apvo-10q_20190331.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 March 31, 2019

OR

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

 

For the transition period from               to               

 

Commission File Number: 001-37746

 

APTEVO THERAPEUTICS INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

81-1567056

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

2401 4th Avenue, Suite 1050

Seattle, Washington

98121

(Address of principal executive offices)

(Zip Code)

 

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

 

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  

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 Global Market)

As of May 7, 2019, the number of shares of the registrant’s common stock outstanding was 45,090,219.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Comprehensive Loss

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity

7

 

Notes to Condensed Consolidated Financial Statements

8

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

Controls and Procedures

26

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

27

Item 1A.

Risk Factors

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 3.

Defaults Upon Senior Securities

51

Item 4.

Mine Safety Disclosures

51

Item 5.

Other Information

51

Item 6.

Exhibits

52

Signatures

53

 

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)

 

 

 

March 31, 2019

 

 

December 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37,011

 

 

$

30,635

 

Accounts receivable

 

 

5,801

 

 

 

5,220

 

Inventories

 

 

4,346

 

 

 

1,785

 

Prepaid expenses

 

 

6,923

 

 

 

6,907

 

Other current assets

 

 

3,561

 

 

 

4,142

 

Total current assets

 

 

57,642

 

 

 

48,689

 

Restricted cash

 

 

7,448

 

 

 

7,448

 

Property and equipment, net

 

 

4,978

 

 

 

5,202

 

Intangible assets, net

 

 

5,043

 

 

 

5,250

 

Operating lease right-of-use asset

 

 

4,481

 

 

 

 

Other assets

 

 

1,249

 

 

 

905

 

Total assets

 

$

80,841

 

 

$

67,494

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,043

 

 

$

11,671

 

Accrued compensation

 

 

5,042

 

 

 

3,898

 

Sales rebates and discounts payable

 

 

857

 

 

 

1,245

 

Other short-term liabilities

 

 

1,348

 

 

 

796

 

Total current liabilities

 

 

18,290

 

 

 

17,610

 

Long-term debt, net

 

 

19,415

 

 

 

19,278

 

Operating lease liability, net of current portion

 

 

3,995

 

 

 

 

Other liabilities

 

 

11

 

 

 

200

 

Total liabilities

 

 

41,711

 

 

 

37,088

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   issued or outstanding

 

 

 

 

 

 

Common stock: $0.001 par value; 500,000,000 shares authorized; 45,090,219

   and 22,808,416 shares issued and outstanding at March 31, 2019 and

   December 31, 2018, respectively

 

 

45

 

 

 

23

 

Additional paid-in capital

 

 

178,511

 

 

 

157,791

 

Accumulated deficit

 

 

(139,426

)

 

 

(127,408

)

Total stockholders' equity

 

 

39,130

 

 

 

30,406

 

Total liabilities and stockholders' equity

 

$

80,841

 

 

$

67,494

 

 

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

 

3


 

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

Product sales

 

$

7,022

 

 

$

4,071

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of product sales

 

 

3,847

 

 

 

1,781

 

Research and development

 

 

7,285

 

 

 

8,199

 

Selling, general and administrative

 

 

7,330

 

 

 

7,592

 

Loss from operations

 

 

(11,440

)

 

 

(13,501

)

Other expense, net

 

 

(578

)

 

 

(353

)

Net loss

 

$

(12,018

)

 

$

(13,854

)

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per basic share

 

$

(0.44

)

 

$

(0.63

)

Weighted-average shares used to compute per share

   calculations

 

 

27,567,584

 

 

 

22,025,268

 

 

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

 

 

4


 

Aptevo Therapeutics Inc.

CONDENSED COLSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Net loss

 

$

(12,018

)

 

$

(13,854

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Unrealized loss on available-for-sale investments,

   net

 

 

 

 

 

22

 

Total comprehensive loss

 

$

(12,018

)

 

$

(13,832

)

 

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

 

 

5


 

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(12,018

)

 

$

(13,854

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

594

 

 

 

717

 

Depreciation and amortization

 

 

583

 

 

 

587

 

Non-cash interest expense and other

 

 

198

 

 

 

60

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(581

)

 

 

(957

)

Inventories

 

 

(2,561

)

 

 

(257

)

Prepaid expenses and other current assets

 

 

121

 

 

 

97

 

Operating lease right of use asset

 

 

211

 

 

 

 

Accounts payable, accrued compensation and other liabilities

 

 

368

 

 

 

(3,371

)

Long-term operating lease liability

 

 

(371

)

 

 

 

Sales rebates and discounts

 

 

(388

)

 

 

 

Net cash used in operating activities

 

 

(13,844

)

 

 

(16,978

)

Investing Activities

 

 

 

 

 

 

 

 

Proceeds from the maturity of investments

 

 

 

 

