UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2017

2018

OR

For the transition period from               to               

Commission File Number: 001-37746

APTEVO THERAPEUTICS INC.

(Exact Name of Registrant as Specified in its Charter)

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.

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 ).     Yes  ☐    No  ☒

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 8, 2017,7, 2018, the number of shares of Registrant’sthe registrant’s common stock outstanding was 21,419,356.22,669,405.

Table of Contents

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)

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

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

Aptevo Therapeutics Inc.

CONSOLIDATEDCONDENSED COLSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, unaudited)

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

Aptevo Therapeutics Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

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

Aptevo Therapeutics Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Nature of Business and Significant Accounting Policies

Organization and Basis of Presentation

We areAptevo 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™ADAPTIR (modular protein technology) platform. We currently have fourone revenue-generating productsproduct in the areasarea of hematology, and infectious diseases,IXINITY, as well as various investigational stage product candidates in immuno-oncology.the areas of immuno-oncology and autoimmune and inflammatory diseases.

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

On August 6, 2015, Emergent BioSolutions Inc., (Emergent or former parent), announced a plan to separate into two independent publicly traded companies. To accomplish this separation, Emergent created Aptevo Therapeutics Inc. or Aptevo, to be the parent company for the development-based biotechnology business focused on novel oncology and hematology therapeutics. Aptevo was incorporated in Delaware in February 2016 as a wholly owned subsidiary of Emergent. To effect the separation, Emergent made a pro rata distribution of Aptevo’s common stock to Emergent’s stockholders on August 1, 2016. We are currently trading on the NASDAQNasdaq Global Market under the symbol “APVO.”

Prior to August 1, 2016,On September 28, 2017, Aptevo completed the consolidated financial statements were prepared on a “carve-out” basissale 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 purposeprevention of presenting Aptevo’sHepatitis 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 position,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 cash flows, and were derived from Emergent’s consolidated financial statements and accounting records. Aptevo did not operate as a standalone entity in the past and accordingly the selected financial data presented herein is not necessarily indicativenet of Aptevo’s future performance and does not reflect what Aptevo’s performance would have been had Aptevo operated as an independent publicly-traded company prior to August 1, 2016. The consolidated financial statements reflect Aptevo’s financial position, results of operations, and cash flows as a separately operated business in conformity with GAAP post the August 1, 2016 spin-off.

Prior to August 1, 2016, the consolidated financial statements included an allocation of certain assets and liabilities that have historically been held at the Emergent corporate level but which were specifically identifiable or allocable to Aptevo. All Aptevo intracompany transactions and accounts have been eliminated. All intercompany transactions between Aptevo and Emergent are considered to be effectively settledtax, in the consolidated financial statements at the time the transaction was recorded. The total net effect of the settlement of these intercompany transactions is reflected in the consolidated statement of cash flows as a financing activity and in the consolidated balance sheet as a net investment from Emergent. As of August 1, 2016, in connection with the separation and distribution, Emergent’s investment in the Company’s business was redesignated as stockholder’s equity and allocated between common stock and additional paid-in capital based on the number of shares issued at the distribution date.

Prior to August 1, 2016, Aptevo’s consolidated financial statements included an allocation of expenses related to certain Emergent corporate functions, including senior management, legal, human resources, finance, information technology, and quality assurance. These expenses were allocated to Aptevo based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of expenses, headcount, square footage, or other measures. Aptevo considers the expense allocation methodology and results to be reasonable for all periods presented. However, the allocations may not be indicative of the actual expense that would have been incurred had Aptevo operated as an independent, publicly-traded companyoperations for the periods presented.

Prior to August 1, 2016, the income tax amounts in these consolidated financial statements were calculated based on a separate return methodology and presented as if Aptevo’s operations were a standalone taxpayer in eachsix months ended June 30, 2017 reporting period. See Note 2 - Sale of its tax jurisdictions.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.

Revenue RecognitionAccounts Receivable

We recognize revenue if four basic criteria have been met: (1) there is persuasive evidenceAptevo records accounts receivable net of an arrangement, (2) delivery has occurred or services have been rendered, (3) the fee is fixed or determinable,allowance for doubtful accounts based upon its assessment of collectability, and (4) collectability is reasonably assured. Where the revenue recognition criteria areof applicable discounts. Aptevo performs ongoing credit evaluations of its customers and generally does not met,require collateral.

