apvo-10q_20180630.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, 2018

OR

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

 

For the transition period from               to               

 

Commission File Number: 001-37746

 

APTEVO THERAPEUTICS INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

81-1567056

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

2401 4th Avenue, Suite 1050

Seattle, Washington

98121

(Address of principal executive offices)

(Zip Code)

 

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

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act ).      

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 7, 2018, the number of shares of the registrant’s common stock outstanding was 22,669,405.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations

3

 

Condensed Consolidated Statements of Comprehensive Loss

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

Item 3.

Defaults Upon Senior Securities

50

Item 4.

Mine Safety Disclosures

50

Item 5.

Other Information

50

Item 6.

Exhibits

51

Signatures

52

 

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

 

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

 

 

June 30, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,228

 

 

$

7,095

 

Short-term investments

 

 

37,503

 

 

 

73,688

 

Accounts receivable

 

 

6,145

 

 

 

2,141

 

Inventories

 

 

2,970

 

 

 

1,028

 

Prepaid expenses

 

 

4,863

 

 

 

4,022

 

Other current assets

 

 

7,138

 

 

 

6,710

 

Restricted cash

 

 

400

 

 

 

400

 

Total current assets

 

 

66,247

 

 

 

95,084

 

Restricted cash, net of current portion

 

 

12,447

 

 

 

10,000

 

Property and equipment, net

 

 

5,638

 

 

 

5,843

 

Intangible assets, net

 

 

5,665

 

 

 

6,080

 

Total assets

 

$

89,997

 

 

$

117,007

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and other accrued liabilities

 

$

9,535

 

 

$

7,350

 

Accrued compensation

 

 

2,685

 

 

 

4,626

 

Sales rebates and discounts payable

 

 

953

 

 

 

623

 

Current portion of long-term debt

 

 

4,167

 

 

 

3,333

 

Other short-term liabilities

 

 

762

 

 

 

2,578

 

Total current liabilities

 

 

18,102

 

 

 

18,510

 

Long-term debt, net

 

 

15,400

 

 

 

15,728

 

Other liabilities

 

 

465

 

 

 

734

 

Total liabilities

 

 

33,967

 

 

 

34,972

 

 

 

 

 

 

 

 

 

 

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; 22,667,873

   and 21,605,716 shares issued and outstanding at June 30, 2018 and

   December 31, 2017, respectively

 

 

23

 

 

 

22

 

Additional paid-in capital

 

 

156,760

 

 

 

155,837

 

Accumulated other comprehensive loss

 

 

(36

)

 

 

(105

)

Accumulated deficit

 

 

(100,717

)

 

 

(73,719

)

Total stockholders' equity

 

 

56,030

 

 

 

82,035

 

Total liabilities and stockholders' equity

 

$

89,997

 

 

$

117,007

 

 

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

 

2


 

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

6,826

 

 

$

3,512

 

 

$

10,897

 

 

$

5,626

 

Collaborations

 

 

 

 

 

14

 

 

 

 

 

 

42

 

Total revenues

 

 

6,826

 

 

 

3,526

 

 

 

10,897

 

 

 

5,668

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

2,534

 

 

 

2,968

 

 

 

4,315

 

 

 

1,241

 

Research and development

 

 

9,713

 

 

 

6,787

 

 

 

17,912

 

 

 

12,660

 

Selling, general and administrative

 

 

7,023

 

 

 

8,420

 

 

 

14,616

 

 

 

18,547

 

Loss from operations

 

 

(12,444

)

 

 

(14,649

)

 

 

(25,946

)

 

 

(26,780

)

Other expense from continuing operations

 

 

(711

)

 

 

(514

)

 

 

(1,118

)

 

 

(920

)

Loss before income taxes

 

 

(13,155

)

 

 

(15,163

)

 

 

(27,064

)

 

 

(27,700

)

Benefit from income taxes

 

 

 

 

 

996

 

 

 

 

 

 

1,819

 

Net loss from continuing operations

 

 

(13,155

)

 

 

(14,167

)

