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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, 2021

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 11, 2021, the number of shares of the registrant’s common stock outstanding was 4,898,034.

 

 

 

 


 

 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

3

 

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

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4.

Controls and Procedures

24

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

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, 2021

 

 

December 31, 2020

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

52,118

 

 

$

39,979

 

Restricted cash - current

 

 

1,259

 

 

 

2,555

 

Royalty receivable

 

 

3,096

 

 

 

2,369

 

Prepaid expenses

 

 

2,391

 

 

 

2,228

 

Other current assets

 

 

9

 

 

 

133

 

Total current assets

 

 

58,873

 

 

 

47,264

 

Property and equipment, net

 

 

2,521

 

 

 

2,815

 

Operating lease right-of-use asset

 

 

1,865

 

 

 

2,722

 

Other assets

 

 

746

 

 

 

746

 

Total assets

 

$

64,005

 

 

$

53,547

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and other accrued liabilities

 

$

3,687

 

 

$

5,583

 

Accrued compensation

 

 

1,565

 

 

 

2,757

 

Liability related to the sale of future royalties, net - short-term

 

 

13,369

 

 

 

 

Current portion of long-term debt

 

 

11,167

 

 

 

5,000

 

Other current liabilities

 

 

2,592

 

 

 

1,199

 

Total current liabilities

 

 

32,380

 

 

 

14,539

 

Liability related to the sale of future royalties, net - long-term

 

 

18,711

 

 

 

 

Loan payable - long-term

 

 

4,012

 

 

 

20,054

 

Operating lease liability

 

 

1,610

 

 

 

2,360

 

Total liabilities

 

 

56,713

 

 

 

36,953

 

 

 

 

 

 

 

 

 

 

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; 4,895,759

   and 4,410,909 shares issued and outstanding at September 30, 2021 and

   December 31, 2020, respectively

 

 

47

 

 

 

46

 

Additional paid-in capital

 

 

215,036

 

 

 

202,154

 

Accumulated deficit

 

 

(207,791

)

 

 

(185,606

)

Total stockholders' equity

 

 

7,292

 

 

 

16,594

 

Total liabilities and stockholders' equity

 

$

64,005

 

 

$

53,547

 

 

The accompanying notes are an integral part of these unaudited 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,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Royalty revenue

 

 

3,096

 

 

 

1,463

 

 

 

8,627

 

 

 

1,936

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

(4,367

)

 

 

(4,494

)

 

 

(14,451

)

 

 

(12,940

)

General and administrative

 

 

(3,479

)

 

 

(3,215

)

 

 

(11,536

)

 

 

(9,671

)

Loss from operations

 

 

(4,750

)

 

 

(6,246

)

 

 

(17,360

)

 

 

(20,675

)

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense from continuing operations, net

 

 

(2,327

)

 

 

(702

)

 

 

(5,451

)

 

 

(973

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

(2,104

)

Net loss from continuing operations

 

$

(7,077

)

 

$

(6,948

)

 

$

(22,811

)

 

$

(23,752

)

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

$

80

 

 

$

157

 

 

$

626

 

 

$

13,055

 

Net loss

 

$

(6,997

)

 

$

(6,791

)

 

$

(22,185

)

 

$

(10,697

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations per share

 

$

(1.45

)

 

$

(2.15

)

 

$

(4.94

)

 

$

(7.35

)

Net income from discontinued operations

   per share

 

$

0.02

 

 

$

0.05

 

 

$

0.14

 

 

$

4.04

 

Basic and diluted net loss per basic share

 

$

(1.43

)

 

$

(2.10

)

 

$

(4.80

)

 

$

(3.31

)

Weighted-average shares used to compute per

   share calculations

 

 

4,891,881

 

 

 

3,232,811

 

 

 

4,617,357

 

 

 

3,233,257

 

 

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

 

4


 

 

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(22,185

)

 

$

(10,697

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

1,465

 

 

 

1,057

 

Depreciation and amortization

 

 

884

 

 

 

1,064

 

Loss on disposal of property and equipment

 

 

4

 

 

 

 

Gain on sale of Aptevo BioTherapeutics

 

 

 

 

 

(14,338

)