 

25,929

 

Cash received from sale of Hyperimmune Business

 

 

 

 

 

54

 

Purchases of property and equipment

 

 

(153

)

 

 

(473

)

Purchases of investments

 

 

 

 

 

(1,998

)

Net cash (used in) provided by investing activities

 

 

(153

)

 

 

23,512

 

Financing Activities

 

 

 

 

 

 

 

 

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

 

 

20,410

 

 

 

 

Proceeds from exercise of common stock options

 

 

 

 

 

186

 

Proceeds from the exercise of pre-funded warrants

 

 

21

 

 

 

 

Payment of tax liability for vested equity awards

 

 

(58

)

 

 

(742

)

Net cash provided by (used in) financing activities

 

 

20,373

 

 

 

(556

)

Increase in cash, cash equivalents, and restricted cash

 

 

6,376

 

 

 

5,978

 

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

 

 

38,083

 

 

 

17,495

 

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

 

$

44,459

 

 

$

23,473

 

 

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

 

 

6


 

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share amounts, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance at December 31, 2018

 

 

22,808,416

 

 

$

23

 

 

$

157,791

 

 

 

 

$

(127,408

)

 

$

 

 

$

30,406

 

Issuance of common stock, pre-funded warrants and warrants, net

 

 

22,000,000

 

 

 

22

 

 

 

20,184

 

 

 

 

 

 

 

 

 

 

 

20,206

 

Issuance of commitment shares of common stock, non-cash transaction

 

 

195,867

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued upon vesting of restricted stock units

 

 

85,936

 

 

 

 

 

 

(58

)

 

 

 

 

 

 

 

 

 

 

(58

)

Stock-based compensation

 

 

 

 

 

 

 

 

594

 

 

 

 

 

 

 

 

 

 

 

594

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,018

)

 

 

 

 

 

(12,018

)

Balance at March 31, 2019

 

 

45,090,219

 

 

$

45

 

 

$

178,511

 

 

 

 

$

(139,426

)

 

$

 

 

$

39,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance at December 31, 2017

 

 

21,605,716

 

 

$

22

 

 

$

155,837

 

 

 

 

$

(73,719

)

 

$

(105

)

 

$

82,035

 

Unrealized losses on available-

   for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22

 

 

 

22

 

Common stock issued upon exercise of stock options

 

 

75,425

 

 

 

 

 

 

186

 

 

 

 

 

 

 

 

 

 

 

186

 

Common stock issued upon vesting of restricted stock units

 

 

760,833

 

 

 

 

 

 

 

(742

)

 

 

 

 

 

 

 

 

 

 

 

 

(742

)

Stock-based compensation

 

 

 

 

 

 

 

 

717

 

 

 

 

 

 

 

 

 

 

 

717

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,854

)

 

 

 

 

 

(13,854

)

Balance at March 31, 2018

 

 

22,441,974

 

 

$

22

 

 

$

155,998

 

 

 

 

$

(87,573

)

 

$

(83

)

 

$

68,364

 

 

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

7


 

Aptevo Therapeutics Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Note 1. Nature of Business and Significant Accounting Policies

Organization and Liquidity

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.

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

In accordance with Financial Accounting Standards Board, or the FASB, Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. As of May 9, 2019, there are not such conditions or events, as we expect our existing cash and cash equivalents will be sufficient to fund our operations through May 9, 2020.

 

In March 2019, we completed a public offering relating to the issuance and sale of 19,850,000 shares of our common stock and warrants to purchase up to 19,850,000 shares of common stock at an exercise price of $1.30 per share, as well as pre-funded warrants to purchase up to 2,150,000 shares of common stock at an exercise price of $0.01 per share and 2,150,000 of related warrants to purchase shares of common stock at $1.30 per share. We received net proceeds of $20.2 million, after underwriting fees, legal fees, and other expenses. If the remaining warrants are fully exercised in the future, additional proceeds to be received upon exercise of these warrants totals up to $28.6 million over the ten-year term of the warrants.

 

Our results of operations will be highly dependent on IXINITY sales unless or until we develop or partner any of our development stage product candidates, which we expect may take a number of years and is subject to significant uncertainty. If we obtain regulatory approval for one of our development stage product candidates, we expect to incur significant commercialization expenses related to sales, marketing, manufacturing and distribution, to the extent that such costs are not paid by collaborators. We do not have sufficient cash to complete the clinical development of any of our development stage product candidates and will require additional funding in order to complete the development activities required for regulatory approval of such product candidates.  While we may be able to access capital under our existing equity sales agreement with Lincoln Park Financial LLC or our Equity Distribution Agreement with Piper Jaffray, if we are unable to obtain additional financing when needed, or if IXINITY revenue growth does not continue or continue at the rates we expect, we may have to delay, reduce the scope of, suspend or eliminate one or more of our research and development programs.

