Xencor, Inc.
Xencor Inc (Form: 10-Q, Received: 11/02/2016 17:29:33)

Table of Contents

AvailableForSaleSecuritiesGrossUnrealizeLoss

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 

 

(Mark One)

 

 

 

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

 

For the quarterly period ended September 30, 2016

 

or

 

 

 

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

 


 

Commission file number: 001-36182

 

Xencor, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

 

Delaware

 

20-1622502

(State or Other Jurisdiction of Incorporation

or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

111 West Lemon Avenue, Monrovia, CA

 

91016

(Address of Principal Executive Offices)

 

(Zip Code)

 

(626) 305-5900

(Registrant’s Telephone Number, Including Area Code)

 

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 or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐   Accelerated filer ☒   Non-accelerated filer ☐   Smaller reporting company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes ☐  No ☒

 

Indicate the number of shares of each of the issuer’s classes of common stock, as of the latest practicable date:

 

 

 

Class

 

Outstanding at October 25, 2016

Common stock, $0.01 par value

 

41,138,851

 

 

 

 

 

 


 

Table of Contents

Xencor, Inc.

 

Quarterly Report on FORM 10-Q for the quarter ended September 30, 2016

 

Table of C ontents

 

 

 

 

 

Page

 

 

 

 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

PART I.  

FINANCIAL INFORMATION

Item 1.  

Financial Statements

 

Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015

 

Statements of Comprehensive Income (Loss) for the Three Months and Nine Months ended September 30, 2016 and 2015 (unaudited)

 

Statement of Stockholders’ Equity as of September 30, 2016 (unaudited)

 

Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (unaudited)

 

Notes to Financial Statements (unaudited)

Item 2.  

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

20 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

29 

Item 4.  

Controls and Procedures

29 

 

 

 

PART II.  

OTHER INFORMATION

30 

Item 1.  

Legal Proceedings

30 

Item 1A.  

Risk Factors

30 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

31 

Item 6.  

Exhibits

32 

 

 

 

Signatures  

33 

 

In this report, unless otherwise stated or the context otherwise indicates, references to “Xencor,” “the Company,” “we,” “us,” “our” and similar references refer to Xencor, Inc.  The Xencor logo is a registered trademark of Xencor, Inc.  This report also contains registered marks, trademarks and trade names of other companies. All other trademarks, registered marks and trade names appearing in this report are the property of their respective holders.

 

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Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements include statements that may relate to our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs and other information that is not historical information. Many of these statements appear, in particular, under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Forward-looking statements can often be identified by the use of terminology such as “subject to”, “believe”, “anticipate”, “plan”, “expect”, “intend”, “estimate”, “project”, “may”, “will”, “should”, “would”, “could”, “can”, the negatives thereof, variations thereon and similar expressions, or by discussions of strategy.

 

All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and beliefs, but they are inherently uncertain. We may not realize our expectations, and our beliefs may not prove correct. Actual results could differ materially from those described or implied by such forward-looking statements. The following uncertainties and factors, among others (including those set forth under “Risk Factors”), could affect future performance and cause actual results to differ materially from those matters expressed in or implied by forward-looking statements:

 

·

our plans to develop and commercialize our product candidates;

 

·

our ongoing and planned clinical trials;

 

·

the timing of and our ability to obtain and maintain regulatory approvals for our product candidates;

 

·

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

 

·

our ability to identify additional products or product candidates with significant commercial potential that are consistent with our business objectives;

 

·

the rate and degree of market acceptance and clinical utility of our products;

 

·

the capabilities and strategy of our suppliers and vendors including key manufacturers of our clinical drug supplies;

 

·

significant competition in our industry;

 

·

costs of litigation and the failure to successfully defend lawsuits and other claims against us;

 

·

our partners’ ability to advance drug candidates into, and successfully complete, clinical trials;

 

·

our ability to receive research funding and achieve anticipated milestones under our collaborations;

 

·

our intellectual property position;

 

·

loss or retirement of key members of management;

 

·

costs of compliance and our failure to comply with new and existing governmental regulations;

 

·

failure to successfully execute our growth strategy, including any delays in our planned future growth; and

 

·

our failure to maintain effective internal controls.

 

The factors, risks and uncertainties referred to above and others are more fully described under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December, 31, 2015 and subsequent Quarterly Reports on Form 10-Q. Forward-looking statements should be regarded solely as our current plans, estimates and beliefs. You should not place undue reliance on forward-looking statements. We cannot guarantee future results, events, levels of activity, performance or achievements. We do not undertake and specifically decline any obligation to update, republish or revise forward-looking statements to reflect future events or circumstances or to reflect the occurrences of unanticipated events.