Loss on extinguishment of debt

 

 

 

 

 

2,104

 

Non-cash interest expense and other

 

 

4,387

 

 

 

606

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Royalty receivable

 

 

(727

)

 

 

(1,463

)

Prepaid expenses and other current assets

 

 

(39

)

 

 

(455

)

Operating lease right-of-use asset

 

 

857

 

 

 

757

 

Accounts payable, accrued compensation and other liabilities

 

 

(1,695

)

 

 

(2,824

)

Long-term operating lease liability

 

 

(750

)

 

 

(725

)

Changes in assets and liabilities held for sale

 

 

 

 

 

1,719

 

Net cash used in operating activities

 

 

(17,799

)

 

 

(23,195

)

Investing Activities

 

 

 

 

 

 

 

 

Cash received from sale of Aptevo BioTherapeutics

 

 

 

 

 

28,120

 

Purchases of property and equipment

 

 

(595

)

 

 

 

Net cash (used in) provided by investing activities

 

 

(595

)

 

 

28,120

 

Financing Activities

 

 

 

 

 

 

 

 

Proceeds from other long-term obligations, net of issuance costs

 

 

 

 

 

24,730

 

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

 

 

(10,550

)

 

 

(22,104

)

Repayments under liability related to sale of future royalties

 

 

(5,531

)

 

 

 

Proceeds from sale of future royalties

 

 

35,000

 

 

 

 

Transaction costs from sale of future royalties

 

 

(1,100

)

 

 

 

Proceeds from exercise of stock options

 

 

200

 

 

 

 

Proceeds from exercise of warrants

 

 

985

 

 

 

 

Proceeds from common stock issued pursuant to the Lincoln Park Purchase Agreement

 

 

10,233

 

 

 

 

Net cash provided by financing activities

 

 

29,237

 

 

 

2,626

 

Increase  in cash, cash equivalents, and restricted cash

 

 

10,843

 

 

 

7,551

 

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

 

 

42,534

 

 

 

19,946

 

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

 

$

53,377

 

 

$

27,497

 

 

The accompanying notes are an integral part of these unaudited 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 December 31, 2020

 

 

4,410,909

 

 

$

46

 

 

$

202,154

 

 

$

(185,606

)

 

$

16,594

 

Proceeds from exercise of stock

   options

 

 

10,685

 

 

 

 

 

 

86

 

 

 

 

 

 

86

 

Proceeds from exercise of

   warrants

 

 

27,828

 

 

 

 

 

 

506

 

 

 

 

 

 

506

 

Stock-based compensation

 

 

 

 

 

 

 

 

574

 

 

 

 

 

 

574

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

(7,256

)

 

 

(7,256

)

Balance at March 31, 2021

 

 

4,449,422

 

 

$

46

 

 

$

203,320

 

 

$

(192,862

)

 

$

10,504

 

Proceeds from exercise of stock

   options

 

 

1,769

 

 

 

 

 

 

25

 

 

 

 

 

 

25

 

Proceeds from exercise of

   warrants

 

 

26,277

 

 

 

 

 

 

478

 

 

 

 

 

 

478

 

Common stock sold pursuant to

   the Lincoln Park Purchase

   Agreement

 

 

407,047

 

 

 

1

 

 

 

10,233

 

 

 

 

 

 

10,234

 

Stock-based compensation

 

 

 

 

 

 

 

 

572

 

 

 

 

 

 

572

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

(7,932

)

 

 

(7,932

)

Balance at June 30, 2021

 

 

4,884,515

 

 

$

47

 

 

$

214,628

 

 

$

(200,794

)

 

$

13,881

 

Exercise of stock options

 

 

11,244

 

 

 

 

 

 

89

 

 

 

 

 

 

89

 

Stock-based compensation

 

 

 

 

 

 

 

 

319

 

 

 

 

 

 

319

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

(6,997

)

 

 

(6,997

)

Balance at September 30, 2021

 

 

4,895,759

 

 

$

47

 

 

$

215,036

 

 

$

(207,791

)

 

$

7,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2019

 

 

3,234,231

 

 

$

45

 

 

$

179,653

 

 

$

(167,856

)

 

$

11,842

 