 

 

(27,064

)

 

 

(25,881

)

Discontinued operations (Note 2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, before income

   taxes

 

 

11

 

 

 

3,974

 

 

 

65

 

 

 

6,566

 

Income tax expense

 

 

 

 

 

(996

)

 

 

 

 

 

(1,819

)

Income from discontinued operations

 

 

11

 

 

 

2,978

 

 

 

65

 

 

 

4,747

 

Net loss

 

$

(13,144

)

 

$

(11,189

)

 

$

(26,999

)

 

$

(21,134

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations

 

$

(0.58

)

 

$

(0.67

)

 

$

(1.21

)

 

$

(1.23

)

Net income from discontinued operations

 

$

 

 

$

0.14

 

 

$

 

 

$

0.22

 

Net loss

 

$

(0.58

)

 

$

(0.53

)

 

$

(1.21

)

 

$

(1.01

)

Weighted-average shares used to compute per share

   calculations

 

 

22,588,334

 

 

 

21,265,599

 

 

 

22,308,356

 

 

 

21,012,760

 

 

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

 

 

3


 

Aptevo Therapeutics Inc.

CONDENSED COLSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, unaudited)

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(13,144

)

 

$

(11,189

)

 

$

(26,999

)

 

$

(21,134

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale investments,

   net

 

 

47

 

 

 

(6

)

 

 

69

 

 

 

(14

)

Total comprehensive loss

 

$

(13,097

)

 

$

(11,195

)

 

$

(26,930

)

 

$

(21,148

)

 

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,

 

 

 

2018

 

 

2017

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(26,999

)

 

$

(21,134

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

1,166

 

 

 

2,779

 

Depreciation and amortization

 

 

1,187

 

 

 

1,716

 

Non-cash interest expense

 

 

506

 

 

 

459

 

Other

 

 

(28

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,004

)

 

 

(1,232

)

Inventories

 

 

(1,942

)

 

 

(1,467

)

Prepaid expenses and other current assets

 

 

(1,360

)

 

 

(301

)

Accounts payable, accrued compensation and other liabilities

 

 

(1,510

)

 

 

(5,139

)

Assets and liabilities held for sale

 

 

 

 

 

(217

)

Net cash used in operating activities

 

 

(32,984

)

 

 

(24,536

)

Investing Activities

 

 

 

 

 

 

 

 

Proceeds from the maturity of investments

 

 

52,843

 

 

 

29,189

 

Cash received from sale of Hyperimmune Business

 

 

65

 

 

 

 

Purchases of property and equipment

 

 

(567

)

 

 

(970

)

Purchases of investments

 

 

(16,534

)

 

 

(10,279

)

Net cash provided by investing activities

 

 

35,807

 

 

 

17,940

 

Financing Activities

 

 

 

 

 

 

 

 

Settlement of contribution receivable from former parent

 

 

 

 

 

20,000

 

Common stock issued upon exercise of stock options

 

 

564

 

 

 

 

Payment of tax liability for vested equity awards

 

 

(807

)

 

 

(811

)

Net cash (used in) provided by financing activities

 

 

(243

)

 

 

19,189

 

Increase in cash, cash equivalents, and restricted cash

 

 

2,580

 

 

 

12,593

 

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

 

 

17,495

 

 

 

10,076

 

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

 

$

20,075

 

 

$

22,669

 

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

 

 

5


 

Aptevo Therapeutics Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Note 1. Nature of Business and Significant Accounting Policies

Organization and Basis of Presentation

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

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

On September 28, 2017, Aptevo completed the sale of its hyperimmune business which consisted of the following products: WinRho® SDF for autoimmune platelet disorder and hemolytic disease of the newborn; HepaGam B® for the prevention of Hepatitis B following liver transplantation and for treatment following hepatitis B exposure; and VARIZIG® for treatment following exposure to varicella zoster virus for individuals with compromised immune systems (Hyperimmune Business). The Hyperimmune Business met all the conditions to be classified as a discontinued operation since the sale of Hyperimmune Business represented a strategic shift that will have a major effect on the Company’s operations and financial results. Aptevo will not have further significant involvement in the operations of the discontinued Hyperimmune Business. The operating results of the Hyperimmune Business are reported as income from the discontinued operations, both pre-tax and net of tax, in the consolidated statements of operations for the six months ended June 30, 2017 reporting period. See Note 2 - Sale of Hyperimmune Business for additional information.