 

Basis of Presentation

 

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

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

 

The condensed consolidated financial statements include the accounts of the company and its wholly owned subsidiaries: Aptevo Research and Development LLC; Aptevo BioTherapeutics LLC; and Aptevo Europe Limited. All intercompany balances and transactions have been eliminated.

8


 

Significant Accounting Policies

Leases

 

On January 1, 2019 we adopted ASU No. 2016-02, Leases (ASC 842), which amends the existing standards for lease accounting, requiring lessees to recognize most leases on their balance sheets and disclose key information about leasing arrangements. We adopted the new standard using a modified retrospective transition approach for the leases at the beginning of the current fiscal year, January 1, 2019. We did not adjust comparative periods in our financial statements prior to that period. See note 6 – Leases, of our condensed consolidated financial statements for additional information.

 

The new standard establishes a right-of-use model that requires a lessee to recognize an operating lease right-of-use asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases are to be classified as finance or operating at the lease commencement, which affects the classification of expense recognition in the income statement. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments, as agreed to in the lease. Operating lease liabilities are recognized at the date of lease commencement based on the present value of lease payments over the lease term. As leases may include options to extend the lease period, or options for early termination, when it is reasonably certain that an entity is going to exercise the renewal option, the additional payments are to be included in the lease’s terms. When it is reasonably certain that an early termination option will not be exercised, the lease’s terms are to be extended beyond the possible early termination date or dates.

 

The standard requires that we use our incremental borrowing rate (IBR) as the discount rate in our lease evaluation if a rate implicit in the lease cannot be identified. Due to the significant judgment involved and the complex analysis needed to determine this discount rate, we engaged a third-party valuation specialist to advise us in our determination of our IBR.

 

An operating right-of-use asset is measured as the amount of the initial measurement of the lease liability, adjusted for prepaid or accrued lease payments, the remaining balance of any lease incentive received, unamortized initial direct costs, and any impairment of the right-of-use asset. The initial measurement of the lease liabilities and right-to-use assets of finance leases is the same as for operating leases.

 

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

 

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

 

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

 

Other Significant Accounting Policies

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

Recently Adopted Standards

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842). Under the new guidance, lessees are 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. We adopted this standard on January 1, 2019 and applied the practical expedients thereby continuing to account for leases that commenced before the effective date in accordance with previous GAAP. See note 1 – Significant Accounting Policies, and note 6 – Lease of our condensed consolidated financial statements, for further information.  

 

9


 

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (ASC 718) – Improvements to Non-employee 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 used in lieu of an expected term in the option-pricing model for nonemployee awards. We adopted this on January 1, 2019, and there was no impact on our consolidated results of operations, financial position, and cash flows.

In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. Among the amendments is the requirement to present any changes in shareholders’ equity in the interim financial statements, either in a separate statement or footnote in the quarterly reports on Form 10-Q. The amendments became effective on November 5, 2018. We have included a separate statement, the Condensed Consolidated Statements of Changes in Stockholders’ Equity in this Quarterly Report on Form 10Q.

 

Note 2. Collaboration Agreements

Alligator

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

 

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 ASC 606 and concluded that the contract counterparty, Alligator, is not a customer. As such the arrangement is not in the scope of ASC 606 and is instead treated as a collaborative agreement under ASC 808. For the three months ended March 31, 2019, we recorded a reduction in our research and development expense of $0.4 million and for the three months ended March 31, 2018, we recorded an increase in our research and development expense of less than $0.1 million related to the collaboration arrangement.

 

10


 

Note 3. Fair Value Measurements

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

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

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

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

 

At March 31, 2019 and December 31, 2018, we had $34.1 million and $29.0 million in money market funds, respectively.

The carrying amounts of our money market funds approximate their fair value. At March 31, 2019, we did not have any level two or level three assets.

 

 

Note 4. Cash, Cash Equivalents, and Restricted Cash

 

The Company’s cash equivalents are highly liquid investments with a maturity of 90 days or less at the date of purchase and include time deposits and investments in money market funds. Restricted cash, long-term includes $5.0 million related to the minimum cash covenant included in the Company’s Credit and Security Agreement (the Credit Agreement) with MidCap Financial Trust, and $2.4 million securing letters of credit.