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Table of Contents

PART I — FINANCIAL INFORMATION

Item1. Financial Statements

 

Xencor, Inc.

Balance Sheet s

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,787

 

$

12,590

 

Marketable securities

 

 

89,518

 

 

83,840

 

Accounts receivable

 

 

3,089

 

 

44

 

Prepaid expenses and other current assets

 

 

3,448

 

 

1,201

 

Total current assets

 

 

110,842

 

 

97,675

 

Property and equipment, net

 

 

3,050

 

 

2,310

 

Patents, licenses, and other intangible assets, net

 

 

10,565

 

 

9,971

 

Marketable securities - long term

 

 

197,570

 

 

96,891

 

Other assets

 

 

103

 

 

63

 

Total assets

 

$

322,130

 

$

206,910

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

7,334

 

$

6,400

 

Accrued expenses

 

 

6,536

 

 

3,634

 

Current portion of deferred rent

 

 

122

 

 

108

 

Current portion of deferred revenue

 

 

96,274

 

 

33,287

 

Income taxes

 

 

400

 

 

 —

 

Total current liabilities

 

 

110,666

 

 

43,429

 

Deferred rent, less current portion

 

 

431

 

 

507

 

Deferred revenue, less current portion

 

 

8,613

 

 

542

 

Total liabilities

 

 

119,710

 

 

44,478

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: 10,000,000 authorized shares; -0- issued and outstanding shares at September 30, 2016 and December 31, 2015

 

 

 —

 

 

 —

 

Common stock, $0.01 par value: 200,000,000 authorized shares at September 30, 2016 and December 31, 2015; 41,138,851 issued and outstanding at September 30, 2016 and 40,551,039 issued and outstanding at December 31, 2015

 

 

411

 

 

405

 

Additional paid-in capital

 

 

431,154

 

 

424,128

 

Accumulated other comprehensive income loss

 

 

(250)

 

 

(516)

 

Accumulated deficit

 

 

(228,895)

 

 

(261,585)

 

Total stockholders’ equity

 

 

202,420

 

 

162,432

 

Total liabilities and stockholders’ equity

 

$

322,130

 

$

206,910

 

 

 

 

 

 

 

 

 

See accompanying notes .

 

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Table of Contents

Xencor, Inc.

Statements of Comprehensive Income (Loss )

(unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2016

    

2015

 

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Collaborations, licenses and milestones

 

$

7,821

 

$

3,503

 

$

81,080

 

$

6,008

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

14,069

 

 

10,582

 

 

38,512

 

 

23,263

General and administrative

 

 

3,007

 

 

3,233

 

 

10,000

 

 

8,521

Total operating expenses  

 

 

17,076

 

 

13,815

 

 

48,512

 

 

31,784

Income (loss) from operations  

 

 

(9,255)

 

 

(10,312)

 

 

32,568

 

 

(25,776)

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

579

 

 

274

 

 

1,306

 

 

425

Interest expense

 

 

(2)

 

 

(4)

 

 

(39)

 

 

(11)

Other income

 

 

3

 

 

5

 

 

5

 

 

13

Total other income, net

 

 

580

 

 

275

 

 

1,272

 

 

427

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income tax

 

 

(8,675)

 

 

(10,037)

 

 

33,840

 

 

(25,349)

Provision (benefit) for income tax

 

 

(598)

 

 

 —

 

 

1,150

 

 

 —

Net income (loss)

 

 

(8,077)

 

 

(10,037)

 

 

32,690

 

 

(25,349)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on marketable securities

 

 

(466)

 

 

84

 

 

266

 

 

(6)

Comprehensive income (loss)

 

$

(8,543)

 

$

(9,953)

 

$

32,956

 

$

(25,355)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share

 

$

(0.20)

 

$

(0.25)

 

$

$
0.80

 

$

(0.66)

Diluted net income (loss) per common share

 

$

(0.20)

 

$

(0.25)

 

$

$
0.78

 

$

(0.66)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

41,033,973

 

 

40,473,520

 

 

40,814,587

 

 

38,514,179

Diluted weighted average common shares outstanding

 

 

41,033,973

 

 

40,473,520

 

 

41,861,361

 

 

38,514,179

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes .  

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Table of Contents

Xencor, Inc.