Use of Estimates

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

Accounts Receivable

Aptevo records accounts receivable net of an allowance for doubtful accounts based upon its assessment of collectability, and of applicable discounts. Aptevo performs ongoing credit evaluations of its customers and generally does not require collateral.

 

Revenue Recognition

 

Effective January 1, 2018, we adopted Financial Accounting Standards Board (FASB) Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) on a modified retrospective basis, which required the cumulative effect of the adoption to be recognized as an adjustment to opening retained earnings in the first period of 2018. For Aptevo, there was no financial impact for the cumulative effect of this change, and therefore there was no adjustment to opening retained earnings. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaborative arrangements and financial instruments. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services.  To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. 

We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customers. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and identify, as a performance obligation, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

6


 

Product Revenue, Net

Aptevo has one marketed commercial product, IXINITY, a coagulation factor IX (recombinant) therapeutic indicated in adults and children 12 years of age and older with hemophilia B for control and prevention of bleeding episodes, and management of bleeding during operations.  

We sell IXINITY to a limited number of specialty distributors in the United States, collectively, our customers. These customers subsequently resell IXINITY to health care providers and patients. Revenue from product sales are recognized when the customer obtains control of the IXINITY product. Our customers provide us with a new order for every purchase of goods. This incorporates the terms and conditions of the contract, including pricing. Acceptance of the order is the point at which we are obligated to provide the product, and we have determined that each order represents a unique performance obligation. Product revenue is recorded at the amount we expect to receive, which is net of any rebates or chargebacks.

Reserves for Variable Consideration

We have identified the following fees, discounts and rebates that result in consideration being variable: chargebacks, distributor and Government Purchasing Organizations (GPO) fees, government rebates, return rights, and patient assistance. As part of determining variable consideration we noted that although the distributors are our customers, there are additional indirect customers in the distribution chain to whom we make payments.  These indirect customers are not customers; however, unless a distinct good or service is provided to us, payments to these indirect customers need to be accounted for as a reduction in the transaction price, and therefore constitute an element of variable consideration, under Topic 606.  Further, if material, we would also account for returns as variable consideration.  

These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the Customer) or a current liability (if the amount is payable to a party other than a Customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

We have established reserves for the following types of variable consideration:

Chargebacks: We make payments to customers (in the form of credit memos) which are based on the difference between the price paid by the distributor and contracted prices paid by the authorized customers of the distributor. Specialty pharmacies, GPOs and other smaller specialty distributors buy the product from the distributors at prices agreed to in contracts with us, or if they are eligible, at government established prices (PHS/Medicaid/Medicare/VA prices). When the distributor sells the product at contracted prices lower than their acquisition price, the distributor is allowed to charge the difference between their price and the contract price paid by their customer to Aptevo. We referred to this as a “Chargeback”.

These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by Customers, and we generally issue credits for such amounts within a few weeks of the Customer’s notification to us of the resale. Reserves for chargebacks consist of credits we expect to issue for units that remain in the distribution channel inventories at each reporting period end that we expect will be sold to qualified healthcare providers, and chargebacks that Customers have claimed but for which we have not yet issued a credit.

Distribution and Data Fees – We pay fees (in the form of direct payments) to the distributors and some GPOs (indirect customers) for distribution of the products and for transmission of data. Fees owed to our distributors is based on their purchases and is calculated as a direct percent of quarterly purchases. Although fees can vary from distributor to distributor, the fees associated with a specific sale is known at the time of the sale. Fees owed to GPOs are determined based on history, and other factors such as contracting strategy or a shift in sales to certain channels which may impact the provider mix.