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

 

 

 

March 31,

 

 

December 31,

 

(in thousands)

 

2019

 

 

2018

 

Cash

 

$

7,864

 

 

$

6,588

 

Cash equivalents

 

 

29,147

 

 

 

24,047

 

Restricted cash

 

 

7,448

 

 

 

7,448

 

Total cash, cash equivalents, and restricted cash

 

$

44,459

 

 

$

38,083

 

 

 

Note 5. Inventories

Inventories consist of the following:

 

 

 

March 31,

 

 

December 31,

 

(in thousands)

 

2019

 

 

2018

 

Raw materials and supplies

 

$

162

 

 

$

194

 

Work-in-process

 

 

4,023

 

 

 

916

 

Finished goods

 

 

161

 

 

 

675

 

Total inventories

 

$

4,346

 

 

$

1,785

 

 

 

 

Note 6. Leases

 

Office Space Lease - Operating

 

In 2003, we entered into a lease for our corporate headquarters located in Seattle, Washington. This lease has been amended multiple times to add additional space and extend the lease term. Amendment number seven, became effective on September 1, 2014 and expires on April 30, 2020, covering 50,466 square feet of office, laboratory, and meeting space. We are required to pay a proportionate share of certain operating expenses as defined in the agreement with the lessor and a proportionate share of the real estate taxes as assessed. We received a tenant improvement allowance that was settled in June 2017 and which we elected to amortize

11


 

as a reduction in rent over the remaining term of the lease. The lease has a two-year renewal option at fair market value on the date of renewal and a termination option by giving nine months’ notice and a penalty equal to the unamortized tenant improvement allowance, the unamortized real estate fee, and the market value of free parking. For the three months ended  March 31, 2019, we recorded $0.4 million in lease expense, including $0.1 million for variable payments.

 

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

 

On March 19, 2019, we entered into a new lease amendment, number eight, for our current headquarters in Seattle, Washington. This amendment extended the terms of the lease for ten years, until April 30, 2030, and reduced the total square footage of our office space to 47,692 after May 1, 2020. 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.  In March 2019, we recorded an increase to our right-of-use asset for this lease amendment of $3.2 million which reflects the amount of the remaining lease liability through April 30, 2023, less the balance of accrued and deferred rent, and net of the unamortized balance of tenant incentives. In March 2019, we also recorded an increase to our lease liability for this lease amendment of $3.2 million which reflects the present value of the remaining lease payments through April 30, 2023, discounted using our incremental borrowing rate of 14.45% for the remaining term of the lease on the date of amendment.

 

This new amendment 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.

Equipment Leases - Operating

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

Equipment Lease – Financing

As of January 1, 2019, we had one equipment lease classified as a financing lease as the lease transfers ownership of the underlying asset to us at the end of the lease term. At the adoption of the standard at January 1, 2019, we did not make any additional reclassification for this lease as the entire carrying amount had already been recorded as a capital lease obligation under ASC 840 – Leases. The remaining term of this lease is seventeen months and has a remaining expense obligation of less than $0.1 million. There were no financing lease payments in the three months ended March 31, 2019.  

 

Components of lease expense:

 

 

 

For the Three Months Ended March 31,

 

(in thousands)

 

2019

 

Operating lease cost

 

$

335

 

Finance lease cost:

 

 

 

 

Amortization of right-of-use assets

 

 

1

 

Interest on lease liabilities

 

 

1

 

Total lease cost

 

$

337

 

 

Supplemental cash flows information related to leases is as follows:

12


 

Right of use assets acquired under operating leases:

 

 

 

For the Three Months Ended March 31,

 

(in thousands)

 

2019

 

Operating leases, excluding Seattle office lease

 

$

345

 

Seattle office lease, including amendment

 

 

4,347

 

Total operating leases

 

$

4,692

 

 

Lease payments:

 

 

 

For the Three Months Ended March 31,

 

(in thousands)

 

2019

 

For operating leases

 

$

434

 

 

 

Future minimum payments as of March 31, 2019 are as follows:

 

(in thousands)

 

 

 

 

9 months ended December 31, 2019

 

$

1,310

 

12 months ended December 31, 2020

 

 

1,510

 

12 months ended December 31, 2021

 

 

1,387

 

12 months ended December 31, 2022

 

 

1,294

 

12 months ended December 31, 2023

 

 

1,399

 

Total Future minimum lease payments

 

 

6,900

 

Less: imputed interest

 

 

(1,824

)

Total

 

$

5,076

 

 

The long-term portion of the lease liabilities included in the amounts above is $4.0 million and the remainder of our lease liabilities are included in other current liabilities on our condensed consolidated balance sheets.

As of March 31, 2019, the weighted average remaining lease term and weighted discount rate for operating leases was 4.0 years and 14.56%.

Note 7. Debt

 

Credit Facility

 

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.

 

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, 2020.

 

13


 

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.

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

 

Additionally, this amendment is subject to a subjective acceleration clause, although we believe the likelihood of an acceleration of the due date for this obligation is remote.  