Revenue Recognition

Effective January 1, 2018, we defer the recognition of revenue by recording deferred revenue until such time as all criteria are met.

Recent Accounting Pronouncements

In May 2014, theadopted Financial Accounting Standards Board (FASB) issued 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 updated standard on revenue recognition. ASU 2014-09 provides enhancementsadjustment to the quality and consistency of how revenue is reported by companies while also improving comparabilityopening retained earnings in the first period of 2018. For Aptevo, there was no financial statementsimpact for the cumulative effect of companies reporting using International Financial Reporting Standards or GAAP. The main purposethis 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 the new standard is for companies to recognizeother standards, such as leases, insurance, collaborative arrangements and financial instruments. Under Topic 606, an entity recognizes revenue to depict the transferwhen its customer obtains control of promised goods or services, to customers in amountsan amount that reflectreflects the consideration to which a companythat the entity expects to be entitledreceive in exchange for those goods or services.  TheTo 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.

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 standard also willorder 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 enhanced disclosures about revenue, provide guidanceconsideration 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 transactionsas 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 were not previously addressed comprehensivelyare probability-weighted for relevant factors such as our historical experience, current contractual and improve guidance for multiple-element arrangements. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferralstatutory 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 Effective Date,amount of consideration to which deferredwe are entitled based on the effective dateterms of the newcontract. 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 standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted butrecognized will not earlier thanoccur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the original effective date. Accordingly,future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the updated standard is effectiveperiod such variances become known.

We have established reserves for the Companyfollowing 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 first quartersame period that the related revenue is recognized, resulting in a reduction of fiscal 2018. Aptevo has assembledproduct 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 cross functional teamfew weeks of the Customer’s notification to identifyus of the populationresale. 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 customersthese agencies that require rebates for sales made under these programs. We estimate our Medicaid and evaluate themMedicare 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

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 provisionsMedicare Part D program. Our liability for these rebates consists of ASU No. 2014-09. Aptevoinvoices 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 currently expecting to useestimated at the modified retrospective method to adopt this standardtime of the sale and is continuingbased on the terms of the Customer agreements. There are minimum volume requirements in order to assessreceive 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 potential impactsdeferred 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 new standard onvaluation allowance established against its consolidated financial statementsdeferred 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 disclosures, although we do not expect the implementation to have a material impact.

In August 2014, the FASB issued ASU No.2014-15 Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under the new guidance, management is required to assess an entity’s ability to continue as a going concernsuch uncertain tax positions. Aptevo’s estimates and to provide related footnote disclosures in certain circumstances. The provisions of this standard are effective for annual periods ending after December 31, 2016, and for annual and interim periods thereafter. Aptevo adopted this guidance for the year ended December 31, 2016 and management believes that Aptevo’s existing cash, cash equivalents and short-term investments will be sufficient to fund its operations through at least the third quarter of 2018.assumptions may differ significantly from tax benefits ultimately realized.

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 the CompanyAptevo starting on January 1, 2019. Aptevo is2019 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 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies2016-18, Statement of Cash Flows: Restricted cash. This standard requires that a statement of cash flows explain the accounting for share-based payment award transactions includingchange during the financial statement presentationperiod in the total of excess tax benefitscash, cash equivalents, restricted cash, and deficiencies, classification of awards as either equity or liabilities, accounting for forfeituresrestricted cash equivalents when reconciling the beginning-of and classificationending-of period total amounts shown on the statement of cash flows. AptevoThis 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, 2017.2018. Upon adoption of this standard, we applied the standard, excess tax benefits and deficiencies resulting from stock-based compensation awards vesting and exercises are now recognized as discrete items in the statementretrospective transition method for each period presented. As a result of operations. Aptevo has elected to maintain its current forfeitures policy and will continue to include an estimate of forfeitures when recognizing stock-based compensation expense. Additionally, cash paid by Aptevo when directly withholding shares for tax withholding purposes will continue to be classified as a financing activity in the condensedthis adoption we adjusted our consolidated statement of cash flows as required by the standard. The adoptionto include $10.4 million of this standard did not have a material impact on Aptevo’s consolidated financial statementsrestricted cash at December 31, 2017 and related disclosures.$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, “StatementStatement 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. ThisWe adopted this standard is effective beginning January 1, 2018, with early adoption permitted. The new standard requires a retrospective transition. Aptevo is aware the adoption2018. Adoption of this standard will have anhad no impact for restrictedon our condensed consolidated statements of cash and evaluating further impactsflows 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 its consolidated financial statements.