Government Rebates: Certain sales by the specialty pharmacies and GPOs are to qualified PHS/Medicaid/Medicare/VA and other government patients. We have contracts with these agencies that require rebates for sales made under these programs. We estimate our Medicaid and Medicare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product

7


 

revenue and the establishment of a current liability that is included in accrued expenses on the consolidated balance sheet. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. Our liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but remains in the distribution channel inventories at period end.

Commercial Rebates: We currently offer the option to receive a rebate based on volume thresholds. This discount is estimated at the time of the sale and is based on the terms of the Customer agreements. There are minimum volume requirements in order to receive this rebate, which varies per Customer.

Cash Discounts: All customers have the option to receive a cash discount for early payment. Currently cash discounts are two-percent of the invoice amount if the payment is made within ten days.

Patient Assistance: All patients are eligible for the IXINITY Savings Program, which provides for up to $12,000 annual benefit to assist with co-payments. Historically, this has been insignificant to our revenue as the total benefit provided since sales of IXINITY commenced in 2015 has been less than $0.1 million.

The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue, but remains in the distribution channel inventories at period end.

Returns: If product is damaged in shipment (either observable or hidden), or the incorrect number of units was shipped (for example, if the customer ordered 1 unit and 10 were shipped) these are allowable returns under our Return Policy (a component of the distributor agreements). However, as product is generally received by the distributors within 1 business day, and product damage is usually noted upon inspection, we would not recognize revenue on those shipments as part of our normal revenue recognition process. To date there has not been any such damaged product and we expect any such issues to be rare; however, if returns were to become significant a reserve estimate would be developed and accounted for as a reduction of revenue. See Note 11 – Revenue Reserves for additional information.

 

Reclassifications

 

Our financial statements reflect all adjustments that we consider to be necessary for the fair presentation of our results, due to changes in accounting policies, sale of our Hyperimmune Business, and the reclassification of restricted cash.

Income Taxes

Income taxes are accounted for using the liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and research and development tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled.

Aptevo’s ability to realize deferred tax assets depends upon future taxable income as well as the limitations discussed below. For financial reporting purposes, a deferred tax asset must be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized prior to expiration. Aptevo considers future taxable income and ongoing tax planning strategies in assessing the need for valuation allowances. In general, if Aptevo determines that it is more likely than not to realize more than the recorded amounts of net deferred tax assets in the future, Aptevo will reverse all or a portion of the valuation allowance established against its deferred tax assets, resulting in a decrease to the provision for income taxes in the period in which the determination is made. Likewise, if Aptevo determines that it is not more likely than not to realize all or part of the net deferred tax asset in the future, Aptevo will establish a valuation allowance against deferred tax assets, with an offsetting increase to the provision for income taxes, in the period in which the determination is made.

Because tax laws are complex and subject to different interpretations, significant judgment is required. As a result, Aptevo makes certain estimates and assumptions, in (1) calculating Aptevo’s income tax expense, deferred tax assets and deferred tax liabilities, (2) determining any valuation allowance recorded against deferred tax assets and (3) evaluating the amount of unrecognized tax benefits, as well as the interest and penalties related to such uncertain tax positions. Aptevo’s estimates and assumptions may differ significantly from tax benefits ultimately realized.

8


 

New Accounting Pronouncements

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

 

In December 2017, the SEC issued Staff Accounting Bulletin (SAB) 118 to address the application of U.S. GAAP in situations in which a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (the Tax Reform Act) which was signed into law on December 22, 2017. In March 2018, the FASB issued ASU 2018-05, which amended ASC 740 to incorporate the requirements of SAB 118. We recognized the provisional tax impacts of the Tax Reform Act in the fourth quarter of 2017. During the first six months of 2018, we did not receive any additional information regarding these provisional calculations. As a result, we continue to anticipate finalizing our analysis in connection with the completion of our tax return for 2017 to be filed in 2018.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting, which aligns the accounting for share-based payment awards issued to employees and nonemployees. Under ASU 2018-07, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The new standard is effective on January 1, 2019, and early adoption is permitted, including in interim periods, and should be applied to all new awards granted after the date of adoption. We are currently assessing the potential impact this ASU will have on our consolidated results of operations, financial position, and cash flows.

