Xencor, Inc.
Xencor Inc (Form: 10-Q, Received: 05/10/2017 06:10:10)

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 March  31, 2017

 

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

 

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

 

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 May 2, 2017

Common stock, $0.01 par value

 

46,703,182

 

 

 

 

 

 


 

Table of Contents

Xencor, Inc.

 

Quarterly Report on FORM 10-Q for the quarter ended March  31, 2017

 

Table of C ontents

 

 

 

 

 

Page

 

 

 

 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

3

PART I.  

FINANCIAL INFORMATION

4

Item 1.  

Financial Statements

4

 

Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016

4

 

Statements of Comprehensive Loss for the Three Months ended March 31, 2017 and 2016 (unaudited)

5

 

Statement of Stockholders’ Equity as of March  31, 2017 (unaudited)

6

 

Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (unaudited)

7

 

Notes to Financial Statements (unaudited)

8

Item 2.  

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

21

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.  

Controls and Procedures

29

 

 

 

PART II.  

OTHER INFORMATION

29

Item 1.  

Legal Proceedings

29

Item 1A.  

Risk Factors

30

Item 6.  

Exhibits

30

 

 

 

Signatures  

31

 

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.

 

2


 

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 research, 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, 2016 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.

3


 

Table of Contents

PART I — FINANCIAL INFORMATION

Item1. Financial Statements

 

Xencor, Inc.

Balance Sheet s

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,561

 

$

14,528

 

Marketable securities

 

 

141,225

 

 

115,608

 

Accounts receivable

 

 

6,938

 

 

8,616

 

Prepaid expenses and other current assets

 

 

4,365

 

 

2,901

 

Total current assets

 

 

166,089

 

 

141,653

 

Property and equipment, net

 

 

3,360

 

 

3,105

 

Patents, licenses, and other intangible assets, net

 

 

10,886

 

 

10,362

 

Marketable securities - long term

 

 

237,865

 

 

273,340

 

Other assets

 

 

103

 

 

103

 

Total assets

 

$

418,303

 

$

428,563

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

4,275

 

$

3,880

 

Accrued expenses

 

 

6,502

 

 

6,692

 

Current portion of deferred rent

 

 

135

 

 

128

 

Current portion of deferred revenue

 

 

95,788

 

 

95,521

 

Income taxes

 

 

175

 

 

65

 

Total current liabilities

 

 

106,875

 

 

106,286

 

Deferred rent, less current portion

 

 

361

 

 

397

 

Deferred revenue, less current portion

 

 

7,319

 

 

7,926

 

Total liabilities

 

 

114,555

 

 

114,609

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: 10,000,000 authorized shares; -0- issued and outstanding shares at March 31, 2017 and December 31, 2016

 

 

 —

 

 

 —

 

Common stock, $0.01 par value: 200,000,000 authorized shares at March 31, 2017 and December 31, 2016; 46,689,447 issued and outstanding at March 31, 2017 and 46,567,978 issued and outstanding at December 31, 2016

 

 

467

 

 

466

 

Additional paid-in capital

 

 

557,473

 

 

552,889

 

Accumulated other comprehensive loss

 

 

(1,196)

 

 

(1,441)

 

Accumulated deficit

 

 

(252,996)

 

 

(237,960)

 

Total stockholders’ equity

 

 

303,748

 

 

313,954

 

Total liabilities and stockholders’ equity

 

$

418,303

 

$

428,563

 

 

See accompanying notes .

 

4


 

Table of Contents

Xencor, Inc.

Statements of Comprehensive Loss

(unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

Collaborations, licenses and milestones

 

$

4,340

 

$

7,252

 

Operating expenses

 

 

 

 

 

 

 

Research and development

 

 

15,048

 

 

10,035

 

General and administrative

 

 

4,811

 

 

3,950

 

Total operating expenses  

 

 

19,859

 

 

13,985

 

Loss from operations  

 

 

(15,519)

 

 

(6,733)

 

Other income (expenses)

 

 

 

 

 

 

 

Interest income

 

 

1,057

 

 

359

 

Interest expense

 

 

(3)

 

 

(27)

 

Other income

 

 

 —

 

 

 3

 

Total other income, net

 

 

1,054

 

 

335

 

 

 

 

 

 

 

 

 

Loss before income tax expense

 

 

(14,465)

 

 

(6,398)

 

Income tax expense

 

 

170

 

 

 —

 

Net loss

 

 

(14,635)

 

 

(6,398)

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

Net unrealized gain on marketable securities

 

 

245

 

 

619

 

Comprehensive loss

 

$

(14,390)

 

$

(5,779)

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(0.31)

 

$

(0.16)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding used to compute basic and diluted net loss per share

 

 

46,598,797

 

 

40,626,729

 

 

See accompanying notes .  