Cancellation of fractional

   shares arising from reverse

   stock split

 

 

(1,420

)

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

413

 

 

 

 

 

 

413

 

Net income for the period

 

 

 

 

 

 

 

 

 

 

 

2,897

 

 

 

2,897

 

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

 

Stock-based compensation

 

 

 

 

 

 

 

 

343

 

 

 

 

 

 

343

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

(6,791

)

 

 

(6,791

)

Balance at September 30, 2020

 

 

3,232,811

 

 

$

45

 

 

$

180,710

 

 

$

(178,553

)

 

$

2,202

 

 

The accompanying notes are an integral part of these unaudited 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 and Liquidity

Aptevo Therapeutics Inc. (Aptevo, we, us, or the Company) is a clinical-stage, research and development biotechnology company focused on developing novel immunotherapeutic candidates for the treatment of different forms of cancer. We have developed two versatile and enabling platform technologies for rational design of precision immune stimulatory drugs. Our lead clinical candidate, APVO436, and preclinical candidates, ALG.APV-527 and APVO603, were developed using our ADAPTIR™ modular protein technology platform. Our preclinical candidate APVO442 was developed using our ADAPTIR-FLEX™ modular protein technology platform.  

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

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. For the three and nine months ended September 30, 2021, we had a net loss of $7.0 million and $22.2 million, respectively. We had an accumulated deficit of $207.8 million as of September 30, 2021. For the nine months ended September 30, 2021, net cash used in our operating activities was $17.8 million. We have suffered recurring losses from operations and negative cash flows from operating activities. We believe that our existing cash resources, the cash to be generated from future deferred payments and milestones, and release of restricted cash securing letters of credit, 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 may choose to raise additional funds to support our operating and capital needs in the future.

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 Pharmaceuticals Inc. (Medexus) with respect to IXINITY; (e) whether and to what extent future proceeds are received under our Royalty Purchase Agreement; 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 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 ongoing COVID-19 pandemic, we may experience delays or difficulties in the financing environment and raising capital due to economic uncertainty.  

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). These unaudited 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 interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2020, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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 and changes in these estimates are recorded when known.

The unaudited condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries: Aptevo Research and Development LLC and Aptevo BioTherapeutics LLC (for the period prior to its sale on February 28, 2020). All intercompany balances and transactions have been eliminated.

7


 

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.

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 unaudited condensed consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, forecasted royalties, effective interest rates, clinical accruals, useful lives of equipment, commitments and contingencies, and stock-based compensation forfeiture rates. Given the global economic climate and additional or unforeseen effects from the ongoing COVID-19 pandemic, these estimates are becoming more challenging, and actual results could differ materially from those estimates.

Significant Accounting Policies

Liability Related to Sale of Future Royalties and Non-Cash Interest Expense

On March 30, 2021, the Company entered into and closed a royalty purchase agreement (the Royalty Purchase Agreement) with an entity managed by HealthCare Royalty Management, LLC (HCR) pursuant to which the Company sold to HCR the right to receive royalty payments made by Pfizer Inc. (Pfizer) in respect of net sales of RUXIENCE. Under the terms of the agreement, the Company received $35 million (the Investment Amount) at closing and the Company is eligible to receive additional payments in aggregate of up to an additional $32.5 million based on the achievement of sales milestones in 2021, 2022, and 2023 (collectively, the Milestone Amounts). The Royalty Purchase Agreement further provides that, once HCR reaches aggregate royalty payments totaling 190% of the Investment Amount plus the Milestone Amounts to the extent paid by HCR to the Company, Aptevo will be entitled to receive 50% of royalty interest payments thereafter.

We treat the Royalty Purchase Agreement with HCR (see Note 7) as a debt financing, amortized under the effective interest rate method over the estimated life of the related expected royalty stream. The liabilities related to the sale of future royalties and the debt amortization are based on our current estimates of future royalties expected to be paid over the life of the arrangement. To the extent total future royalties collected are an amount less than the liability, the Company is not obligated to fund any such shortfall. We will periodically assess the expected royalty payments using projections from external sources. To the extent our estimates of future royalty payments are greater or less than previous estimates or the estimated timing of such payments is materially different than previous estimates, we will adjust the effective interest rate and recognize related non-cash interest expense on a prospective basis. We are not obligated to repay the proceeds received under the Royalty Purchase Agreement with HCR. Due to our continuing involvement under the Collaboration and License Agreement originally between Trubion and Wyeth, we continue to recognize royalty revenue on net sales of RUXIENCE and record the royalty payments to HCR as a reduction of the liability when paid. As such payments are made to HCR, the balance of the liability will be effectively repaid over the life of the Royalty Purchase Agreement.