 

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

 

 

 

 

Note 8. Net Loss per Share

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

 

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

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

 

 

 

For the Three Months Ended March 31,

 

(in thousands)

 

2019

 

 

2018

 

Warrants

 

 

22,000

 

 

 

 

Outstanding options to purchase common stock

 

 

4,100

 

 

 

3,472

 

Unvested RSUs

 

 

10

 

 

 

196

 

 

Note 9. Equity

 

Common Stock

 

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

 

 

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

 

 

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

 

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

 

14


 

For the three months ended March 31, 2019, we issued 85,936 shares of common stock due to the vesting of RSUs. In addition, pursuant to our purchase agreement with Lincoln Park, we issued 195,867 of commitment shares in a non-cash transaction.

 

During the three months ended March 31, 2018, we received proceeds of $0.2 million upon the exercise of stock options which resulted in the issuance of 75,425 shares of common stock and issued 760,833 shares of common stock due to the vesting of restricted stock units.

 

 

Equity Distribution Agreement

 

On November 9, 2017, we entered into an Equity Distribution Agreement (the Equity Distribution Agreement) with Piper Jaffray & Co. (Piper Jaffray). The Equity Distribution Agreement provides that, upon the terms and subject to the conditions set forth therein, we may issue and sell through Piper Jaffray, acting as sales agent, shares of our common stock, $0.001 par value per share (the Common Stock) having an aggregate offering price of up to $17.5 million. We have no obligation to sell any such shares under the Equity Distribution Agreement. The sale of such shares of common stock by Piper Jaffray will be effected pursuant to a Registration Statement on Form S-3 which we filed on November 9, 2017. We issued 13,265 shares under the Equity Distribution Agreement in the fourth quarter of 2018, and no shares in the first quarter of 2019.

 

 

 

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

15


 

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 March 31, 2019, there are 2.0 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 March 31,

 

(in thousands)

 

2019

 

 

2018

 

Research and development

 

$

251

 

 

$

327

 

Selling, general and administrative

 

 

343

 

 

 

390

 

Total stock-based compensation expense

 

$

594

 

 

$

717

 

 

The Company accounts for stock-based compensation by measuring the cost of employee services received in exchange for all equity awards granted based on the fair value of the award as of the grant date. The Company recognizes the compensation expense over the vesting period.

Stock Options

Aptevo utilizes the Black-Scholes valuation model for estimating the fair value of all stock options granted. Set forth below are the assumptions used in valuing the stock options granted:

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Expected dividend yield

 

0.00%

 

 

0.00%

 

Expected volatility

 

75.00%

 

 

75.00%

 

Risk-free interest rate

 

2.52%

 

 

2.72%

 

Expected average life of options

 

7 years

 

 

6 years

 

 

Management has applied an estimated forfeiture rate of 10% for the periods presented.

 

The following is a summary of option activity for the three months ended March 31, 2019:

 

 

 

Number of

Shares

 

 

Weighted-

Average

Exercise Price

 

 

Weighted-

Average

Remaining Term

 

 

Aggregate

Intrinsic

Value

 

Balance at December 31, 2018

 

 

3,329,618

 

 

$

2.74

 

 

 

 

 

$

 

Granted

 

 

821,523

 

 

 

1.60

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(50,670

)

 

 

2.42

 

 

 

 

 

 

 

Outstanding at March 31, 2019

 

 

4,100,471

 

 

$

2.51

 

 

 

7.31

 

 

$

 

Exercisable at March 31, 2019

 

 

2,062,402

 

 

$

2.56

 

 

 

5.59

 

 

$

 

 

As of March 31, 2019, we had $2.6 million of unrecognized compensation expense related to options expected to vest over a weighted average period of 2.0 years. The weighted average remaining contractual life of outstanding and exercisable options is  5.6 years.

16


 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the closing stock price of Aptevo’s common stock on the last trading day of March 2019 and the exercise price, multiplied by the number of in the money options) that would have been received by the option holders had all the option holders exercised their options on the last trading day of the quarter. As of December 31, 2018, and March 31, 2019, we had no outstanding options with an exercise price below the trading price of our common stock.

Restricted Stock Units

The following is a summary of RSU activity for the three months ended March 31, 2019:

 

 

 

Number of

Units

 

 

Weighted

Average Fair

Value per Unit

 

 

Aggregate

Fair Value

 

Balance at December 31, 2018

 

 

133,040

 

 

$

2.97

 

 

$

168,961

 

Vested

 

 

123,442

 

 

 

2.94

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2019

 

 

9,618

 

 

$

3.38

 

 

$

8,991

 

Expected to Vest

 

 

9,618

 

 

$

3.38

 

 

$

8,991

 

 

As of March 31, 2019, we had less than $0.1 million of unrecognized compensation expense related to RSU’s, which will all be fully vested by May 10, 2019.

The fair value of each RSU has been determined to be the closing trading price of the Company’s common stock on the date of grant as quoted on the Nasdaq Global Market.