5


 

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, 2016 as originally reported

 

46,567,978

 

$

466

 

$

552,889

 

$

(1,441)

 

$

(237,960)

 

$

313,954

Adoption of ASU 2016-09 (see note 1)

 

 —

 

 

 —

 

 

401

 

 

 —

 

 

(401)

 

 

 —

Balance December 31, 2016 as restated

 

46,567,978

 

 

466

 

 

553,290

 

 

(1,441)

 

 

(238,361)

 

 

313,954

Issuance of common stock upon exercise and vesting of stock awards

 

121,469

 

 

 1

 

 

1,025

 

 

 —

 

 

 —

 

 

1,026

Comprehensive income (loss)

 

 —

 

 

 —

 

 

 —

 

 

245

 

 

(14,635)

 

 

(14,390)

Stock-based compensation

 

 —

 

 

 —

 

 

3,158

 

 

 —

 

 

 —

 

 

3,158

Balance, March 31, 2017 (unaudited)

 

46,689,447

 

$

467

 

$

557,473

 

$

(1,196)

 

$

(252,996)

 

$

303,748

 

See accompanying notes .  

 

6


 

Table of Contents

Xencor, Inc.

Statements of Cash Flow s

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(14,635)

 

$

(6,398)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

410

 

 

282

 

Amortization of premium on marketable securities

 

 

659

 

 

426

 

Stock-based compensation

 

 

3,158

 

 

1,960

 

Abandonment of capitalized intangible assets

 

 

 9

 

 

 9

 

Gain on sale of marketable securities available for sale

 

 

 —

 

 

(3)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

1,678

 

 

(604)

 

Interest receivable

 

 

(479)

 

 

41

 

Prepaid expenses and other assets

 

 

(1,465)

 

 

(683)

 

Accounts payable

 

 

395

 

 

(2,109)

 

Accrued expenses

 

 

(190)

 

 

(1,243)

 

Income taxes

 

 

110

 

 

 —

 

Deferred rent

 

 

(30)

 

 

(26)

 

Deferred revenue

 

 

(340)

 

 

(5,952)

 

Net cash used in operating activities

 

 

(10,720)

 

 

(14,300)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(6,988)

 

 

(16,340)

 

Purchase of intangible assets

 

 

(702)

 

 

(343)

 

Purchase of property and equipment

 

 

(494)

 

 

(317)

 

Proceeds from sale and maturities of marketable securities

 

 

16,911

 

 

26,660

 

Net cash provided by investing activities

 

 

8,727

 

 

9,660

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock upon exercise of stock awards

 

 

1,026

 

 

200

 

Net cash provided by financing activities

 

 

1,026

 

 

200

 

Net decrease in cash and cash equivalents

 

 

(967)

 

 

(4,440)

 

Cash and cash equivalents , beginning of period

 

 

14,528

 

 

12,590

 

Cash and cash equivalents , end of period

 

$

13,561

 

$

8,150

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

 3

 

$

 —

 

Income taxes

 

$

60

 

$

 —

 

Supplemental disclosures of non-cash investing activities

 

 

 

 

 

 

 

Unrealized gain on marketable securities, net of tax

 

$

245

 

$

619

 

 

See accompanying notes .  

 

7


 

Table of Contents

Xencor, Inc.

 

Notes to Financial Statements

(unaudited)

 

March 31, 2017

 

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 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 1, 2017.

 

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

 

Pronouncements Adopted in 2017

 

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.  In addition, the standard allows an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, as currently required, or account for forfeitures of awards in the period that they occur. We adopted the new standard on January 1, 2017 and established an accounting policy election to account for forfeitures when they occur. We applied the modified retrospective approach which resulted in a cumulative-effect adjustment of a decrease of $0.4 million to retained earnings and additional paid-in capital. The adoption will result in periodic adjustments in the recognition of stock compensation expense associated with forfeitures in the period in which they occur. The remaining aspects of adopting ASU 2016-09 did not have a material impact on our financial statement position or results from operations.

 