Statement of Stockholders’ Equity

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

Total

 

 

Common Stock

 

Paid

 

Comprehensive

 

Accumulated

 

Stockholders’

Stockholders’ Equity

 

Shares

 

Amount

 

in-Capital

 

Loss

 

Deficit

 

Equity

Balance, December 31, 2015

 

40,551,039

 

$

405

 

$

424,128

 

$

(516)

 

$

(261,585)

 

$

162,432

Issuance of common stock upon exercise and vesting of stock awards

 

569,046

 

 

6

 

 

942

 

 

 —

 

 

 —

 

 

948

Issuance of common stock under the Employee Stock Purchase Plan

 

18,766

 

 

 —

 

 

226

 

 

 —

 

 

 —

 

 

226

Comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

266

 

 

32,690

 

 

32,956

Stock-based compensation

 

 —

 

 

 —

 

 

5,858

 

 

 —

 

 

 —

 

 

5,858

Balance, September 30, 2016 (unaudited)

 

41,138,851

 

$

411

 

$

431,154

 

$

(250)

 

$

(228,895)

 

$

202,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes .  

 

 

 

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Table of Contents

Xencor, Inc.

Statements of Cash Flow s

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2016

    

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income (loss)

 

$

32,690

 

$

(25,349)

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

999

 

 

768

 

Amortization of premium on marketable securities

 

 

1,398

 

 

642

 

Stock-based compensation

 

 

5,858

 

 

3,386

 

Abandonment of capitalized intangible assets

 

 

107

 

 

280

 

Gain on disposal of assets

 

 

 —

 

 

(9)

 

Gain on sale of marketable securities available for sale

 

 

(6)

 

 

(4)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,044)

 

 

2,558

 

Interest receivable

 

 

(541)

 

 

(659)

 

Prepaid expenses and other assets

 

 

(2,288)

 

 

(715)

 

Accounts payable

 

 

934

 

 

3,417

 

Accrued expenses

 

 

2,902

 

 

1,608

 

Income taxes

 

 

400

 

 

 —

 

Deferred rent

 

 

(62)

 

 

595

 

Deferred revenue

 

 

71,058

 

 

43,993

 

Net cash provided by operating activities

 

 

110,405

 

 

30,511

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(202,147)

 

 

(168,489)

 

Purchase of intangible assets

 

 

(1,207)

 

 

(1,220)

 

Purchase of property and equipment

 

 

(1,233)

 

 

(1,724)

 

Proceeds from sale and maturities of marketable securities

 

 

95,205

 

 

28,008

 

Proceeds from sale of property and equipment

 

 

 —

 

 

9

 

Net cash used in investing activities

 

 

(109,382)

 

 

(143,416)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

 —

 

 

122,906

 

Proceeds from issuance of common stock upon exercise of stock awards

 

 

948

 

 

543

 

Proceeds from issuance of common stock under the Employee Stock Purchase Plan

 

 

226

 

 

247

 

Common stock issuance costs

 

 

 —

 

 

(7,702)

 

Net cash provided by financing activities

 

 

1,174

 

 

115,994

 

Net increase in cash and cash equivalents

 

 

2,197

 

 

3,089

 

Cash and cash equivalents , beginning of period

 

 

12,590

 

 

54,649

 

Cash and cash equivalents , end of period

 

$

14,787

 

$

57,738

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Income taxes

 

$

760

 

$

 —

 

Supplemental disclosures of non-cash investing activities

 

 

 

 

 

 

 

Unrealized gain on marketable securities, net of tax

 

$

266

 

$

6

 

 

 

 

 

See accompanying notes .  

 

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Xencor, Inc.

 

Notes to Financial Statements

(unaudited)

 

September 30, 2016

 

1. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited interim financial statements for Xencor, Inc. (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. The financial statements include all adjustments (consisting only of normal recurring adjustments) that the management of the Company believes are necessary for a fair presentation of the periods presented. The preparation of interim financial statements requires the use of management’s estimates and assumptions that affect reported amounts of assets and liabilities at the date of the interim financial statements and the reported revenues and expenditures during the reported periods. These interim financial results are not necessarily indicative of the results expected for the full fiscal year or for any subsequent interim period.

 

The accompanying unaudited interim financial statements and related notes should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 8, 2016.

 

Marketable Securities

 

The Company has an investment policy that includes guidelines on acceptable investment securities, minimum credit quality, maturity parameters and concentration and diversification. The Company invests its excess cash primarily in marketable securities issued by investment grade institutions.