Recently Adopted Standards

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and has subsequently issued a number of amendments to ASU 2014-09. We adopted this standard effective January 1, 2018 on a modified retrospective basis. The new standard as amended, provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, included industry-specific guidance.  

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted cash. This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents when reconciling the beginning-of and ending-of period total amounts shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted this standard effective January 1, 2018. Upon adoption of this standard, we applied the retrospective transition method for each period presented. As a result of this adoption we adjusted our consolidated statement of cash flows to include $10.4 million of restricted cash at December 31, 2017 and $12.8 million in restricted cash at June 30, 2018. See Note 5 – Cash, cash equivalents, and restricted cash for additional information.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies the classification and presentation of eight specific cash flow issues in the statement of cash flows. We adopted this standard effective January 1, 2018. Adoption of this standard had no impact on our condensed consolidated statements of cash flows or related disclosures.    

Note 2. Sale of Hyperimmune Business

 

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

 

9


 

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

 

The net gain on sale of the Hyperimmune Business totaling, $52.7 million, was calculated as the difference between the fair value of the consideration received for the Hyperimmune Business, the carrying value of the net assets transferred to Saol, less the transaction costs incurred and a working capital adjustment. The net gain on sale of the business may be adjusted in future periods by the contingent consideration based upon the achievement of certain gross profit milestones and collection of certain outstanding accounts receivable. In the first half of 2018, we recorded $0.1 million of these receivables, which is the amount recorded in other income from discontinued operations.

 

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

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

Product sales

 

$

 

 

$

7,238

 

 

$

 

 

$

12,506

 

Total revenues

 

 

 

 

 

7,238

 

 

 

 

 

 

12,506

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

 

 

 

2,929

 

 

 

 

 

 

5,143

 

Research and development

 

 

 

 

 

1

 

 

 

 

 

 

41

 

Selling, general and administrative

 

 

 

 

 

334

 

 

 

 

 

 

756

 

Income from operations

 

 

 

 

 

3,974

 

 

 

 

 

 

6,566

 

Other income

 

 

11

 

 

 

 

 

 

65

 

 

 

 

Income from discontinued operations, before income taxes

 

 

11

 

 

 

 

 

 

65

 

 

 

 

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

(1,819

)

Income from discontinued operations

 

$

11

 

 

$

3,974

 

 

$

65

 

 

$

4,747

 

 

 

In the first half of 2018, we recorded $0.1 million due to the collection of certain accounts receivable transferred to Saol during the sale. Amortization for the Hyperimmune Business was $0.3 million for the three months ended June 30, 2017, and $0.6 million for the six months ended June 30, 2017. There was no depreciation, capital expenditures or other significant operating or investing non-cash items for the three and six months ended June 30, 2018.

 

Note 3. Collaboration Agreements

Alligator

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

 

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

 

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

10


 

 

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

 

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

We assessed the arrangement in accordance with Topic 606 and concluded that the contract counterparty, Alligator, is not a customer. As such the arrangement is not in the scope of Topic 606 and is instead treated as a collaborative agreement under Topic 808. For the six months ended June 30, 2018, we incurred a higher share of the research and development costs than those of Alligator which netted to $0.1 million and is reflected as a reduction in our research and development expenses.  

MorphoSys

In August 2014, Aptevo entered into a collaboration agreement with MorphoSys AG (MorphoSys Agreement) for the joint development of MOR209/ES414, a targeted immunotherapeutics protein, which activates host T-cell immunity specifically against cancer cells expressing prostate specific membrane antigen, an antigen commonly overexpressed on prostate cancer cells. Effective August 31, 2017, MorphoSys terminated the MorphoSys Agreement. As a result of the termination, Aptevo has no ongoing obligation related to this agreement.