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Table of Contents

Pronouncements Not Yet Effective

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers , as a new Topic, Accounting Standards Codification Topic 606 (“ASU 2014-09”). The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or  services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customer   Topic 606, Principal versus Agent Considerations , which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers Topic 606, Identifying Performance Obligations and Licensing , which clarifies certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers Topic 606, Narrow-Scope Improvements and Practical Expedients ,   related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes collected from customers. In December 2016, the FASB issued ASU No. 2016-20, T echnical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers , which amends certain narrow aspects of the guidance issued in ASU 2014-09 including guidance related to the disclosure of remaining performance obligations and prior-period performance obligations, as well as other amendments to the guidance on loan guarantee fees, contract costs, refund liabilities, advertising costs and the clarification of certain examples. These ASUs are effective for public entities for interim and annual reporting periods beginning after December 15, 2017, including interim periods within that year, which for us is the period beginning January 1, 2018. The Company will adopt the new standard in 2018 and  is currently evaluating and planning for its implementation including assessing its overall impact during the second and third quarter of 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. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. Credit losses on available-for-sale securities will be required when the amortized cost is below the fair market value.The amendment is effective for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. We will apply the standard’s provision as a cumulative effect adjustment to retained earnings as of the beginning of the first effective reporting period. We do not expect the adoption to have a material impact on our results of operations or financial position.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The standard clarifies when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. The amendment is effective for fiscal years beginning after December 15, 2017 with early adoption permitted. We continue to review the requirements of this standard and any potential impact it may have on our cash flow statement.

In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which amends the guidance on the amortization period of premiums on certain purchased callable debt securities by shortening the amortization period of premiums to the earliest call date. The amendment affects all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date. The amendment is effective for fiscal years beginning after December 31, 2018 with early adoption permitted. The Company will review the requirements of the standard but does not anticipate it will have a significant impact  on our financial statements.

There have been no other material changes to the significant accounting policies previously disclosed in the Company’s 2016 Annual Report on Form 10-K.

 

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Table of Contents

2.   Fair Value of Financial Instruments

 

Financial instruments included in the financial statements include cash equivalents, marketable securities, 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.

 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

    

Total

    

    

 

 

 

 

    

Total

    

    

 

 

 

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Fair Value

 

Level 1

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Funds

 

$

11,057

 

$

11,057

 

$

 —

 

$

12,137

 

$

12,137

 

$

 —

Corporate Securities

 

 

164,682

 

 

 —

 

 

164,682

 

 

181,483

 

 

 —

 

 

181,483

Government Securities

 

 

214,408

 

 

 —

 

 

214,408

 

 

207,465

 

 

 —

 

 

207,465

 

 

$

390,147

 

$

11,057

 

$

379,090

 

$

401,085

 

$

12,137

 

$

388,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 months ended March  31, 2017, there were no transfers between Level 1 and Level 2. The Company does not have any Level 3 assets or liabilities.

 

3. Net Loss Per Share  

 

We compute net loss per common share by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period without consideration of common stock equivalents. Diluted loss per share is computed by dividing the net 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.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

 

 

(in thousands, except share

 

 

and per share data)

Numerator:

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(14,635)

 

$

(6,398)

 

Denominator:

 

 

 

 

 

 

 

Weighted-average common shares outstanding used in computing basic and diluted net loss

 

 

46,598,797

 

 

40,626,729

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(0.31)

 

$

(0.16)

 

 

 

 

 

 

 

 

 

 

For the three months ended March  31, 2017 and 2016 1,474,000 shares and 1,050,000 shares, respectively, of 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 loss

 

Comprehensive loss is comprised of net loss and other comprehensive income (loss). For the three months ended March  31, 2017 and 2016, the only component of other comprehensive loss is net unrealized gains on marketable securities.  There were no material reclassifications out of accumulated other comprehensive income (loss) during the three months ended March  31, 2017 and 2016.

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5. Marketable Securities

 

The Company’s marketable securities held as of March 31, 2017 and December 31, 2016 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

    

Amortized

    

Unrealized

 

Unrealized

    

 

    March 31, 2017

 

Cost

 

Gains

 

Losses

 

Fair Value

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Funds

 

$

11,057

 

$

 —

 

$

 —

 

$

11,057

Corporate Securities

 

 

165,269

 

 

10

 

 

(597)

 

 

164,682

Government Securities

 

 

215,008

 

 

16

 

 

(616)

 

 

214,408

 

 

$

391,334

 

$

26

 

$

(1,213)

 

$

390,147

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as

 

 

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

$

11,057

    Marketable securities

 

 

 

 

 

 

 

 

 

 

 

379,090

Total investments

 

 

 

 

 

 

 

 

 

 

$

390,147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

    

Amortized

    

Unrealized

 

Unrealized

    

 

   December 31, 2016

 

Cost

 

Gains

 

Losses

 

Fair Value

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Funds

 

$

12,137

 

$

 —

 

$

 —

 

$

12,137

Corporate Securities

 

 

182,394

 

 

 6

 

 

(917)

 

 

181,483

Government Securities

 

 

207,986

 

 

44

 

 

(565)

 

 

207,465

 

 

$

402,517

 

$

50

 

$

(1,482)

 

$

401,085

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as

 

 

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

$

12,137

    Marketable securities

 

 

 

 

 

 

 

 

 

 

 

388,948

Total investments

 

 

 

 

 

 

 

 

 

 

$

401,085

 

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

 

 

 

 

 

 

 

 

 

 

Amortized

    

Estimated

    March 31, 2017

 