 

Warrants

In March 2019, as part of a public offering, we issued warrants to purchase up to 24,150,000 shares of our common stock, 22,000,000 of which have an exercise price of $1.30 per share and have a five-year life, and 2,150,000 of pre-funded warrants with an exercise price of $0.01 per share. The pre-funded warrants have a ten-year life and expire on March 11, 2029. The warrants with a $0.01 per share exercise price were exercised in March 2019. We determined the warrants do not meet liability classification pursuant to ASC 480 – Distinguishing Liabilities from Equity. There are therefore included within equity on our consolidated balance sheet. As of March 31, 2019, there were 22,000,000 outstanding.

 

Note 10. Revenue Reserves

The following table summarizes activity in each of our product revenue allowance and reserve categories for the three months ending March 31, 2019:

 

(in thousands)

 

Chargebacks and

Cash Discounts

 

 

Distribution Fees,

Rebates and Patient Assistance

 

Balance at December 31, 2018

 

$

(1,323

)

 

$

(865

)

Provision related to current period sales

 

 

(704

)

 

 

(923

)

Credit or payments made during the period

 

 

922

 

 

 

931

 

Balance at March 31, 2019

 

$

(1,105

)

 

$

(857

)

 

 

 

17


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements in this quarterly report, other than statements of historical facts, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, intentions, expectations and objectives could be forward-looking statements. The words “anticipates,” “believes,” “could,” “designed,” “estimates,” “expects,” “goal,” “intends,” “may,” “plans,” “projects,” “pursuing,” “will,” “would” and similar expressions (including the negatives thereof) are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, expectations or objectives disclosed in our forward-looking statements and the assumptions underlying our forward-looking statements may prove incorrect. Therefore, you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions, expectations and objectives disclosed in the forward-looking statements that we make. Factors that we believe could cause actual results or events to differ materially from our forward-looking statements include, but are not limited to, those discussed in “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this quarterly report. Our forward-looking statements in this quarterly report are based on current expectations and we do not assume any obligation to update any forward-looking statements.

You should read the following discussion and analysis together with the financial statements and the related notes to those statements included elsewhere in this quarterly report.

Overview

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

 

For the three months ended March 31, 2019, we had a net loss of $12.0 million, compared to the three months ended March 31, 2018, when we had a net loss $13.9 million. We had an accumulated deficit of $139.4 million as of March 31, 2019. For the three months ended March 31, 2019, net cash used in our operating activities was $13.8 million. On March 7, 2019, we completed a public offering relating to the issuance and sale of 19,850,000 shares of our common stock and warrants to purchase up to 19,850,000 shares of common stock at $1.30 per share, as well as pre-funded warrants to purchase up to 2,150,000 shares of common stock at an exercise prices of $0.01 per share and 2,150,000 of related warrants to purchase shares of common stock at $1.30 per share. We received net proceeds of $20.2 million, after underwriting fees, legal fees, and other expenses. If the remaining warrants are fully exercised in the future, additional proceeds to be received upon exercise of these warrants totals up to $28.6 million over the ten-year term of the warrants.

 

Although we expect our existing cash and cash equivalents will be sufficient to fund our operations for at least twelve months from the date of this filing, if we are unable to obtain additional financing when needed, we may have to delay, reduce the scope of, suspend or eliminate one or more of our research and development programs. Our results of operations will be highly dependent on IXINITY sales unless or until we develop or partner any of our development stage product candidates. We will not generate commercial revenues from our development stage product candidates unless and until we or our collaborators successfully complete development and obtain regulatory approval for such product candidates, which we expect will take a number of years and is subject to significant uncertainty. If we obtain regulatory approval for one of our development stage product candidates, we expect to incur significant commercialization expenses related to sales, marketing, manufacturing and distribution, to the extent that such costs are not paid by collaborators. We do not have sufficient cash to complete the clinical development of any of our development stage product candidates and will require additional funding in order to complete the development activities required for regulatory approval of such product candidates.

Pipeline Highlights

We have one marketed product, IXINITY coagulation factor IX (recombinant), 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 also have numerous investigational stage product candidates based on our ADAPTIR platform. The ADAPTIR platform technology can produce monospecific and multispecific immunotherapeutic proteins that specifically bind to one or more targets, for example, bispecific therapeutic molecules, which may have structural and functional advantages over monoclonal antibodies. The structural differences of ADAPTIR molecules over monoclonal antibodies allow for the development of ADAPTIR immunotherapeutics that engage immune effector cells and disease targets in a novel manner to produce unique signaling responses and ultimately kill tumors or modulate the immune system to kill tumors. We are skilled at product candidate generation, validation and subsequent preclinical and clinical development using the ADAPTIR platform. We have the ability to progress ADAPTIR molecules from concept to commercialization by way of our protein engineering, preclinical development and process development capabilities, cGMP manufacturing oversight and clinical development capabilities. We also have the ability to launch, market and commercialize these product candidates upon approval.

