Xencor, Inc.
Xencor Inc (Form: 10-Q, Received: 11/08/2017 06:09:02)

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, 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 October 31, 2017

Common stock, $0.01 par value

 

46,960,847

 

 

 

 

 

 


 

Table of Contents

Xencor, Inc.

 

Quarterly Report on FORM 10-Q for the quarter ended September  30, 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 September 30, 2017 (unaudited) and December 31, 2016

4

 

Statements of Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2017 and 2016 (unaudited)

5

 

Statement of Stockholders’ Equity as of September 30, 2017 (unaudited)

6

 

Statements of Cash Flows for the Nine Months Ended September 30, 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

23

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.  

Controls and Procedures

33

 

 

 

PART II.  

OTHER INFORMATION

33

Item 1.  

Legal Proceedings

33

Item 1A.  

Risk Factors

34

Item 6.  

Exhibits

34

 

 

 

Signatures  

36

 

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)

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,634

 

$

14,528

 

Marketable securities

 

 

196,318

 

 

115,608

 

Accounts receivable

 

 

831

 

 

8,616

 

Prepaid expenses and other current assets

 

 

7,027

 

 

2,901

 

Total current assets

 

 

217,810

 

 

141,653

 

Property and equipment, net

 

 

6,085

 

 

3,105

 

Patents, licenses, and other intangible assets, net

 

 

11,043

 

 

10,362

 

Marketable securities - long term

 

 

163,052

 

 

273,340

 

Other assets

 

 

265

 

 

103

 

Total assets

 

$

398,255

 

$

428,563

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

6,602

 

$

3,880

 

Accrued expenses

 

 

4,636

 

 

6,692

 

Current portion of deferred rent

 

 

 —

 

 

128

 

Current portion of deferred revenue

 

 

89,088

 

 

95,521

 

Income taxes

 

 

 —

 

 

65

 

Total current liabilities

 

 

100,326

 

 

106,286

 

Deferred rent, less current portion

 

 

1,202

 

 

397

 

Deferred revenue, less current portion

 

 

6,188

 

 

7,926

 

Total liabilities

 

 

107,716

 

 

114,609

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: 10,000,000 authorized shares; -0- issued and outstanding shares at September 30, 2017 and December 31, 2016

 

 

 —

 

 

 —

 

Common stock, $0.01 par value: 200,000,000 authorized shares at September 30, 2017 and December 31, 2016; 46,955,365 issued and outstanding at September 30, 2017 and 46,567,978 issued and outstanding at December 31, 2016

 

 

470

 

 

466

 

Additional paid-in capital

 

 

566,609

 

 

553,290

 

Accumulated other comprehensive loss

 

 

(1,097)

 

 

(1,441)

 

Accumulated deficit

 

 

(275,443)

 

 

(238,361)

 

Total stockholders’ equity

 

 

290,539

 

 

313,954

 

Total liabilities and stockholders’ equity

 

$

398,255

 

$

428,563

 

 

 

 

 

 

 

 

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, 

 

    

2017

    

2016

 

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Collaborations, licenses and milestones

 

$

7,090

 

$

7,821

 

$

24,771

 

$

81,080

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

19,408

 

 

14,069

 

 

51,376

 

 

38,512

General and administrative

 

 

4,172

 

 

3,007

 

 

13,074

 

 

10,000

Total operating expenses  

 

 

23,580

 

 

17,076

 

 

64,450

 

 

48,512

Income (loss) from operations  

 

 

(16,490)

 

 

(9,255)

 

 

(39,679)

 

 

32,568

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1,048

 

 

579

 

 

3,142

 

 

1,306

Interest expense

 

 

(3)

 

 

(2)

 

 

(8)

 

 

(39)

Other income

 

 

56

 

 

 3

 

 

86

 

 

 5

Total other income, net

 

 

1,101

 

 

580

 

 

3,220

 

 

1,272

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

(15,389)

 

 

(8,675)

 

 

(36,459)

 

 

33,840

Income tax expense (benefit)

 

 

173

 

 

(598)

 

 

623

 

 

1,150

Net income (loss)

 

 

(15,562)

 

 

(8,077)

 

 

(37,082)

 

 

32,690

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on marketable securities

 

 

143

 

 

(466)

 

 

344

 

 

266

Comprehensive income (loss)

 

$

(15,419)

 

$

(8,543)

 

$

(36,738)

 

$

32,956

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share

 

$

(0.33)

 

$

(0.20)

 

$

$ (0.79)

 

$

0.80

Diluted net income (loss) per common share

 

$

(0.33)

 

$

(0.20)

 

$

$ (0.79)

 

$

0.78

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

46,929,498

 

 

41,033,973

 

 

46,766,562

 

 

40,814,587

Diluted weighted average common shares outstanding

 

 

46,929,498

 

 

41,033,973

 

 

46,766,562

 

 

41,861,361

 

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, 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