 

The Company considers its marketable securities to be available-for-sale. These assets are carried at fair value and the unrealized gains and losses are included in accumulated other comprehensive income (loss). Accrued interest on marketable securities is included in marketable securities. If a decline in the value of a marketable security in the Company’s investment portfolio is deemed to be other-than-temporary, the Company writes down the security to its current fair value and recognizes a loss as a charge against income. The Company reviews its portfolio of marketable securities, using both quantitative and qualitative factors, to determine if declines in fair value below cost are other-than-temporary.

 

Recent Accounting Pronouncements

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which amends the current stock compensation guidance. The amendments simplify the accounting for the taxes related to stock based compensation, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified. The standard is effective for fiscal periods beginning after December 15, 2016, with early adoption permitted.

In April 2016, the FASB issued ASU No. 2016-10 “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” which amends and clarifies the revenue recognition guidance on accounting for licenses of intellectual property (IP) and identifying performance obligations. The amendment clarifies how an entity should evaluate the nature of its promise in granting a license of IP which will determine whether it recognizes revenue over time or at a point in time and also clarifies when a promised good or service is separately identifiable, which is an important step in determining whether goods or services should be accounted for as separate performance obligations. The amendment has the same effective date as the new revenue recognition standard which is for fiscal periods after December 15, 2017.

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In May 2016, the FASB issued ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” which provides clarifying guidance in certain narrow areas, adds some practical expedients and includes assessing the collectability criterion, presentation of sales taxes and other similar taxes collected from customers, noncash consideration, contract modifications at transition, completed contracts at transition and technical correction. The amendment has the same effective date as the new revenue recognition standard which is for fiscal periods after December 15, 2017.

In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which amends the guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For available for sale debt securities, credit losses related to available-for sale debt securities should be recorded through an allowance for credit losses. The amendment is effective for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years.

The Company is currently evaluating the impact of the adoption of the new accounting pronouncements on its financial statements and related disclosures.

There have been no other material changes to the significant accounting policies previously disclosed in the Company’s 2015 Annual Report on Form 10-K.

 

2.   Fair Value of Financial Instruments

 

Financial instruments included in the financial statements include cash equivalents, marketable securities, trade accounts receivable, accounts payable and accrued expenses. Marketable securities and cash equivalents are carried at fair value. The fair value of the other financial instruments closely approximates their fair value due to their short maturities.

The Company accounts for recurring and non-recurring fair value measurements in accordance with FASB Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures . ASC 820 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value, and requires expanded disclosure about fair value measurements.  The ASC 820 hierarchy ranks the quality of reliable inputs, or assumptions, used in the determination of fair value and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:

 

Level 1— Fair Value is determined by using unadjusted quoted prices that are available in active markets for identical assets or liabilities.

 

Level 2— Fair Value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in markets that are not active. Related inputs can also include those used in valuation or other pricing models, such as interest rates and yield curves that can be corroborated by observable market data.

 

Level 3— Fair value is determined by inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgments to be made by the reporting entity –e.g. determining an appropriate discount factor for illiquidity associated with a given security.

 

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The Company measures the fair value of financial assets using the highest level of inputs that are reasonably available as of the measurement date. The assets recorded at fair value are classified within the hierarchy as follows for the periods reported (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

    

Total

    

    

 

 

 

 

    

Total

    

    

 

 

 

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Fair Value

 

Level 1

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Funds

 

$

10,861

 

$

10,861

 

$

 —

 

$

9,453

 

$

9,453

 

$

 —

Corporate Securities

 

 

172,943

 

 

 —

 

 

172,943

 

 

114,846

 

 

 —

 

 

114,846

Government Securities

 

 

114,145

 

 

 —

 

 

114,145

 

 

65,885

 

 

 —

 

 

65,885

 

 

$

297,949

 

$

10,861

 

$

287,088

 

$

190,184

 

$

9,453

 

$

180,731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Our policy is to record transfers of assets between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value.  During the three and nine months ended September 30, 2016, there were no transfers between Level 1 and Level 2. The Company does not have any Level 3 assets or liabilities.

 

3. Net Income (Loss) Per Share  

 

We compute net income (loss) per common share by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period without consideration of common stock equivalents. Diluted income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common stock equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of the Company’s stock option grants. Potentially dilutive securities consisting of stock issuable under options and our 2013 Employee Stock Purchase Plan (ESPP) are not included in the diluted net loss per common share calculation where the inclusion of such shares would have had an antidilutive effect.

