintain the economic value before and after the distribution date using the relative fair market value of the Emergent and Aptevo common stock based on the closing prices as of August 1, 2016. A total of 0.1 million shares of Aptevo common stock have been authorized for issuance under the Converted Plan. Options issued as Conversion Awards were priced according to the Converted Plan. RSUs issued as part of the Converted Plan provide for the issuance of a share of Aptevo’s stock at no cost to the holder.

2016 Stock Incentive Plan

On August 1, 2016, the Company adopted the 2016 Stock Incentive Plan (2016 SIP). A total of 0.2 million shares of Aptevo common stock have been authorized for issuance under the 2016 SIP in the form of equity stock options.

 

Stock options under the 2016 SIP generally vest pro rata over a three-year period and terminate ten years from the grant date, though the specific terms of each grant are determined individually. The Company’s executive officers and certain other employees may be awarded options with different vesting criteria, and options granted to non-employee directors also vest over a three-year period. Option exercise prices for new options granted by the Company equal the closing price of the Company’s common stock on the Nasdaq Capital Market on the date of grant.

14


 

RSUs issued under the 2016 SIP provide for the issuance of a share of the Company’s common stock at no cost to the holder. RSUs granted to employees under the 2016 SIP generally provide for time-based vesting over a twelve-month to three-year period, although certain employees may be awarded RSUs with different time-based vesting criteria. Prior to vesting, RSUs granted under the 2016 SIP do not have dividend equivalent rights, do not have voting rights and the shares underlying the RSUs are not considered issued or outstanding.

The equity compensation awards granted by the Company generally vest only if the employee is employed by the Company (or in the case of directors, the director continues to serve on the Board) on the vesting date.

 

On May 31, 2017, at the 2017 Annual Meeting of Stockholders (Annual Meeting), the Company’s stockholders approved the amendment and restatement of the Company’s 2016 SIP (Restated 2016 Plan) to, among other things, increase the number of authorized shares issuable by 0.1 million shares of Aptevo common stock. The Restated 2016 Plan was previously approved, subject to stockholder approval, by the Board of Directors of the Company.

2018 Stock Incentive Plan

 

On June 1, 2018, at the 2018 Annual Meeting, the Company’s stockholders approved a new 2018 Stock Incentive Plan (2018 SIP), which replaced the Restated 2016 Plan on a go-forward basis. All stock options, RSUs or other equity awards granted subsequent to June 1, 2018 will be issued out of the 2018 SIP, which has 0.3 million shares of Aptevo common stock authorized for issuance. The 2018 Plan became effective immediately upon stockholder approval at the Annual Meeting. Any shares subject to outstanding stock awards granted under the 2016 SIP that (a) expire or terminate for any reason prior to exercise or settlement; (b) are forfeited because of the failure to meet a contingency or condition required to vest such shares or otherwise return to the Company; or (c) otherwise would have returned to the 2016 SIP for future grant pursuant to the terms of the 2016 Plan (such shares, the “Returning Shares”) will immediately be added to the share reserve under the 2018 SIP as and when such shares become Returning Shares, up to a maximum of 0.3 million shares. The 2018 SIP was previously approved, subject to stockholder approval, by the Board of Directors of the Company. As of June 30, 2020, there are 0.1 million shares available to be granted under the 2018 SIP.

 

Stock options under the 2018 SIP generally vest pro rata over a three-year period and terminate ten years from the grant date, though the specific terms of each grant are determined individually. The Company’s executive officers and certain other employees may be awarded options with different vesting criteria, and options granted to non-employee directors also vest over a three-year period. Option exercise prices for new options granted by the Company equal the closing price of the Company’s common stock on the Nasdaq Capital Market on the date of grant.

 

 

Stock-Based Compensation Expense

Stock-based compensation expense includes amortization of stock options and RSUs granted to employees and non-employees and has been reported in our Condensed Consolidated Statements of Operations as follows:

 

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Research and development

 

$

114

 

 

$

121

 

 

$

284

 

 

$

372

 

General and administrative

 

 

187

 

 

 

280

 

 

 

430

 

 

 

623

 

Total stock-based compensation expense

 

$

301