 

352,881

 

 

 4

 

 

2,665

 

 

 —

 

 

 —

 

 

2,669

Issuance of common stock under the Employee Stock Purchase Plan

 

34,506

 

 

 —

 

 

443

 

 

 —

 

 

 —

 

 

443

Comprehensive income (loss)

 

 —

 

 

 —

 

 

 —

 

 

344

 

 

(37,082)

 

 

(36,738)

Stock-based compensation

 

 —

 

 

 —

 

 

10,211

 

 

 —

 

 

 —

 

 

10,211

Balance, September 30, 2017 (unaudited)

 

46,955,365

 

$

470

 

$

566,609

 

$

(1,097)

 

$

(275,443)

 

$

290,539

 

 

 

 

 

 

 

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, 

 

 

    

2017

    

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income (loss)

 

$

(37,082)

 

$

32,690

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,420

 

 

999

 

Amortization of premium on marketable securities

 

 

2,148

 

 

1,398

 

Stock-based compensation

 

 

10,211

 

 

5,858

 

Abandonment of capitalized intangible assets

 

 

273

 

 

107

 

Gain on disposal of assets

 

 

(2)

 

 

 —

 

Gain on sale of marketable securities available for sale

 

 

 —

 

 

(6)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

7,785

 

 

(3,044)

 

Interest receivable

 

 

(588)

 

 

(541)

 

Prepaid expenses and other assets

 

 

(3,971)

 

 

(2,288)

 

Accounts payable

 

 

2,722

 

 

934

 

Accrued expenses

 

 

(2,056)

 

 

2,902

 

Income taxes

 

 

(65)

 

 

400

 

Deferred rent

 

 

359

 

 

(62)

 

Deferred revenue

 

 

(8,171)

 

 

71,058

 

Net cash (used in) provided by operating activities

 

 

(27,017)

 

 

110,405

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(49,203)

 

 

(202,147)

 

Purchase of intangible assets

 

 

(1,520)

 

 

(1,207)

 

Purchase of property and equipment

 

 

(3,834)

 

 

(1,233)

 

Proceeds from sale of property and equipment

 

 

 2

 

 

 —

 

Proceeds from sale and maturities of marketable securities

 

 

77,566

 

 

95,205

 

Net cash provided by (used in) investing activities

 

 

23,011

 

 

(109,382)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock upon exercise of stock awards

 

 

2,669

 

 

948

 

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

 

 

443

 

 

226

 

Net cash provided by financing activities

 

 

3,112

 

 

1,174

 

Net (decrease) increase in cash and cash equivalents

 

 

(894)

 

 

2,197

 

Cash and cash equivalents , beginning of period

 

 

14,528

 

 

12,590

 

Cash and cash equivalents , end of period

 

$

13,634

 

$

14,787

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

 8

 

$

 —

 

Income taxes

 

$

790

 

$

760

 

Supplemental disclosures of non-cash investing activities

 

 

 

 

 

 

 

Unrealized gain on marketable securities, net of tax

 

$

344

 

$

266

 

 

See accompanying notes .  

 

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Xencor, Inc.

 

Notes to Financial Statements

(unaudited)

 

September 30, 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 an increase of $0.4 million to accumulated deficit 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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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 has reviewed the new standard and its current and prior revenue arrangements and determined that there are several provisions in the new standard that may affect its revenue recognition related to such arrangements. Many of the Company’s collaboration arrangements include licensing of intellectual property for rights to certain of its technologies or drug candidates. Additionally, many of these arrangements include upfront payments and potential future payments from partners for future development, regulatory and sales milestones and royalties on sales of approved products. The new standard makes changes to both revenue recognition for licensing of intellectual property and potential milestone revenue for future payments.

We believe that these provisions will have the following impact on contract revenues from our collaboration and license agreements:

1)

changes in the period of revenue recognition for licensing of intellectual property that are functional and distinct performance obligations. While revenue from these contracts was recognized over the term of access to the license or technology under the revenue recognition guidance in place at the contract’s inception, revenue recognition under the new guidance may result in revenue related to such agreements recognized at a point in time. This could change the period of time that we recognize revenue related to the licensing of our intellectual property.

2)

milestone payments that are directly linked to events under the Company’s control will result in variable consideration when determining the contract price under the new guidance and may be recognized earlier when it is probable that the milestone will be achieved without a significant future reversal of cumulative revenue expected. Under current accounting guidance the Company has applied the milestone method of accounting for recognizing such revenue or contingent payments. The new standard may change the period in which such revenue from these arrangements is recognized.

The Company is still in the process of completing its review and has not concluded on the impact on the revenue recognized in periods prior to the required adoption date, January 1, 2018. The Company expects to adopt the full retrospective method of implementation which will require the Company to restate its revenue and earnings for the 2016 and 2017 periods. Management will adopt the new standard effective January 1, 2018 and will continue to monitor additional changes, clarifications or interpretations being undertaken by the FASB which may impact management’s implementation approach.