September 28, 2017.

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):

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 2. MorphoSys3. 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 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 worldwide development and commercialization of MOR209/ES414, a targeted immunotherapeuticimmunotherapeutics protein, which activates host T-cell immunity specifically against cancer cells expressing prostate specific membrane antigen, an antigen commonly overexpressed on prostate cancer cells. MOR209/ES414 was constructed using Aptevo’s proprietary ADAPTIR™ platform technology.

In accordance with the initial terms ofEffective August 31, 2017, MorphoSys terminated the MorphoSys Agreement, Aptevo received a nonrefundable $20.0 million upfront payment and could receive up to $163.0 million in additional contingent payments, comprised of up to $80.0 million and up to $83.0 million, respectively, due upon the achievement of specified development and regulatory milestones. MorphoSys and Aptevo jointly agreed to fund further development of MOR209/ES414, with Aptevo responsible for 36% of the total development costs and MorphoSys responsible for the remainder, with Aptevo’s funding requirement capped at $186.0 million. Aptevo’s development effort includes the performance of non-clinical, clinical, manufacturing and regulatory activities. Aptevo retains commercialization rights in the U.S. and Canada, with a tiered royalty obligation to MorphoSys, ranging from mid-single digit up to 20% of sales. MorphoSys has worldwide commercialization rights excluding the U.S. and Canada, with a low single digit royalty obligation to Aptevo. In December 2015, after a joint review of data from the ongoing Phase I dose escalation study of MOR209/ES414 in prostate cancer patients, Aptevo and MorphoSys decided to adjust the dosing regimen and administration of MOR209/ES414. Patients receiving weekly doses of MOR209/ES414 developed antibodies against the drug; this is called anti-drug antibodies, or ADA. ADA developed in most patients including those receiving the maximum tolerated dose of drug which could be given safely on a weekly basis. These antibodies bind to the drug and reduce the concentration of active MOR209/ES414 in the blood and thus could potentially reduce its efficacy. However, no safety issues related to the development of ADA were observed. The cause of these antibodies is unclear but could be due to the weekly administration of the drug. Hence, the protocol was amended to a continuous intravenous infusion as a way to administer higher levels of drug and prevent the development of ADA. The MOR209/ES414 Phase I clinical trial under the amended protocol, providing continuous intravenous infusion as a way to administer higher levels of drug and prevent the development of ADA, commenced December 2016.

Agreement. As a result of the required dosing regimen change and the impact to the overall development timeline and technical risk, our co-development agreement with MorphoSys was restructured. In December 2015, we and MorphoSys amended the collaboration agreement to (1) decrease the additional contingent payments due to us upon the achievement of specified development and regulatory milestones of up to $32.5 million and up to $41.5 million, respectively, (2) change the total funding requirement cap for us to up to approximately $250 million and (3) change the jointly funded development cost allocation. In addition, the termination, provisions under the MorphoSys collaboration agreement were amended to give MorphoSys a one-time right to terminate the collaboration agreement, without notice, at either the end of 2016 or after review of clinical data from the first six patients enrolled and dosed in the Phase 1 trial. The requirement for further adjustments to the dosing regimen or other parts of the program could delay our development timeline or delay or prevent our ability to receive regulatory approval for MOR209/ES414. In December 2016, the collaboration agreement was further amended to adjust the allocation of certain manufacturing and development costs and extend MorphoSys’s convenience termination rights. In June 2017, the collaboration agreement was further amended to extend the periods pertaining to the development costs. Under the amendment, we will bear 75% of all development costs with respect to MOR209/ES414, and MorphoSys will bear 25% of such costs, during the period from January 1, 2017 through August 31, 2017. During the period from September 1, 2017 through December 31, 2018, we will bear 49% of such development costs and MorphoSys will bear 51%. Beyond January 1, 2019, we would bear 36% and MorphoSys will bear 64% of such development costs.

In addition, under the revised termination rights, MorphoSys can terminate the collaboration for convenience (i) within one week following the receipt and discussion of certain test results or (ii) at any time during the last two weeks of August 2017.