 

Basic and diluted income (loss) per common share is computed as follows (in thousands except share and per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2016

    

2015

    

2016

    

2015

 

 

(in thousands, except

 

 

per share data)

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) used for calculation of basic and diluted EPS

 

$

(8,077)

 

$

(10,037)

 

$

32,690

 

$

(25,349)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding, basic

 

 

41,033,973

 

 

40,473,520

 

 

40,814,587

 

 

38,514,179

Dilutive effect of stock options

 

 

 —

 

 

 —

 

 

1,046,774

 

 

 —

Weighted average shares outstanding, diluted

 

 

41,033,973

 

 

40,473,520

 

 

41,861,361

 

 

38,514,179

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share, basic

 

$

(0.20)

 

$

(0.25)

 

$

0.80

 

$

(0.66)

Net income (loss) per share, diluted

 

$

(0.20)

 

$

(0.25)

 

$

0.78

 

$

(0.66)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2016 all outstanding potentially dilutive securities have been excluded from the calculation of diluted net loss per common share as the effect of including such securities would have been antidilutive. For the nine months ended September 30, 2016 there were no shares from the Company’s employee stock purchase plan that had a dilutive effect on shares outstanding. For the three and nine months ended September 30, 2015,

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all outstanding potentially dilutive securities have been excluded from the calculation of diluted net loss per common share as the effect of including such securities would have been antidilutive.

 

 

 

4.   Comprehensive income (loss)

 

Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). For the three and nine months ended September 30, 2016, the only component of other comprehensive income (loss) is net unrealized gains (losses) on marketable securities. For the three months and nine months ended September 30, 2015, the only component of other comprehensive loss is net unrealized gains (losses) on marketable securities. There were no material reclassifications out of accumulated other comprehensive income (loss) during the three and nine months ended September 30, 2016 and 2015.

 

5. Marketable Securities

 

The Company’s marketable securities held as of September 30, 2016 and December 31, 2015 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

    

Amortized

    

Unrealized

 

Unrealized

    

 

    September 30, 2016

 

Cost

 

Gains

 

Losses

 

Fair Value

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Funds

 

$

10,861

 

$

 —

 

$

 —

 

$

10,861

Corporate Securities

 

 

173,145

 

 

84

 

 

(286)

 

 

172,943

Government Securities

 

 

114,183

 

 

28

 

 

(66)

 

 

114,145

 

 

$

298,189

 

$

112

 

$

(352)

 

$

297,949

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as

 

 

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

$

10,861

    Marketable securities

 

 

 

 

 

 

 

 

 

 

 

287,088

Total investments

 

 

 

 

 

 

 

 

 

 

$

297,949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

    

Amortized

    

Unrealized

 

Unrealized

    

 

   December 31, 2015

 

Cost

 

Gains

 

Losses

 

Fair Value

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Funds

 

$

9,453

 

$

 —

 

$

 —

 

$

9,453

Corporate Securities

 

 

115,148

 

 

6

 

 

(308)

 

 

114,846

Government Securities

 

 

66,099

 

 

 —

 

 

(214)

 

 

65,885

 

 

$

190,700

 

$

6

 

$

(522)

 

$

190,184

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as

 

 

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

$

9,453

    Marketable securities

 

 

 

 

 

 

 

 

 

 

 

180,731

Total investments

 

 

 

 

 

 

 

 

 

 

$

190,184

 

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The maturities of the Company’s marketable securities are as follows:

 

 

 

 

 

 

 

 

 

Amortized

    

Estimated

    September 30, 2016

 

Cost

 

Fair Value

    (in thousands)

 

 

 

 

 

 

    Mature in one year or less

 

$

89,548

 

$

89,518

    Mature after one year through five years

 

 

197,780

 

 

197,570

 

 

$

287,328

 

$

287,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

    

Estimated

   December 31, 2015

 

Cost

 

Fair Value

    (in thousands)

 

 

 

 

 

 

    Mature in one year or less

 

$

83,963

 

$

83,840

    Mature after one year through five years

 

 

97,284

 

 

96,891

 

 

$

181,247

 

$

180,731

 

 

6. Stock Based Compensation

 

Our Board of Directors and the requisite stockholders previously approved the 2010 Equity Incentive Plan (the 2010 Plan). In October 2013, our Board of Directors approved the 2013 Equity Incentive Plan (the 2013 Plan) and in November 2013 our stockholders approved the 2013 Plan. The 2013 Plan became effective as of December 3, 2013, the date of the Company’s initial public offering (IPO). As of December 2, 2013, we suspended the 2010 Plan and no additional awards may be granted under the 2010 Plan. Any shares of common stock covered by awards granted under the 2010 Plan that terminate after December 2, 2013 by expiration, forfeiture, cancellation or other means without the issuance of such shares will be added to the 2013 Plan reserve.