Cost

 

Fair Value

    (in thousands)

 

 

 

 

 

 

    Mature in one year or less

 

$

141,371

 

$

141,225

    Mature after one year

 

 

238,906

 

 

237,865

 

 

$

380,277

 

$

379,090

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

    

Estimated

   December 31, 2016

 

Cost

 

Fair Value

    (in thousands)

 

 

 

 

 

 

    Mature in one year or less

 

$

115,748

 

$

115,608

    Mature after one year

 

 

274,632

 

 

273,340

 

 

$

390,380

 

$

388,948

 

 

The unrealized losses on available-for-sale investments and their related fair values as of March 31, 2017 and December 31, 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or greater

March 31, 2017

 

 

Fair value

 

 

Unrealized losses

 

 

Fair value

 

 

Unrealized losses

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Securities

 

$

78,164

 

$

(82)

 

$

72,512

 

$

(515)

Government Securities

 

 

48,472

 

 

(71)

 

 

141,980

 

 

(545)

 

 

$

126,636

 

$

(153)

 

$

214,492

 

$

(1,060)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or greater

December 31, 2016

 

 

Fair value

 

 

Unrealized losses

 

 

Fair value

 

 

Unrealized losses

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Securities

 

$

82,215

 

$

(133)

 

$

88,990

 

$

(784)

Government Securities

 

 

17,573

 

 

(16)

 

 

149,694

 

 

(549)

 

 

$

99,787

 

$

(149)

 

$

238,684

 

$

(1,333)

 

The unrealized losses from the listed securities are due to a change in the interest rate environment and not a change in the credit quality of the securities.

 

 

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

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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 March 31, 2017 the total number of shares of common stock available for issuance under the 2013 Plan is 8,768,599, 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, 2017, the total number of shares of common stock available for issuance under the 2013 Plan was increased by 1,862,719 shares. As of March 31, 2017 a total of 4,686,672 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 2017. As of March 31, 2017, we have issued a total of 221,486 shares of common stock under the ESPP.

 

Total employee, director and non-employee stock-based compensation expense recognized for the three months ended March 31, 2017 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

General and administrative

 

$

1,467

 

$

952

 

Research and development

 

 

1,691

 

 

1,008

 

 

 

$

3,158

 

$

1,960

 

 

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, 2016

 

4,045,801

 

$

11.95

 

 

7.82

 

 

 

Options granted

 

1,135,600

 

$

22.67

 

 

 

 

 

 

Options forfeited

 

(72,678)

 

$

15.40

 

 

 

 

 

 

Options exercised

 

(121,469)

 

$

8.45

 

 

 

 

 

 

Balance at March 31, 2017

 

4,987,254

 

$

14.43

 

 

8.05

 

$

47,683

Exercisable

 

2,072,560

 

$

9.61

 

 

6.70

 

$

29,654

 

We calculate the intrinsic value as the difference between the exercise price of the options and the closing price of common stock of $23.92 per share as of March 31, 2017.

 

Weighted average fair value of options granted during the three-month period ended March 31, 2017 and 2016 was $16.95 and $8.30 per share, respectively.  There were 957,000 options granted during the period ended March 31, 2016. We estimated the fair value of each stock option using the Black-Scholes option-pricing model based on the date

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of grant of such stock option with the following weighted average assumptions for the three months ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

Options

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

Expected term (years)

 

6.2

 

6.1

 

Expected volatility

 

89.2

%

75.8

%

Risk-free interest rate

 

2.07

%

1.56

%

Expected dividend yield

 

 —

%  

 —

%  

 

 

 

 

 

 

 

 

 

 

ESPP

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

Expected term (years)

 

0.5 - 2.0

 

0.5 - 2.0

 

Expected volatility

 

67.8 - 79.8

%

67.8

%

Risk-free interest rate

 

.55 - .93

%

.55 - .93

%

Expected dividend yield

 

 —

%

 —

%

 

As of March 31, 2017, the unamortized compensation expense related to unvested stock options was $35.4 million.  As of March 31, 2016, the unamortized compensation expense related to unvested stock options net of estimated forfeitures was $16.3 million. The remaining unamortized compensation expense will be recognized over the next three years. As of March 31, 2017 and 2016, the unamortized compensation expense under our ESPP was $339,000 and $418,000, respectively. The remaining unamortized expense will be recognized over the next 8.5 months.

 

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 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

 

$

607

2018

 

 

833

2019

 

 

859

2020

 

 

466

Thereafter

 

 

 —

 

Rent expense for the three months ended March  31, 2017 and 2016 was $189,000 and $143,000 respectively.