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

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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 fair market value is below the amortized cost. The amendment is effective for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. The Company will apply the standard’s provision as a cumulative effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company does 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.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting . The standard applies when a company changes the terms of a stock compensation award previously granted to an employee where modification accounting applies. According to the standard, modification accounting is not required if (1) the fair value of the modified award (or the award’s calculated value or intrinsic value as appropriate) is the same as the value immediately prior to its modification, (2) the vesting conditions of the modified award are the same as the vesting conditions of the award immediately prior to its modification; and (3) the award’s classification as an equity or liability is the same after the modification as it was immediately prior to its modification. The new standard is effective for annual periods beginning after December 15, 2017 including interim periods within those years. 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.

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 term 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.

 

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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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016

 

    

Total

    

    

 

 

 

 

    

Total

    

    

 

 

 

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Fair Value

 

Level 1

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Funds

 

$

9,330

 

$

9,330

 

$

 —

 

$

12,137

 

$

12,137

 

$

 —

Corporate Securities

 

 

148,095

 

 

 —

 

 

148,095

 

 

181,483

 

 

 —

 

 

181,483

Government Securities

 

 

211,275

 

 

 —

 

 

211,275

 

 

207,465

 

 

 —

 

 

207,465

 

 

$

368,700

 

$

9,330

 

$

359,370

 

$

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 and nine months ended Septemer 30, 2017 and 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 net 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.

 

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Basic and diluted net 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, 

 

    

2017

    

2016

    

2017

    

2016

 

 

(in thousands, except share

 

 

and per share data)

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

(15,562)

 

$

(8,077)

 

$

(37,082)

 

$

32,690

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, basic

 

 

46,929,498

 

 

41,033,973

 

 

46,766,562

 

 

40,814,587

Dilutive effect of stock options

 

 

 —

 

 

 —

 

 

 —

 

 

1,046,774

Weighted average common shares outstanding, diluted

 

 

46,929,498

 

 

41,033,973

 

 

46,766,562

 

 

41,861,361

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share, basic

 

$

(0.33)

 

$

(0.20)

 

$

(0.79)

 

$

0.80

Net income (loss) per share, diluted

 

$

(0.33)

 

$

(0.20)

 

$

(0.79)

 

$

0.78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three and nine months ended September 30, 2017 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 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. 

 

 

 

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, 2017 and 2016, the only component of other comprehensive income (loss) is net unrealized gains (loss) on marketable securities.  There were no material reclassifications out of accumulated other comprehensive income (loss) during the three and nine months ended September 30, 2017 and 2016.

 

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5. Marketable Securities

 

The Company’s marketable securities held as of September 30, 2017 and December 31, 2016 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

    

Amortized

    

Unrealized

 

Unrealized

    

 

   September 30, 2017

 

Cost

 

Gains

 

Losses

 

Fair Value

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Money Market Funds

 

$

9,330

 

$

 —

 

$

 —

 

$

9,330

Corporate Securities

 

 

148,514

 

 

 1

 

 

(420)

 

 

148,095

Government Securities

 

 

211,943

 

 

 —

 

 

(668)

 

 

211,275

 

 

$

369,787

 

$

 1

 

$

(1,088)

 

$

368,700

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as

 

 

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

$

9,330

    Marketable securities

 

 

 

 

 

 

 

 

 

 

 

359,370

Total investments

 

 

 

 

 

 

 

 

 

 

$

368,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

   September 30, 2017

 

Cost

 

Fair Value

    (in thousands)

 

 

 

 

 

 

    Mature in one year or less

 

$

196,599

 

$

196,318

    Mature after one year

 

 

163,859

 

 

163,052

 

 

$

360,458

 

$

359,370

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2017 and December 31, 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or greater

September 30, 2017

 

 

Fair value

 

 

Unrealized losses

 

 

Fair value

 

 

Unrealized losses

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Securities

 

$

101,803

 

$

(118)

 

$

46,292

 

$

(301)

Government Securities

 

 

94,515

 

 

(163)

 

 

116,760

 

 

(506)

 

 

$

196,318

 

$

(281)

 

$

163,052

 

$

(807)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2017, the total number of shares of common stock available for issuance under the 2013 Plan is 8,537,187, 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 September 30, 2017, a total of 4,872,350 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 September 30, 2017, we have issued a total of 255,992 shares of common stock under the ESPP.

 

Total employee, director and non-employee stock-based compensation expense recognized for the three and nine months ended September 30, 2017 and 2016 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2017

    

2016

 

2017

    

2016

General and administrative

 

$

1,422

 

$

874

 

$

4,305

 

$

2,699

Research and development

 

 

2,183

 

 

992

 

 

5,906

 

 

3,159

 

 

$

3,605

 

$

1,866

 

$

10,211

 

$

5,858

 

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