 

As of September 30, 2016 the total number of shares of common stock available for issuance under the 2013 Plan is 7,157,369, which includes 2,684,456 of common stock that were available for issuance under the 2010 Plan as of the effective date of the 2013 Plan. Unless otherwise determined by the Board, beginning January 1, 2014, and continuing until the expiration of the 2013 Plan, the total number of shares of common stock available for issuance under the 2013 Plan will automatically increase annually on January 1 of each year by 4% of the total number of issued and outstanding shares of common stock as of December 31 of the immediate preceding year. Pursuant to approval by our board on January 1, 2016, the total number of shares of common stock available for issuance under the 2013 Plan was increased by 1,400,000 shares. As of September 30, 2016 a total of 3,279,750 options had been issued under the 2013 Plan.

 

In November 2013, our Board of Directors and stockholders approved the 2013 Employee Stock Purchase Plan (ESPP), which became effective as of December 5, 2013. We have reserved a total of 581,286 shares of common stock for issuance under the ESPP. Unless otherwise determined by our Board, beginning on January 1, 2014, and continuing until the expiration of the ESPP, the total number of shares of common stock available for issuance under the ESPP will automatically increase annually on January 1 by the lesser of (i) 1% of the total number of issued and outstanding shares of common stock as of December 31 of the immediately preceding year, or (ii) 621,814 shares of common stock. Pursuant to approval by our board, there was no increase in the number of authorized shares in the ESPP in 2016. As of September 30, 2016, we have issued a total of 195,129 shares of common stock under the ESPP.

 

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Total employee, director and non-employee stock-based compensation expense recognized for the three and nine months ended September 30, 2016 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2016

    

2015

 

2016

    

2015

General and administrative

 

$

874

 

$

593

 

$

2,699

 

$

1,628

Research and development

 

 

992

 

 

493

 

 

3,159

 

 

1,758

 

 

$

1,866

 

$

1,086

 

$

5,858

 

$

3,386

 

The following table summarizes option activity under our stock plans and related information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

Weighted

 

Weighted

 

 

 

 

 

 

Average

 

Average

 

 

 

 

Number of

 

Exercise

 

Remaining

 

Aggregate

 

 

Shares subject

 

Price

 

Contractual

 

Intrinsic

 

 

to outstanding

 

(Per

 

Term

 

Value

 

 

options

 

Share)

 

(in years)

 

(in thousands)

Balances at December 31, 2015

 

3,370,901

 

$

8.50

 

 

6.98

 

 

 

Options granted

 

1,275,000

 

$

13.85

 

 

 

 

 

 

Options forfeited

 

(47,883)

 

$

12.05

 

 

 

 

 

 

Options cancelled

 

(1,031)

 

$

15.69

 

 

 

 

 

 

Options exercised

 

(569,046)

 

$

1.67

 

 

 

 

 

 

Balance at September 30, 2016

 

4,027,941

 

$

11.12

 

 

7.88

 

$

53,879

Exercisable

 

1,723,815

 

$

8.09

 

 

6.67

 

$

28,317

 

We calculate the intrinsic value as the difference between the exercise price of the options and the closing price of common stock of $24.49 per share as of September 30, 2016.

 

Weighted average fair value of options granted during the nine-month period ended September 30, 2016 and 2015 was $9.26 and $10.73 per share, respectively.  There were 930,250 options granted during the period ended September 30, 2015. We estimated the fair value of each stock option using the Black-Scholes option-pricing model based on the date of grant of such stock option with the following weighted average assumptions for the three and nine months ended September 30, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options

 

Options

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Expected term (years)

 

6.1

 

6.4

 

6.1

 

6.1

 

Expected volatility

 

79.3

%

86.5

%

76.2

%  

76.6

%

Risk-free interest rate

 

1.23

%

1.95

%

1.50

%  

1.62

%

Expected dividend yield

 

 —

%  

 —

%  

 —

%  

 —

%  

 

 

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ESPP

 

ESPP

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Expected term (years)

 

0.5 - 2.0

 

0.5 - 2.0

 

0.5 - 2.0

 

0.5 - 2.0

 

Expected volatility

 

67.8 - 79.6

%

70.6 - 82.9

%

67.8 - 79.6

%

70.6 - 82.9

%

Risk-free interest rate

 

.47% - .93

%

.06% - .46

%

.47% - .93

%

.06% - .46

%

Expected dividend yield

 

 —

%

 —

%

 —

%

 —

%

 

As of September 30, 2016, the unamortized compensation expense related to unvested stock options was $17.6 million, net of estimated forfeitures. The remaining unamortized compensation expense will be recognized over the next three years.