 

In April 2017, the Company entered into a Letter of Intent (“LOI”) to lease additional office space in San Diego, CA. Under the terms of the LOI, the Company would lease approximately 23,700 square feet of office space for a five-year period beginning from the date of occupancy. The total payments over the term of the lease would be $5.7 million. The Company expects to complete the lease negotiations and take occupancy of the space in the second quarter of 2017.

 

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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.

 

The plaintiffs and the Company agreed to separate the litigation into two separate claims; Count I relating to the claim of Breach of Fiduciary Duty by the current and former directors of the Company and, Count II relating to the Invalidity of Director and Stockholder consents. 

 

On December 14, 2015, the Delaware Chancery Court entered an Order and Partial Final Judgment in connection with Count II and approved 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 of $950,000. 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 claim, Count II, 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.

 

On April 4, 2017, the Delaware Court of Chancery approved the Settlement between the parties. On May 1, 2017, the Company’s insurance carriers fully funded the settlement account.

 

We continue to recognize legal costs related to the litigation as incurred and offset any insurance proceeds when approved and issued. As of March  31, 2017 and December 31, 2016 we have reported the $2.355 million settlement as a payable and also reflected a receivable of the same amount for the insurance coverage that will fund the settlement.

 

We are obligated to make future payments to third parties under in‑license agreements, including sublicense fees, royalties, and payments that become due and payable on the achievement of certain development and commercialization milestones. As the amount and timing of sublicense fees and the achievement and timing of these milestones are not probable and estimable, such commitments have not been included on our balance sheet.

 

8. Collaboration and Licensing Agreements

 

Following is a summary description of the arrangements that generated revenue in the three months ended March 31, 2017 and 2016.

 

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

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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.

 

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

·

application of its bispecific technology to four Novartis selected target pair antibodies and delivery of four bispecific product candidates and,

·

delivery of a non-exclusive license to its Fc technologies: Cytotoxic, Xtend and Immune Inhibitor

 

The Company determined that the $150 million upfront payment represents the total initial consideration and was allocated to each of the deliverables using the relative selling price method. The Company determined that each of the development and regulatory milestones is substantive. Although sales milestones are not considered substantive, they are still recognized upon achievement of a milestone. After identifying each of the deliverables included in the arrangement, the Company determined the relative selling price using its best estimate of selling price for each of the deliverables.

 

The total allocable consideration of $150 million was allocated to the deliverables based on the relative selling price method as follows:

 

*

$27.1 million to certain rights to the XmAb14045 Program,

*

$31.4 million to certain rights to the XmAb13676 Program,

*

$20.05 million to each of the four Global Discovery Programs and,

*

$11.3 million to the Fc licenses

 

The Company recognized as license revenue the amount of the total allocable consideration allocated to the rights to the XmAb13676 and XmAb14045 Programs upon delivery of the exclusive license to Novartis both of which were transferred as of the effective date of the Novartis Agreement. At the time that each Global Discovery Program is accepted by Novartis, the Company will recognize collaboration revenue of $20.05 million for each program. Since Novartis has substitution rights for up to four target pair antibodies, revenue recognition may be delayed until the earlier that Novartis has an open IND for a delivered bispecific Discovery Program or the right to substitute the target pair lapses. No bispecific antibodies for Global Discovery Programs have been delivered as of March 31, 2017.

 

The Company will recognize as licensing revenue the amount of the total consideration allocated to the Fc license over the five year research term beginning from the effective date of the Novartis Agreement.

 

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During the three months ended March 31, 2017, we recognized $0.6 million. No revenue was recognized for the three months ended March 31, 2016. As of March 31, 2017 there is $89.7 million in deferred revenue related to the arrangement.

 

Amgen, Inc.

 

In September 2015, the Company entered into a research and license agreement (the Amgen Agreement) with Amgen, Inc. (Amgen) to develop and commercialize bispecific antibody product candidates using the Company’s proprietary XmAb® bispecific Fc technology. Under the Amgen Agreement, the Company granted an exclusive license to Amgen to develop and commercialize bispecific drug candidates from the Company’s preclinical program that bind the CD38 antigen and the cytotoxic T-cell binding domain CD3, (the CD38 Program). The Company will also apply its bispecific technology to five previously identified Amgen provided targets (each a Discovery Program). The Company received a $45.0 million upfront payment from Amgen and is eligible to receive up to $1.7 billion in future development, regulatory and sales milestones in total for all six programs and is eligible to receive royalties on any global net sales of products.

 

In the fourth quarter ended December 31, 2015, the Company transferred the research material and data related to its CD38 Program to Amgen. Amgen will assume full responsibility for the further development and commercialization of product candidates under the CD38 Program. Assuming successful development and commercialization of a product, the Company could receive up to $355 million in milestones payments which include $55 million in development milestones, $70 million in regulatory milestones and, $230 million in sales milestones. If commercialized, the Company is eligible to receive from high single-digit up to low double-digit royalties on global net sales of approved products under the CD38 Program.