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Our investigational stage product candidates are:

 

 

APVO436, a bispecific ADAPTIR candidate targeting CD123, a cell surface receptor highly expressed on several hematological malignancies and CD3. APVO436 engages T cells to initiate killing of tumor cells.  We commenced a Phase 1/1b clinical trial in the United States in December 2018 in patients with AML and MDS. The objective of the trial is to evaluate safety, pharmacokinetics, and pharmacodynamics of APVO436 in patients. We anticipate that we will have anti-drug antibody (ADA) date in the third quarter of 2019, and preliminary Phase 1 safety data in the fourth quarter of 2019.

 

APVO210, a bispecific ADAPTIR preclinical candidate with a novel mechanism of action based on targeted cytokine delivery.  APVO210 is composed of a humanized anti-CD86 antibody fused with a modified form of IL-10 that specifically induces IL-10 signaling on antigen presenting cells, but not on lymphoid populations. APVO210 functions by suppressing immune responses and inducing certain tolerogenic responses and therefore may have potential benefit for the treatment of autoimmune and inflammatory diseases. We initiated a Phase 1 clinical trial in Australia in March 2019. The Phase 1 clinical trial will evaluate safety, tolerability, pharmacokinetics and pharmacodynamics of APVO210 in healthy volunteers. The trial will consist of two stages.  Stage 1 will consist of up to 64 healthy volunteers receiving a single ascending dose. Stage 2 will consist of up to 40 healthy volunteers receiving multiple ascending doses. For both stages of the Phase 1 clinical trial, healthy volunteers will receive APVO210 or placebo administered by intravenous infusion. We anticipate that initial results of APVO210 single dose cohorts will be available in the third quarter of 2019, and that preliminary Phase 1 data will be available in the fourth quarter of 2019 for cohorts enrolled by the beginning of fourth quarter of 2019.

 

ALG.APV-527, a bispecific antibody candidate, partnered with Alligator Bioscience, featuring a novel mechanism of action designed to simultaneously target 4-1BB (CD137) and 5T4, a tumor antigen widely overexpressed in a number of different types of cancer.  4-1BB, a costimulatory receptor on T cells, is known to enhance the immune response to cancer through activation of tumor-specific T cells and is believed to be a promising target for new immunotherapeutic approaches. ALG.APV-527 could potentially have utility in the treatment of a broad spectrum of cancers over-expressing the tumor antigen, including breast, cervical, non-small-cell-lung, prostate, renal, gastric, colorectal and bladder cancers. Aptevo intends to file a clinical trial authorization (CTA) in the second half of 2019.

 

RORI Bispecific, is a proof-of-concept bispecific candidate in pre-clinical development featuring an immunotherapeutic protein targeting ROR1, an antigen found on several solid tumors and hematologic, or blood-related malignancies and CD3, a component of the T-cell receptor complex expressed on all T-cells. Initial pre-clinical data demonstrate redirected T-cell killing of tumors expressing ROR1 in vitro and in vivo in animal studies.

Collaboration with Alligator Bioscience AB

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 R&D and Alligator are collaboratively developing 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. Under this Collaboration Agreement, Alligator also granted to Aptevo R&D 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 this Collaboration Agreement, the parties intend to develop the lead bispecific antibody candidate targeting 4-1BB (CD137) through the completion of Phase II clinical trials in accordance with an agreed upon development plan and budget. Subject to certain exceptions for Aptevo R&D’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. Under the terms of the 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 the Collaboration Agreement, in proportion to the development costs borne by each party.

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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 this 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 this 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 that, if not met, will cause an automatic termination and wind-down of the 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.

IXINITY

 

IXINITY is a third-generation recombinant human coagulation factor IX approved by the FDA in April 2015 in the United States for the control and prevention of bleeding episodes and for perioperative management in adults and children 12 years of age or older with hemophilia B. Hemophilia B, also known as Christmas disease, is a rare, inherited bleeding disorder. The blood of hemophilia B patients has an impaired clotting ability, which results from substantially reduced or missing factor IX activity. Patients with hemophilia B commonly experience joint bleeding with pain and swelling, which can result in irreversible joint damage. They may also experience more serious or life-threatening hemorrhages. People with hemophilia B require factor IX injections to restore normal blood coagulation temporarily. Many patients use regular, prophylactic treatment to try to prevent bleeding episodes, while others use on-demand treatment to control bleeding episodes after they occur. Treatment selection and approach is individualized based on factors including the patient’s condition and age, factor level severity, bleeding pattern, activity level and individual pharmacokinetic parameters.

 

In 2019, we intend to introduce a new 3,000 IU assay size and anticipate that this new assay will be available mid-2019.  The 3,000 IU assay size will provide enhanced convenience for patients who use IXINITY.  The 3,000 IU assay size is designed to allow some patients to use fewer vials when infusing.  We believe that the 3,000 IU assay size will also be a more attractive option for some patients on IXINITY when traveling.