 

7. Commitments and Contingencies

 

Operating Leases

 

The Company leases office and laboratory space in Monrovia, CA through June 2020 with an option to renew for an additional five years.

 

The Company also leases office space in San Diego, CA through April 2018 and includes an option to renew for a period of one year. In March 2016, the Company signed a lease for additional space contiguous with its existing office space. The combined lease expires in June 2020.

 

The leases are accounted for as non-cancellable operating leases and future minimum payments are as follows (in thousands):

 

 

 

 

 

 

 

 

 

Years ending December 31,

 

 

For the remainder of the fiscal year

 

$

196

2017

 

 

807

2018

 

 

833

2019

 

 

859

2020

 

 

466

Thereafter

 

 

 —

 

Rent expense for the nine months ended September 30, 2016 and 2015 was $468,000 and $415,000 respectively.

 

Contingencies

 

From time to time, the Company may be subject to various litigation and related matters arising in the ordinary course of business. The Company does not believe it is currently subject to any material matters where there is at least a reasonable possibility that a material loss may be incurred.

 

On March 3, 2015, a verified class action complaint, captioned DePinto v. John S. Stafford, et al., C.A. No. 10742, was filed in the Court of Chancery of the State of Delaware against certain of the Company’s current and former directors alleging cause of action for Breach of Fiduciary Duty and Invalidity of Director and Stockholder Consents.  In general, the complaint alleged that the plaintiff and the class he seeks to represent were shareholders of the Company during the recapitalization and certain related transactions that the Company underwent in 2013 and that the defendants breached their fiduciary duties in the course of approving that series of transactions. It also challenged as invalid certain corporate acts taken in the 2013 time period.

 

On June 10, 2015, the Company filed a Verified Petition for Relief under Del. C. Section 205 (the 205 Petition) related to the corporate acts challenged in the complaint. The defendants filed an answer to the class action complaint on June 22, 2015. On July 9, 2015, the Court consolidated the 205 Petition with the class action, joined the Company as a

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defendant and ordered it to file the claims in the 205 Petition as counter-claims in the class action, which the Company has done. 

 

On August 11, 2015, the Company filed a Motion for Leave to File an Amended Counter-Claim, along with the proposed Amended Counter-Claim and related documents. On October 5, the parties filed a Stipulation of Partial Settlement and related documents disclosing a settlement of the invalidity claims addressed in the complaint, the counter-claim and the proposed amended counter-claim including a request by plaintiff’s counsel for reimbursement of legal fees up to $950,000. On October 7, 2015, Xencor filed the Amended Counter-Claim and related documents. On December 14, 2015, the Court entered an Order and Partial Final Judgment approving the settlement of the invalidity claims, validating each corporate act challenged in the complaint, dismissing with prejudice Count II of the complaint (the invalidity claims) and granting plaintiff’s counsel a fee award. We have paid the plaintiff’s legal award of $950,000 net of insurance proceeds of $187,500 which has been reflected as a charge in our 2015 operations.

 

On September 27, 2016, the parties engaged in voluntary mediation and agreed to settle the complaint’s remaining claims for a total payment of $2.375 million to the class certified by the Delaware Court of Chancery. The settlement, which is subject to approval by the Court, was reached without any party admitting wrong-doing. Under the terms of the settlement, no payments shall be made to the plaintiffs by the Company or any of the defendants in the lawsuit other than payments covered by the Company’s insurance. The Company currently expects that the court will approve the settlement in the first quarter of 2017.

 

We continue to recognize legal costs related to the litigation as incurred and offset any insurance proceeds when approved and issued. For the period ended September 30, 2016 no amount of loss related to the settlement has been accrued. As of September 30, 2016 we have reported the $2.375 million settlement as a payable and also reflected a receivable of the same amount for the insurance coverage that will fund the settlement.

 

8. Collaboration and Licensing Agreements

 

Following is a summary description of the arrangements that generated revenue in the nine months ended September 30, 2016 and 2015.