 

Pursuant to the Amgen Agreement, for each of the five Discovery Programs the Company will apply its bispecific technology to antibody molecules provided by Amgen that bind Discovery Program Targets and return the bispecific product candidates to Amgen for further testing, development and commercialization. Subject to approval by Xencor, Amgen has the right to substitute up to three of the previously identified targets during the research term provided that Amgen has not initiated non-human primate studies with the Xencor provided bispecific candidate. The initial research term is three years from the date of the Amgen Agreement but Amgen, at its option, may request an extension of one year if Xencor has not completed delivery of all five Discovery Program bispecific candidates to Amgen.

 

Amgen will assume full responsibility for development and commercialization of product candidates under each of the Discovery Programs. Assuming successful development and commercialization of each Discovery Program compound, the Company could receive up to $260.5 million in milestones for each compound which include $35.5 million in development milestones, $55.0 million in regulatory milestones and $170.0 million in sales milestones. If commercialized, the Company is eligible to receive mid to high single-digit royalties on global net sales of approved products.

 

The Company evaluated the Amgen Agreement and determined that it is a revenue arrangement with multiple deliverables or performance obligations. The Company’s substantive performance obligations under the Amgen Agreement include delivery of research material and data related to its CD38 Program and application of its bispecific technology to five Amgen provided targets and delivery of the five bispecific product candidates. The Company evaluated the Amgen Agreement and determined that the CD38 Program and each of the five Discovery Programs represent separate units of accounting.

 

The $45 million upfront payment represents the total initial consideration and was allocated to each of the deliverables using the relative selling price method. After identifying each of the deliverables included in the arrangement, the Company determined its best estimate of selling price for each of the deliverables.

 

The total allocable consideration of $45 million was allocated to the deliverables based on the relative selling price method as follows:

 

$13.75 million to the CD38 Program and,

$6.25 million to each of the five Discovery Programs

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The Company recognized as collaboration revenue the amount of consideration allocated to the CD38 Programs upon delivery of the CD38 research material and data to Amgen in the fourth quarter of 2015.

 

During 2016, the Company recognized as collaboration revenue the amount of consideration for delivery of three Discovery Programs; the Company delivered bispecific antibody candidates for five Discovery Programs and Amgen elected to substitute one of the originally identified antibody candidates. There were no additional Discovery Programs delivered in the three months ended March 31, 2017 and there were  no additional substitutions of originally identified candidate by Amgen during the three months ended March 31, 2017.

 

During the three months ended March 31, 2017 and 2016, we recognized zero and $6.25 million in revenue under this arrangement, respectively. As of March 30, 2017 there is $12.5 million in deferred revenue related to the arrangement.

 

Merck Sharp & Dohme Corporation

 

In July 2013, we entered into a License Agreement with Merck Sharp & Dohme Corp (Merck). Under the terms of the agreement, we provided Merck with a non-exclusive commercial license to certain patent rights to our Fc domains to apply to one of their compounds. The agreement provided for an upfront payment of $1.0 million and annual maintenance fees totaling $0.5 million. We are also eligible to receive future milestones and royalties as Merck advances the compound into clinical development.

 

We determined that the deliverables under this agreement were the non-exclusive commercial license and the options. The options are considered substantive and contingent and no amount of the upfront payment was allocated to these options. We also determined that the future milestones and related payments were substantive and contingent and did not allocate any of the upfront payment to the milestones.

 

During each of the three months ended March 31, 2017 and 2016 we recognized $25,000 of revenue respectively. As of March 31, 2017, there is $25,000 of deferred revenue related to this arrangement.

 

Alexion Pharmaceuticals, Inc.

 

In January 2013, we entered into an option and license agreement with Alexion Pharmaceuticals, Inc. (Alexion). Under the terms of the agreement, we granted to Alexion an exclusive research license, with limited sublicensing rights, to make and use our Xtend technology to evaluate and advance compounds against six different target programs during a five-year research term under the agreement, up to completion of the first multi-dose human clinical trial for each target compound.  Alexion may extend the research term for an additional three years upon written notice to us and payment of an extension fee of $2.0 million. Alexion is responsible for conducting all research and development activities under the agreement at its own expense.

 

Under the agreement, we received an upfront payment of $3.0 million. Alexion is also required to pay an annual maintenance fee of $0.5 million during the research term of the agreement and $1.0 million during any extension of the research term. We determined that $2.5 million of the upfront fee was allocated to the license and is being recognized into income over the initial research term of five years. 

 

In the third quarter of 2014, Alexion achieved a clinical development milestone with an undisclosed molecule to be used against an undisclosed target. In the fourth quarter of 2015, Alexion exercised its option to take an exclusive commercial license and achieved a further clinical development milestone.