Aptevo evaluated the MorphoSys Agreement and determined that it was a revenue arrangement with multiple deliverables or performance obligations. Aptevo determined there were two units of accounting under the MorphoSys Agreement: (1) the delivered license to further develop and commercialize MOR209/ES414, and (2) undelivered itemshas no ongoing obligation related to development services. Aptevo determined that the license had standalone value as the drug candidate has been: (1) developed and is currently Phase I clinical trial ready, (2) MorphoSys possesses the knowledge, technology, skills, experience and infrastructure necessary to complete all further development of the drug through commercialization, and (3) MorphoSys has the right to further sublicense the product. In 2014, Aptevo allocated the $20.0 million upfront payment to the two units of accounting using the relative selling price method. Aptevo determined the estimated selling price for the license using the income approach and an appropriate discount rate. The estimated selling price includes unobservable inputs (Level 3), such as estimates of revenues and operating margins; the time and resources needed to complete the development and approval of the product candidate; and the risk related to the viability of and potential for alternative treatments. Aptevo determined the estimated selling price of the development services unit of accounting based on the estimated number of full-time equivalent personnel at the contractual rate as defined in the MorphoSys Agreement, whose rates and terms approximate those of other Emergent or Aptevo service related contracts and those observed generally through other collaboration negotiations. The allocation resulted in $15.3 million of the $20.0 million upfront payment being allocated to the license

and $4.7 million being allocated to the development services. Aptevo determined the license fee unit of accounting was delivered and completed on the date the MorphoSys Agreement was executed and thus recognized $15.3 million of license revenue in August 2014. Revenue related to the development services is recognized as the services are performed with $0.1 million and $0.2 million, respectively, recognized in the three months ended June 30, 2017 and 2016, and $0.2 million and $0.2 million in the six months ended June 30, 2017 and 2016. The current estimated service period for the undelivered development services under the MorphoSys Agreement is through 2023.this agreement.

Further, Aptevo determined that contingent payments for the achievement of the development and regulatory milestones are substantive milestones and will be accounted for as revenue in the period in which the milestones are achieved. Aptevo received a $5.0 million milestone payment from MorphoSys reflecting the initiation of a Phase I clinical study to evaluate the safety, tolerability, and clinical activity of MOR209/ES414 in patients with metastatic castration-resistant prostate cancer. Aptevo recognized this substantive milestone achievement payment as research and development revenue during the six months ended June 30, 2015.

The MorphoSys Agreement provides for the sharing of development and clinical costs related to MOR209/ES414. In the event Aptevo’s share of the total cost incurred for a given quarter exceeds its pro rata limit, Aptevo records a receivable from MorphoSys for the excess and reduces research and development expense by this amount. For the three months ended June 30, 2017 and June 30, 2016, Aptevo recorded a reduction to research and development expense of $0.2 million and $0.6 million, and for the six months ended June 30, 2017 and June 30, 2016, $0.3 million and $0.1 million, respectively. As of June 30, 2017, the MorphoSys Agreement related accounts receivable balancerevenue was $0.0less than $0.1 million and the related total deferred revenue balance was $3.7 million.million as of June 30, 2017.

Note 3.4. 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.

The Company’s financial assets measured at fair value consisted of the following as of June 30, 20172018 and December 31, 2016:

2017:

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 threethree-month and six monthssix-month periods ended June 30, 2017.2018.

Note 5. Cash, heldCash 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 demand deposit accountsmoney 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 $8.1$10.0 million related to the minimum cash covenant included in the Company’s Credit and $4.4Security Agreement (the Credit Agreement) with MidCap Financial Trust, and $2.4 million is excluded fromsecuring letters of credit.

The following table shows our fair-value hierarchy disclosurecash, cash equivalents and restricted cash, both current and long-term portion as of June 30, 20172018 and December 31, 2016, respectively. The carrying amounts for receivables, accounts payable and other current monetary assets and liabilities approximate fair value because of the immediate or short-term maturity of these financial instruments.2017:

Note 4.6. Investments

Investments are classified as available-for-sale securities and are carried at fair value with unrealized temporary holding gains and losses excluded from net income or loss and reportedincluded in other comprehensive income or loss and also 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. The CompanyWe have determined that the unrealized losses on its investmentsour marketable securities as of June 30, 2017 and December 31, 20162018 were temporary in nature. The Companynature, and currently has the ability and doesdo not intend to sell these investmentssecurities 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.