 

Novartis

 

In June 2016, the Company entered into a Collaboration and License Agreement (the Novartis Agreement) with Novartis Institutes for BioMedical Research, Inc., (Novartis), to develop and commercialize bispecific and other Fc modulated antibody drug candidates using the Company’s proprietary XmAb® technologies and drug candidates. Pursuant to the Agreement:

·

The Company granted Novartis certain exclusive rights to research, develop and commercialize XmAb14045 and XmAb13676, two development stage products that incorporate the Company’s bispecific Fc technology,

·

The Company will apply its bispecific technology in up to four target pair antibodies identified by Novartis (each a Global Discovery Program) and,

·

The Company will provide Novartis with a non-exclusive license to certain of its Fc technologies to apply against up to ten targets identified by Novartis.

The Company received a non-refundable upfront payment under the Novartis Agreement of $150 million in July 2016 and is eligible to receive up to $2.4 billion in future development, regulatory and sales milestones in total for all programs that could be developed under the Novartis Agreement.

 

Under the Novartis Agreement, the Company granted Novartis a worldwide co-exclusive license with Xencor to research, develop and manufacture XmAb14045 and XmAb13676. The Company also granted Novartis an exclusive license to commercialize XmAb14045 and XmAb13676 in all worldwide territories outside the United States (U.S.). Assuming successful development and commercialization of a product, the Company could receive up to $325 million in milestone payments for each of XmAb14045 and XmAb13676. The total potential milestones for each product include $90 million in development milestones, $110 million in regulatory milestones and, $125 million in sales milestones. If

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commercialized, the Company is eligible to receive tiered low double-digit royalties on global net sales of approved products outside the US.

 

The Company and Novartis will co-develop XmAb14045 and XmAb13676 worldwide and share development costs equally. The Company may elect to opt-out of the development of either program by providing notice to Novartis.  If the Company elects to opt-out with respect to a program, Novartis will receive the Company’s U.S. rights to the program and the Company will receive low double-digit royalties on U.S. net sales in addition to the royalties on net sales outside the US.

 

Pursuant to the Novartis Agreement, the Company will apply its bispecific technology to up to four target pair antibodies selected, available for exclusive license to Novartis and not subject to a Xencor internal program. The Company will apply its bispecific technology to generate bispecific antibody candidates from starting target pair antibodies provided by Novartis for each of the four Global Discovery Programs and return the bispecific product candidate to Novartis for further testing, development and commercialization. Novartis has the right to substitute up to four of the original selected target pair antibodies during the research term provided that Novartis has not filed and received acceptance for an Investigational New Drug Application (IND) with the Xencor provided bispecific candidate. The research term is five years from the date of the Novartis Agreement.

 

Novartis will assume full responsibility for development and commercialization of each product candidate under each of the Global Discovery Programs. Assuming successful development and commercialization of each Global Discovery Program compound, the Company could receive up to $250.0 million in milestones for each Global Discovery Program which includes $50.0 million in development milestones, $100.0 million in regulatory milestones and $100.0 million in sales milestones. If commercialized, the Company is eligible to receive mid-single digit royalties on global net sales of approved products.

 

Under the Novartis Agreement, the Company has the right to participate in the development and commercialization of one of the Global Discovery Programs prior to filing an IND for Global Discovery Program. If the Company elects to participate in development, it will assume responsibility for 25% of the worldwide development costs for the program and 50% of commercialization costs and will receive 50% of the US profits on net sales of the product.

 

Under the Novartis Agreement, the Company is also granting Novartis a non-exclusive research license to use certain of the Company’s Fc technologies, specifically Cytotoxic, Xtend and Immune Inhibitor to research, develop, commercialize and manufacture antibodies against up to ten targets selected by Novartis, available for non-exclusive license and not subject to a Xencor internal program. Novartis will assume all research, development and commercialization costs for products that are developed from application of the Fc technologies. Assuming successful development and commercialization of a compound that incorporates an Fc technology, the Company could receive up to $76.0 million in milestones for each target which includes $16.0 million in development milestones, $30.0 million in regulatory milestones and $30 million in sales milestones. If commercialized, the Company is eligible to receive low single-digit royalties on global net sales of approved products.

 

The Company evaluated the Novartis Agreement and determined that it is a revenue arrangement with multiple deliverables or performance obligations. The Company’s substantive performance obligations under the Novartis Agreement include:

·

delivery of an exclusive license to commercialize XmAb14045 in worldwide territories outside the U.S., with worldwide co-exclusive rights with Xencor to research, develop and manufacture XmAb14045

·

delivery of an exclusive license to commercialize XmAb13676 in worldwide territories outside the U.S., with worldwide co-exclusive rights with Xencor to research, develop and manufacture XmAb13676