Debt Modification

On March 30, 2021, we amended our Credit Agreement with MidCap Financial and used $10 million of the proceeds received from the Royalty Purchase Agreement to pay down the outstanding principal under the Credit Agreement from $25 million to $15 million. The amended Credit Agreement was accounted for under ASC 470-50, Debt Modifications and Extinguishments as a debt modification, rather than an extinguishment, based on a comparison of the present value of the cash flows under the terms of the debt immediately before and after the amendment, which resulted in a change of less than 10%. Unamortized issuance costs as of the date of modification will be amortized to interest expense using the effective interest method over the repayment term.

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, 2020 that was filed with the SEC on March 31, 2021 and further amended on April 28, 2021. Our other significant accounting policies have not changed materially from the policies previously reported.

Note 2. Discontinued Operations

The accompanying financial statements include discontinued operations from two separate transactions: the sale of our hyperimmune business in 2017, from which we received a payment in March 2021 related to the collection of a certain accounts receivable, and the sale of our Aptevo BioTherapeutics LLC business in February 2020.

On February 28, 2020, we entered into an LLC Purchase Agreement with Medexus, pursuant to which we sold all of the issued and outstanding limited liability company interests of Aptevo BioTherapeutics LLC, a wholly owned subsidiary of Aptevo. As a result

8


 

of the transaction, Medexus obtained all rights, title and interest to the IXINITY product and the related Hemophilia B business and intellectual property.

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. We recorded the gain on sale in the quarter ended March 31, 2020.

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

 

 

 

For the Three Months Ended

September,

 

 

For the Nine Months Ended

September,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Loss from operations - Aptevo BioTherapeutics

 

 

 

 

 

 

 

 

 

 

 

(1,580

)

Gain on sale of Aptevo BioTherapeutics

 

 

 

 

 

 

 

 

 

 

 

14,338

 

Payment from Saol

 

 

 

 

 

 

 

 

227

 

 

 

 

Deferred payment from Medexus

 

 

80

 

 

 

157

 

 

 

399

 

 

 

297

 

Income from discontinued operations

 

$

80

 

 

$

157

 

 

$

626

 

 

$

13,055

 

 

The LLC Purchase Agreement with Medexus entitles us to future deferred payments and royalties. For the three months ended September 30, 2021, we collected an approximately $0.1 million deferred payment from Medexus in September 2021 related to second quarter 2021 IXINITY sales. Medexus communicated their third quarter 2021 net IXINITY sales to Aptevo in October and expects to make an immaterial deferred payment, within 45 days after quarter-end per the LLC Purchase Agreement, to Aptevo. As such, we will record the deferred payment amount related to Medexus’ third quarter sales of IXINITY as a gain when collected.    

There was no amortization for Aptevo BioTherapeutics in the three or nine months ended September 30, 2021 and amortization was $0.1 million for the three and nine months ended September 30, 2020. There was no depreciation or capital expenditures for the three or nine months ended September 30, 2021 or September 30, 2020. Significant operating non-cash items include the gain on sale of Aptevo BioTherapeutics of $14.3 million for the nine months ended September 30, 2020. There were no significant investing non-cash items for the nine months ended September 30, 2021 and 2020.

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 (the 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.

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 – Collaborative Arrangements (ASC 808). In accordance with ASC 808, we concluded that because the Collaboration Agreement is a cost sharing agreement, there is no revenue.

We recorded approximately $0.1 million increase in research and development expense related to the Collaboration Agreement, for the nine months ended September 30, 2021 and September 30, 2020.