For the three and six months ended June 30, 2017, the MorphoSys Agreement related revenue was less than $0.1 million and the related total deferred revenue balance was $3.7 million as of June 30, 2017.

 

Note 4. Fair Value Measurements

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

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

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

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

11


 

The Company’s financial assets measured at fair value consisted of the following as of June 30, 2018 and December 31, 2017:

 

 

 

June 30, 2018

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

14,269

 

 

$

 

 

$

 

 

$

14,269

 

Corporate bonds

 

 

 

 

 

8,563

 

 

 

 

 

 

8,563

 

US government and agency debt securities

 

 

 

 

 

14,956

 

 

 

 

 

 

14,956

 

Foreign government and agency debt securities

 

 

 

 

 

13,984

 

 

 

 

 

 

13,984

 

Total assets

 

$

14,269

 

 

$

37,503

 

 

$

 

 

$

51,772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

10,997

 

 

$

 

 

$

 

 

$

10,997

 

Corporate bonds

 

 

 

 

 

16,443

 

 

 

 

 

 

16,443

 

US government and agency debt securities

 

 

 

 

 

33,300

 

 

 

 

 

 

33,300

 

Foreign government and agency debt securities

 

 

 

 

 

23,945

 

 

 

 

 

 

23,945

 

Total assets

 

$

10,997

 

 

$

73,688

 

 

$

 

 

$

84,685

 

 

If quoted market prices in active markets for identical assets are not available to determine fair value, then the Company uses quoted prices of similar instruments and other significant inputs derived from observable market data obtained from third-party data providers. These investments are included in Level 2 and consist of debt securities of U.S government agencies and corporate bonds. There were no transfers between Levels 1 and 2 during the three-month and six-month periods ended June 30, 2018.

 

 

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 with commercial banks and financial institutions. Restricted cash, current portion, includes $0.4 million maintained in depository as collateral for corporate credit cards. In addition, we have long-term restricted cash of $10.0 million related to the minimum cash covenant included in the Company’s Credit and Security Agreement (the Credit Agreement) with MidCap Financial Trust, and $2.4 million securing letters of credit.

The following table shows our cash, cash equivalents and restricted cash, both current and long-term portion as of June 30, 2018 and December 31, 2017:

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2018

 

 

2017

 

Cash

 

$

4,163

 

 

$

6,098

 

Cash equivalents

 

 

3,065

 

 

 

997

 

Restricted cash, current portion

 

 

400

 

 

 

400

 

Restricted cash, included in other long-term assets

 

 

12,447

 

 

 

10,000

 

Total cash, cash equivalents, and restricted cash

 

$

20,075

 

 

$

17,495

 

 

12


 

Note 6. Investments

Investments are classified as available-for-sale securities and are carried at fair value with unrealized temporary holding gains and losses included in other comprehensive income or loss and as a net amount in accumulated other comprehensive income or loss until such gains and losses are realized. We did not recognize any realized gains or losses in net income during the three and six months ended June 30, 2018. Available-for-sale securities are written down to fair value through income whenever it is necessary to reflect other than temporary impairments. We have determined that the unrealized losses on our marketable securities as of June 30, 2018 were temporary in nature, and currently do not intend to sell these securities before recovery of their amortized cost basis. All short-term investments are limited to a final maturity of less than one year from the reporting date. Our money market funds as of June 30, 2018 and December 31, 2017, are inclusive of $10.0 million in restricted cash.

 

 

 

June 30, 2018

 

(in thousands)

 

Amortized

Cost

 

 

Gross Unrealized

Holding Gains

 

 

Gross Unrealized

Holding (Losses)

 

 

Fair Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market fund

 

$

14,269

 

 

$

 

 

$

 

 

$

14,269

 

Total cash equivalents

 

$

14,269

 

 

$

 

 

$

 

 

$

14,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

8,569

 

 

$

 

 

$

(6

)

 

$

8,563

 

US government and agency debt securities

 

 

14,968

 

 

 

 

 

 

(12

)

 

 

14,956

 

Foreign government and agency debt securities

 

 

14,002

 

 

 

 