 

In December 2016, Alexion achieved a Phase 3 clinical development milestone for an undisclosed target for which we received a $5 million milestone payment.

 

During each of the three months ended March 31, 2017 and 2016 we recognized $250,000 in revenues. As of March 31, 2017, we have deferred revenue related to this arrangement of $0.8 million.

 

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Novo Nordisk A/S

 

In December 2014, we entered into a collaboration and license agreement with Novo Nordisk A/S (Novo). Under the terms of the agreement we granted Novo a research license to use certain Xencor technologies including our bispecific, Fcy-IIb, Xtend and other technologies during a two-year research term. In connection with the agreement we received a $2.5 million upfront payment and funding for research support during the research term.

 

We recognized the $2.5 million upfront payment as income over the two-year research term. The research funding is being recognized into income over the period that the services are being provided. We determined that future milestone payments were substantive and contingent and we did not allocate any of the upfront consideration to these milestones.

 

During the three months ended March 31, 2017 and 2016, we recognized zero and $0.7 million of revenue, respectively. As of March 31, 2017, we have no deferred revenue related to this arrangement.

 

CSL Limited

 

In February 2009, we entered into a Research License and Commercialization Agreement with CSL Limited (CSL). Under the agreement, we provided CSL with a research license to our Fc Cytotoxic technology and options to non-exclusive commercial licenses. CSL elected to exercise one commercial license for a compound, CSL362. 

 

In 2013 CSL sublicensed CSL362 (now called talacotuzumab) to Janssen Biotech Inc. (Janssen Biotech). In March 2017, CSL, through its sub-licensee, Janssen Biotech, initiated a Phase 3 clinical trial for CSL362. As a result of the Phase 3 clinical trial initiation, we received a milestone payment of $3.5 million.

 

During the three months ended March 31, 2017 and March 31, 2016, we recognized $3.5 million and zero of revenue, respectively. As of March 31, 2017, we have no deferred revenue related to this arrangement.

 

9. Income taxes

 

The provision for income taxes for the three-month period ended March 31, 2017 represents the interim period tax allocation of the federal and state alternative minimum tax based on the Company’s projected year-end effective income tax rates which cannot be offset by the Company’s net operating loss carryforwards, No provision for income tax was made for the three-month period ended March 31, 2016 because the Company incurred a loss from operations and its projected year end effective tax rate was zero. The Company has deferred tax assets consisting primarily of net operating loss and tax credit carryforwards that have been fully offset by a valuation allowance.

 

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

 

The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes thereto for the fiscal year ended December 31, 2016 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2016.  This Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended, (the Exchange Act). Such forward-looking statements, which represent our intent, belief, or current expectations, involve risks and uncertainties. We use words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” “should” and similar expressions to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Such statements may include, but are not limited to, statements concerning: (i) the initiation, cost, timing, progress and results of our research and development activities, preclinical studies and future clinical trials, including our expected timeline for nominating clinical development candidates under our strategic alliances and our expected timeline for filing applications with regulatory authorities;(ii) our ability to obtain and maintain regulatory approval of our future product candidates, and any related restrictions, limitations, and/or warnings in the label of an approved product candidate; (iii) our ability to obtain funding for our operations; (iv) our plans to research, develop and commercialize our future product candidates; (v) our ability to attract collaborators with development, regulatory and commercialization expertise; (vi) our ability to obtain and maintain intellectual property protection for our technology; (vii) the size and growth potential of the markets for our technology and future product candidates, and our ability to serve those markets; (viii) our ability to successfully commercialize our technology and our future product candidates; (ix) our ability to develop sales and marketing capabilities, whether alone or with potential future collaborators; (x) regulatory developments in the United States and foreign countries; and (xi) the performance of our collaboration partners, licensees, third-party suppliers and manufacturers.  Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. As a result of many factors, including without limitation those set forth under “Risk Factors” under Item 1A of Part II below, and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

 

Company Overview

 

We are a clinical-stage biopharmaceutical company focused on discovering and developing engineered monoclonal antibodies to treat severe and life-threatening diseases with unmet medical needs. We use our proprietary XmAb technology platform to create next-generation antibody product candidates designed to treat autoimmune and allergic diseases, cancer and other conditions. In contrast to conventional approaches to antibody design, which focus on the portion of antibodies that interact with target antigens, we focus on the portion of the antibody that interacts with multiple segments of the immune system. This portion, referred to as the Fc domain, is constant and interchangeable among antibodies. Our engineered Fc domains, the XmAb technology, can be readily substituted for natural Fc domains.