 

We anticipate commencing a Phase 4 post-marketing study in the third quarter of 2019 that has the potential to support a pediatric label expansion.  We performed a pilot study in patients under 12 years of age that showed that IXINITY was well tolerated.  The pilot study also showed comparable results to that of the overall patient population studied in the Phase 3 pivotal clinical trial of IXINITY.  

 

We are exploring distribution and partnership opportunities for IXINITY outside of the U.S.  We believe that we may be able to leverage existing relationships to grow the IXINITY market outside of the United States. Currently all IXINITY sales are in the U.S.

Results of Operations

Comparison of the three months ended March 31, 2019 and March 31, 2018

Financial Summary

We recognized a net loss of $12.0 million and $13.9 million for the three months ended March 31, 2019, and March 31, 2018 respectively. For the three months ended March 31, 2019 compared to the three months ended March 31, 2018, product sales were higher by $3.0 million, which was offset by an increase in cost of products sold of $2.1 million. Research and development costs decreased by $0.9 million for the quarter and selling, general and administrative costs decreased for the same period by $0.3 million.

Product Revenue

Product sales of IXINITY increased by $3.0 million, or 73%, to $7.0 million for the three months ended March 31, 2019 from $4.1 million for the three months ended March 31, 2018. This increase was primarily related to the continuing expansion of our Hemophilia B patient base and a price increase which went into effect on January 1, 2019.

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Cost of Product Sales

The primary expense we incur to deliver IXINITY to our customers is manufacturing costs consisting of fixed and variable costs. Variable manufacturing costs consist primarily of costs for materials and personnel-related expenses for direct and indirect manufacturing support staff, contract manufacturing and filling operations, and sales-based royalties. Fixed manufacturing costs include facilities, utilities and amortization of intangible assets. We determine the cost of product sales for products sold during a reporting period based on the average cost per unit.

The following table provides information regarding our cost of products sales, including gross profit and gross margin percent for the three months ended March 31, 2019 and 2018:

 

 

 

For the Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

Change

 

Percent

 

Product sales

 

$

7,022

 

 

$

4,071

 

 

$

2,951

 

 

73

%

Cost of product sales

 

 

3,847

 

 

 

1,781

 

 

 

2,066

 

 

116

%

Gross profit

 

$

3,175

 

 

$

2,290

 

 

$

885

 

 

39

%

Gross margin percent

 

 

45

%

 

 

56

%

 

 

 

 

 

 

 

 

Cost of product sales increased by $2.1 million, or 116% for the three months ended March 31, 2019 to $3.8 million from $1.8 million for the three months ended March 31, 2018. This increase in cost of product sales is primarily due to the increase in sales, as well as the first quarter of 2018 having reduced costs of goods sold due to lower cost inventory being sold in the quarter.

 

Research and Development Expenses

We expense research and development costs as incurred. These expenses consist primarily of the costs associated with our research and development activities, including conducting preclinical studies and clinical trials, fees to professional service providers for analytical testing, independent monitoring or other administration of our clinical trials and obtaining and evaluating data from our clinical trials and non-clinical studies, as well as costs of contract manufacturing services for clinical trial material, and costs of materials used in clinical trials and research and development.

Our research and development expenses include:

 

employee salaries and related expenses, including stock-based compensation and benefits for our employees involved in our drug discovery and development activities;

 

external research and development expense incurred under agreements with third-party contract research organizations (CROs) and investigative sites;

 

manufacturing material expense for third-party manufacturing; and

 

overhead costs such as rent, utilities and depreciation.

We expect our future research and development spending will also be dependent upon such factors as the results from our clinical trials, the availability of reimbursement of research and development spending, the number of product candidates under development, the size, structure and duration of any clinical programs that we may initiate, and the costs associated with manufacturing our product candidates on a large-scale basis for later stage clinical trials. While programs are still in the preclinical trial phase, we do not provide a breakdown of the initial associated expenses as we are often evaluating multiple product candidates simultaneously. Costs are reported in preclinical research and discovery until the program enters the clinic.

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Our research and development expenses by program for the three months ended March 31, 2019 and 2018 are shown in the following table:

 

 

 

For the Three Months Ended March 31,

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

 

Change

 

Clinical programs:

 

 

 

 

 

 

 

 

 

 

 

 

APVO436

 

$

1,154

 

 

$

2,132

 

 

$

(978

)

APVO210

 

 

1,214

 

 

 

1,701

 

 

 

(487

)

Other

 

 

143

 

 

 

1,008

 

 

 

(865

)

Total clinical programs

 

 

2,511

 

 

 

4,841

 

 

 

(2,330

)