 

 

(18

)

 

 

13,984

 

Total short-term investments

 

$

37,539

 

 

$

 

 

$

(36

)

 

$

37,503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

(in thousands)

 

Amortized

Cost

 

 

Gross Unrealized

Holding Gains

 

 

Gross Unrealized

Holding (Losses)

 

 

Fair Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market fund

 

$

10,997

 

 

$

 

 

$

 

 

$

10,997

 

Total cash equivalents

 

$

10,997

 

 

$

 

 

$

 

 

$

10,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

16,455

 

 

$

 

 

$

(12

)

 

$

16,443

 

US government and agency debt securities

 

$

33,331

 

 

 

 

 

 

(31

)

 

$

33,300

 

Foreign government and agency debt securities

 

 

24,007

 

 

 

 

 

 

(62

)

 

 

23,945

 

Total short-term investments

 

$

73,793

 

 

$

 

 

$

(105

)

 

$

73,688

 

 

Note 7. Inventories

Inventories consist of the following:

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2018

 

 

2017

 

Raw materials and supplies

 

$

46

 

 

$

56

 

Work-in-process

 

 

2,860

 

 

 

482

 

Finished goods

 

 

64

 

 

 

490

 

Total inventories

 

$

2,970

 

 

$

1,028

 

 

Note 8. Debt

 

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

 

13


 

Pursuant to the second Amendment, the agent and the lenders consented to the LLC purchase agreement and the consummation of the sale transaction, released the agent’s liens on the assets transferred to one of our subsidiaries prior to the sale, and agreed that no prepayment of the term loans under the credit agreement would be required as a result the sale. As part of the second amendment, the agent and the lenders agreed that: (i) the commitments of the lenders to make the remaining $15.0 million tranche of loans under the credit agreement were terminated, (ii) the covenant levels set forth in the minimum net commercial product revenue covenant were revised, (iii) a new covenant requiring us to maintain a minimum $10.0 million unrestricted cash balance, and (iv) the date on which the term loans begin to amortize would be extended to February 1, 2019 if we achieved net commercial product revenues of $16.0 million for the twelve month period ending June 30, 2018 and maintain such level of net commercial product revenues for each quarter prior to February 1, 2019 thereafter. As we achieved net commercial product revenues of $16.2 million for the twelve month period ending June 30, 2018, our principal repayments have been deferred to February 1, 2019.

 

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

 

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

 

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

 

 

Note 9. Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding for the period.

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. 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 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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(13,144

)

 

$

(11,189

)

 

$

(26,999

)

 

$

(21,134

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations

 

$

(0.58

)

 

$

(0.67

)

 

$

(1.21

)

 

$

(1.23

)

Net income from discontinued operations

 

$

 

 

$

0.14

 

 

$

 

 

$

0.22

 

Net loss

 

$

(0.58

)

 

$

(0.53

)

 

$

(1.21

)

 

$

(1.01

)

Weighted-average shares used to compute per share calculations

 

 

22,588,334

 

 

 

21,265,599

 

 

 

22,308,356

 

 

 

21,012,760

 

14


 

 

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:

 

 

 

For the Six Months Ended June 30,

 

(in thousands)

 

2018

 

 

2017

 

Outstanding options to purchase common stock

 

 

3,371

 

 

 

3,020

 

Unvested RSUs

 

 

147

 

 

 

1,450

 

 

Note 10. Equity

 

Common Stock

 

For the six months ended June 30, 2018, we received proceeds $0.6 million upon the exercise of stock options which resulted in the issuance of 254,086 shares of common stock. For the six months ended June 30, 2017 there was no proceeds from the exercise of stock options and no issuance of shares of common stock.

 

 

 

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 1.3 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 3.1 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 Global Market on the date of grant.

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 an eighteen-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 1.3 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 replaces 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 2.9 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

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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 3,711,620 shares. The 2018 SIP was previously approved, subject to stockholder approval, by the Board of Directors of the Company. As of June 30, 2018, there are 2.8 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 Global 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)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development

 

$