 

Our business strategy is based on the plug‑and‑play nature of the XmAb technology, allowing us to create new antibody drug candidates for our internal development or licensing, or to selectively license access to one or more of our XmAb technologies or product candidates to pharmaceutical or biotechnology companies to use in developing their own proprietary antibodies and drug candidates with improved properties.  These licensing transactions provide us with multiple revenue streams that help fund development of our wholly owned product candidates and usually require limited resources or efforts from us.  There are currently eleven antibody product candidates in clinical trials that have been engineered with XmAb technology, including seven candidates being advanced by licensees and development partners.

 

Our protein engineering capabilities allow us to continue to expand the functionality of the XmAb technology platform to identify new protein enhancements and create new antibody drug candidates with improved properties. Our bispecific technology, heterodimer Fc domains, enables the creation of bispecific drug candidates, which are antibodies that are engineered to bind two targets simultaneously. The core of our bispecific programs is a novel Fc domain that is a

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robust and portable scaffold for two, or potentially more, different antigen binding domains.  Our Fc domain technology is designed to maintain full-length antibody properties in a bispecific antibody, potentially enabling stable molecules with favorable in vivo half-life and allowing for the use of standard antibody production methods.  The portability of the bispecific technology, including the ability of bispecific candidates generated from our technology to use standard production methods, allows us to license access to our technology as highlighted in our two bispecific licensing transactions that we entered into with Amgen and Novartis in 2015 and 2016, respectively.

 

We are also developing a pipeline of drug candidates around our bispecific technology. Within the past year, our two lead bispecific drug candidates entered into Phase 1 stage of clinical development and we plan to file an IND for our third bispecific clinical candidate by the end of 2017 and enter the clinic in early 2018 with additional candidates entering into clinical development in 2018 and 2019. 

 

In June 2016 we entered into the Novartis Agreement which included a $150 million upfront payment and up to $2.4 billion in potential development, regulatory and sales milestones. As part of the Agreement, we will apply our bispecific technology to up to four target pair antibodies selected, available for exclusive license to Novartis and not subject to a Xencor internal program.

 

We will apply our 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.  Assuming successful development and commercialization of each bispecific compound, we could receive up to $250 million in milestones for each compound which includes $50 million in development milestones, $100 million in regulatory milestones and $100 million in sales milestones. If commercialized, the Company is eligible to receive mid-single digit royalties on global net sales of approved products.

 

In September 2015 we entered into the Amgen Agreement which included a $45 million upfront payment and up to $1.7 billion in future development, regulatory and sales milestones if all programs under the agreement advance into development. In connection with the Amgen Agreement, we are applying our bispecific technology to up to five previously identified molecules identified by Amgen and approved by us. We are applying our bispecific technology to each of the five identified programs and returning the bispecific product candidates to Amgen, who is assuming full responsibility for further testing, development and commercialization. Assuming successful development and commercialization of each bispecific compound, we could receive up to $260.5 million in milestones which include $35.5 million in development milestones, $55 million in regulatory milestones and $170 million in sales milestones. If commercialized, we are eligible to receive mid to high-single digit royalties on global net sales of approved products. Through September 30, 2016 we have delivered five bispecific product candidates to Amgen under the Agreement. 

 

Since we commenced active operations in 1998, we have devoted substantially all of our resources to staffing our company, business planning, raising capital, developing our technology platforms, identifying potential product candidates, undertaking pre-clinical and IND enabling studies and conducting clinical trials. We have no products approved for commercial sale and have not generated any revenues from product sales, and we continue to incur significant research and development expenses and other expenses related to our ongoing operations. To date, we have funded our operations primarily through the sale of stock and convertible promissory notes and through payments generated from our product development partnership and licensing arrangements.

 

We raised $80.5 million ($72.5 million net of expenses) in December 2013 through the sale of common stock in connection with our Initial Public Offering (IPO) and full exercise by the underwriters of their over-allotment.  We raised an additional $122.9 million ($115.2 million net of expenses) through a follow-on public offering of our common stock and full exercise by the underwriters of their over-allotment in March 2015. We raised an additional $119.6 million ($119.3 million net of expenses) through the sale of a follow-on public offering of our common stock and full exercise by the underwriters of their over-allotment in December 2016. In September 2015 we received a $45 million upfront payment from Amgen in connection with the 2015Amgen Agreement. In July 2016 we received a $150 million upfront payment from Novartis in connection with the Novartis Agreement. Although it is difficult to predict our funding requirements, based upon our current operating plan, we anticipate that our cash and cash equivalents and related marketable securities as of March 31, 2017,  will enable us to fund operations beyond the end of 2020.

 

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As of March  31, 2017, we had an accumulated deficit of $253 million. Substantially all of our operating losses that we have incurred resulted from expenses incurred in connection with our product candidate development programs, our research activities and general and administrative costs associated with our operations. 

 

Company Programs

 

We are developing a pipeline of candidates for clinical development based on our Immune Inhibitor Domain and Bispecific Domain technologies.

 

Immune Inhibitor Pipeline