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, it 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

9


 

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, 2021 and December 31, 2020, we had $47.9 million and $35.4 million in Level 1 money market funds, respectively. The carrying amounts of our money market funds approximate their fair value. At September 30, 2021 and December 31, 2020, we did not have any Level 2 or Level 3 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 - current includes $1.3 million securing letters of credit.

The following table shows our cash, cash equivalents and current restricted cash as of September 30, 2021 and December 31, 2020:

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

2021

 

 

2020

 

Cash

 

$

4,218

 

 

$

4,601

 

Cash equivalents

 

 

47,900

 

 

 

35,378

 

Restricted cash - current

 

 

1,259

 

 

 

2,555

 

Total cash, cash equivalents, and restricted cash

 

$

53,377

 

 

$

42,534

 

 

Note 6. Debt

Credit Agreement

On February 28, 2020, we used the proceeds from the sale of Aptevo BioTherapeutics to Medexus to repay $20 million outstanding principal under the Credit and Security Agreement, including payment of $2.1 million in an end of facility fee, accrued interest, legal fees, and prepayment fees. On August 5, 2020, we entered into a Credit and Security Agreement (the Credit Agreement), with MidCap Financial. The Credit Agreement provided us with up to $25.0 million of available borrowing capacity under a term loan facility. The full $25.0 million was drawn on the closing date of the Credit Agreement. The term loan facility has a 48 month term, is interest-only for the first 18 months, with straight-line amortization for the remaining 30 months and bears interest at a rate of one month LIBOR plus 6.25% per annum, subject to a 1.50% LIBOR floor and a 2.50% LIBOR cap. The term loan facility includes additional repayment provisions should either or both of the royalties or milestones related to IXINITY under the LLC Purchase Agreement with Medexus or royalties related to RUXIENCE under the Royalty Purchase Agreement with HCR be sold during the term of the loan. The United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, has announced that it intends to phase out one-week and two-month US Dollar LIBOR settings on December 31, 2021. All other US Dollar LIBOR settings, including the overnight, one-month, three-month, six-month and twelve-month, will be phased out on June 30, 2023. It is unclear if at that time LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2023. Our Credit Agreement with MidCap Financial currently references one-month LIBOR and also provides that we may amend the Credit Agreement to reflect an alternative rate of interest upon the phase out of LIBOR.

On November 6, 2020, Kevin Tang and his related entities filed a statement on Schedule 13D to report the purchase of 1,760,000 shares of the Company’s common stock, which at the time represented approximately 54% of the Company’s issued and outstanding shares of the Company’s common stock. This acquisition of voting stock triggered a change in control, resulting in an Event of Default under Section 10.1(a)(ii) of the Credit Agreement. On November 10, 2020, the Company obtained a waiver from MidCap Financial pursuant to which, among other things, MidCap Financial waived such Event of Default and MidCap Financial and the Company agreed that an immediate event of default under the Credit Agreement will be deemed to have occurred in the event that (a) a majority of the seats on the Company’s board of directors are occupied by persons who were neither (i) nominated by the Company’s board of directors nor (ii) appointed by the directors so nominated, and (b) Tang has appointed the majority of the Company’s board of directors. No other events of default have occurred with respect to the Credit Agreement.

On March 30, 2021, we amended our Credit Agreement with MidCap Financial and used $10.0 million of the proceeds received from the Royalty Purchase Agreement to pay down the outstanding principal under the Credit Agreement from $25.0 million to $15.0 million. $10.0 million of the remaining $15.0 million principal balance will be payable on March 31, 2022.  Beginning March 1, 2022, monthly repayment of the remaining $5.0 million of principal will commence and continue for the final 30 months of the loan term. If the Company sells the IXINITY deferred payment stream and milestones prior to full repayment of this $5.0 million principal amount, under the agreement with MidCap Financial, we will be required to use the proceeds from the sale to pay down the outstanding loan principal balance. MidCap Financial also released its security interest in the RUXIENCE royalty payments. A fee of $0.6 million was paid by the Company to MidCap Financial in connection with the amendment in lieu of the formula-based fee previously required.

10


 

The amended Credit Agreement was accounted for as a debt modification, rather than an extinguishment, based on a comparison of the present value of the cash flows under the terms of the debt immediately before and after the amendment, which resulted in a change of less than 10%. Unamortized issuance costs as of the date of modification will be amortized to interest expense using the effective interest method over the repayment term.

As of September 30, 2021, we classified $11.2 million of the remaining $15.0 million principal of the amended Credit Agreement to current portion of long-term debt on the unaudited condensed consolidated balance sheet. The amended Credit Agreement states $10.0 million of the remaining $15.0 million principal balance will be payable on March 31, 2022. Additionally, within the next twelve months, we will pay $1.2 million to MidCap Financial for monthly repayments of outstanding principal beginning on March 1, 2022.

This facility is subject to a subjective acceleration clause that could be invoked by MidCap Financial upon the occurrence of any event MidCap Financial deems to have a material adverse effect on our ability to repay the lender.

Note 7. Liability Related to Sale of Future Royalties

In March 2021, we entered into and closed the Royalty Purchase Agreement with HCR pursuant to which we sold to HCR the right to receive royalty payments made by Pfizer in respect of global net sales of RUXIENCE. Under the terms of the agreement, we received $35.0 million (the Investment Amount) at closing and we are eligible to receive additional payments in aggregate of up to an additional $32.5 million based on the achievement of sales milestones in 2021, 2022, and 2023 (collectively, the Milestone Amounts). The Royalty Purchase Agreement further provides that, once HCR reaches aggregate royalty payments totaling 190% of the amount paid at closing plus Milestone Amounts to the extent paid by HCR to the Company, Aptevo will be entitled to receive 50% of royalty interest payments thereafter.

The proceeds received from HCR of $35.0 million were recorded as a liability, net of transaction costs of $1.1 million, which will be amortized over the estimated life of the arrangement using the effective interest method. In order to determine the amortization of the liability, we are required to estimate the total amount of future royalty payments to be received by HCR over the life of the arrangement. The total amount of royalty payments received by HCR under the Royalty Purchase Agreement, less the net proceeds we received of $33.9 million, is recorded as non-cash interest expense over the life of the arrangement using the effective interest method. We maintain our rights under the Definitive Agreement originally between Trubion and Wyeth, with the exception of the cash flows of the RUXIENCE royalty payments purchased by HCR. Due to our continuing involvement under the Definitive Agreement originally between Trubion and Wyeth, we continue to recognize royalty revenue on net sales of RUXIENCE and record the royalty payments to HCR as a reduction of the liability when paid. As such payments are made to HCR, the balance of the liability will be effectively repaid over the life of the Royalty Purchase Agreement. To the extent total future royalties collected are an amount less than the liability, the Company is not obligated to fund any such shortfall.

We estimate the effective interest rate used to record non-cash interest expense under the Royalty Purchase Agreement based on the estimate of future royalty payments to be received by HCR. As of September 30, 2021, the estimated effective interest rate under the agreement was 21.9%. Over the life of the arrangement, the actual effective interest rate will be affected by the amount and timing of the royalty payments received by HCR and changes in our forecasted royalties. Periodically, we will reassess our estimate of total future royalty payments to be received by HCR, and prospectively adjust the effective interest rate and amortization of the liability as necessary.

The following table presents the changes in the liability in the quarter related to the sale of future royalties under the Royalty Purchase Agreement with HCR (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

 

2021

 

Liability related to sale of future royalties, beginning balance

 

$

33,349

 

Non-cash interest expense

 

 

1,841

 

RUXIENCE royalties paid to HCR

 

 

(3,110

)

Liability related to sale of future royalties, ending balance

 

 

32,080

 

Current portion of liability related to sale of future royalties

 

 

(13,369

)

Liability related to sale of future royalties, non-current

 

$

18,711

 

 

11


 

 

Note 8. 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.  

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, 2021, we recorded $0.2 million and $0.6 million, respectively, related to variable expenses. For the three and nine months ended September 30, 2020, we recorded $0.2 million and $0.5 million, respectively, related to variable expenses.

Equipment Leases - Operating

As of September 30, 2021, 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 September 30, 2021, we had one equipment lease classified as a financing lease as the lease transferred ownership of the underlying asset to us at the end of the lease term in 2020. The lease has no remaining expense obligation. There were no financing lease payments in the three months or nine months ended September 30, 2021.  

 

Components of lease expense: