Document and Entity Information - USD ($)	12 Months Ended
Document and Entity Information - USD ($)	Dec. 31, 2017	Feb. 16, 2018	Jun. 30, 2017
Document and Entity Information
Entity Registrant Name	Xencor Inc
Entity Central Index Key	0001326732
Document Type	10-K
Document Period End Date	Dec. 31, 2017
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Public Float			$ 939,648,825
Entity Common Stock, Shares Outstanding		47,009,966
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	FY

Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Current assets
Cash and cash equivalents	$ 16,528	$ 14,528
Marketable securities	207,603	115,608
Accounts receivable	1,142	8,616
Prepaid expenses and other current assets	5,606	2,901
Total current assets	230,879	141,653
Property and equipment, net	7,088	3,105
Patents, licenses, and other intangible assets, net	11,148	10,362
Marketable securities - long term	139,198	273,340
Income tax receivable	1,524
Other assets	265	103
Total assets	390,102	428,563
Current liabilities
Accounts payable	6,869	3,880
Accrued expenses	5,480	6,692
Current portion of deferred rent	26	128
Current portion of deferred revenue	88,813	95,521
Income tax payable	157	65
Total current liabilities	101,345	106,286
Deferred rent, less current portion	1,088	397
Deferred revenue, less current portion	5,623	7,926
Total liabilities	108,056	114,609
Commitments and contingencies (see note 8)
Stockholders' equity
Preferred stock, $0.01 par value: 10,000,000 authorized shares; -0- issued and outstanding shares at December 31, 2017 and 2016
Common stock, $0.01 par value: 200,000,000 authorized shares; 47,002,488 issued and outstanding shares at December 31, 2017 and 46,567,978 issued and outstanding at December 31, 2016	470	466
Additional paid-in capital	570,670	552,889
Accumulated other comprehensive loss	(1,808)	(1,441)
Accumulated deficit	(287,286)	(237,960)
Total stockholders' equity	282,046	313,954
Total liabilities and stockholders' equity	$ 390,102	$ 428,563

Balance Sheets (Parenthetical) - $ / shares	Dec. 31, 2017	Dec. 31, 2016
Condensed Balance Sheets
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	47,002,488	46,567,978
Common stock, shares outstanding	47,002,488	46,567,978

Statements of Comprehensive Income (Loss) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Revenue
Collaborations, licenses and milestones	$ 35,711	$ 87,520	$ 27,762
Operating expenses
Research and development	71,772	51,872	34,140
General and administrative	17,501	13,108	11,960
Total operating expenses	89,273	64,980	46,100
Income (loss) from operations	(53,562)	22,540	(18,338)
Other income (expense)
Interest income	4,194	2,091	744
Interest expense	(13)	(21)	(13)
Other income	(7)	6	15
Total other income, net	4,174	2,076	746
Income (loss) before income taxes	(49,388)	24,616	(17,592)
Income tax expense (benefit)	(463)	991
Net income (loss)	(48,925)	23,625	(17,592)
Other comprehensive income (loss)
Net unrealized loss on marketable securities available-for-sale	(367)	(925)	(516)
Comprehensive income (loss)	$ (49,292)	$ 22,700	$ (18,108)
Net income (loss) per share attributable to common shareholders:
Basic net income (loss) (in dollars per share)	$ (1.05)	$ 0.57	$ (0.45)
Diluted net income (loss) (in dollars per share)	$ (1.05)	$ 0.56	$ (0.45)
Weighted average shares used to compute net income (loss) per share attributable to common stockholders:
Basic (in shares)	46,817,756	41,267,329	39,015,131
Diluted (in shares)	46,817,756	42,388,867	39,015,131

Statement of Stockholders' Equity - USD ($) $ in Thousands	Common Stock	Additional Paid-in Capital	Accumulated Other Comprehensive Loss	Accumulated Deficit	Total
Balance at Dec. 31, 2014	$ 314	$ 302,969		$ (243,993)	$ 59,290
Balance (in shares) at Dec. 31, 2014	31,434,272
Increase (Decrease) in Stockholders' Equity
Sale of common stock, net of issuance cost	$ 86	115,118			115,204
Sale of common stock, net of issuance cost (in shares)	8,625,000
Issuance of common stock upon exercise and vesting of stock awards	$ 4	550			554
Issuance of common stock upon exercise and vesting of stock awards (in shares)	379,268
Issuance of common stock under the Employee Stock Purchase Plan	$ 1	622			623
Issuance of common stock under the Employee Stock Purchase Plan (in shares)	112,499
Comprehensive income (loss)			$ (516)	(17,592)	(18,108)
Stock-based compensation expense		4,869			4,869
Balance at Dec. 31, 2015	$ 405	424,128	(516)	(261,585)	162,432
Balance (in shares) at Dec. 31, 2015	40,551,039
Increase (Decrease) in Stockholders' Equity
Sale of common stock, net of issuance cost	$ 53	119,216			119,269
Sale of common stock, net of issuance cost (in shares)	5,272,750
Issuance of common stock upon exercise and vesting of stock awards	$ 7	1,153			1,160
Issuance of common stock upon exercise and vesting of stock awards (in shares)	699,066
Issuance of common stock under the Employee Stock Purchase Plan	$ 1	544			545
Issuance of common stock under the Employee Stock Purchase Plan (in shares)	45,123
Comprehensive income (loss)			(925)	23,625	22,700
Stock-based compensation expense		7,848			7,848
Balance (Scenario, Previously Reported) at Dec. 31, 2016	$ 466	552,889	(1,441)	(237,960)	313,954
Balance at Dec. 31, 2016	$ 466	553,290	(1,441)	(238,361)	313,954
Balance (in shares) (Scenario, Previously Reported) at Dec. 31, 2016	46,567,978
Balance (in shares) at Dec. 31, 2016	46,567,978
Increase (Decrease) in Stockholders' Equity
Issuance of common stock upon exercise and vesting of stock awards	$ 4	2,793			2,797
Issuance of common stock upon exercise and vesting of stock awards (in shares)	363,603
Issuance of common stock under the Employee Stock Purchase Plan		936			936
Issuance of common stock under the Employee Stock Purchase Plan (in shares)	70,907
Comprehensive income (loss)			(367)	(48,925)	(49,292)
Stock-based compensation expense		13,651			13,651
Balance at Dec. 31, 2017	$ 470	570,670	$ (1,808)	(287,286)	$ 282,046
Balance (in shares) at Dec. 31, 2017	47,002,488
Increase (Decrease) in Stockholders' Equity
Adoption of ASU 2016-09 \| ASU 2016-09		$ 401		$ (401)

Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
Statements of Cash Flows - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Cash flows from operating activities
Net income (loss)	$ (48,925)	$ 23,625	$ (17,592)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation and amortization	2,030	1,466	1,113
Amortization of premium on marketable securities	2,845	2,037	1,096
Stock-based compensation	13,651	7,848	4,869
Abandonment of capitalized intangible assets	396	356	296
Loss (gain) on disposal of assets	83		(9)
Gain on sale of marketable securities available-for-sale		(5)	(5)
Changes in operating assets and liabilities:
Accounts receivable	7,474	(8,572)	2,922
Interest receivable	(293)	(530)	(898)
Prepaid expenses and other current assets	(2,705)	(1,700)	(1,068)
Income tax receivable	(1,524)
Other assets	(161)	(40)	(3)
Accounts payable	2,989	(2,520)	4,710
Accrued expenses	(1,212)	3,058	1,425
Deferred rent	589	(89)	572
Income tax payable	91	65
Deferred revenue	(9,011)	69,618	29,238
Net cash provided by (used in) operating activities	(33,683)	94,617	26,666
Cash flows from investing activities
Proceeds from sale and maturities of marketable securities	115,757	105,505	34,358
Proceeds from sale of property and equipment			9
Purchase of marketable securities	(76,529)	(316,149)	(215,798)
Purchase of intangible assets	(1,967)	(1,502)	(1,745)
Purchase of property and equipment	(5,311)	(1,507)	(1,930)
Net cash provided by (used in) investing activities	31,950	(213,653)	(185,106)
Cash flows from financing activities
Proceeds from issuance of common stock upon exercise of stock awards	2,797	1,160	554
Proceeds from issuance of common stock under the Employee Stock Purchase Plan	936	545	623
Proceeds from issuance of common stock		126,546	122,906
Common stock issuance cost		(7,277)	(7,702)
Net cash provided by financing activities	3,733	120,974	116,381
Net increase (decrease) in cash and cash equivalents	2,000	1,938	(42,059)
Cash and cash equivalents, beginning of period	14,528	12,590	54,649
Cash and cash equivalents, end of period	16,528	14,528	12,590
Cash paid during the period for:
Interest	13	21	13
Taxes	969	936	1
Supplemental disclosures of non-cash investing activities
Unrealized loss on marketable securities, net of tax	$ 367	$ 925	$ 516

Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2017

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Description of Business

Xencor, Inc. (we, us, our, or the Company) was incorporated in California in 1997 and reincorporated in Delaware in September 2004. 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. We focus on the portion of the antibody that interacts with multiple segments of the immune system, referred to as the Fc domain, which is constant and interchangeable among antibodies. Our engineered Fc domains, the XmAb technology, are applied to our pipeline of antibody‑based drug candidates to increase immune inhibition, improve cytotoxicity, extend half‑life and most recently create bispecific antibodies.

Our operations are based in Monrovia and San Diego, California.

Basis of Presentation

The Company’s financial statements as of December 31, 2017, 2016, and 2015 and for the years then ended have been prepared in accordance with accounting principles generally accepted in the United States.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include useful lives of long-lived assets, the periods over which certain revenues and expenses will be recognized including collaboration revenue recognized from non-refundable upfront licensing payments, the amount of non-cash compensation costs related to share-based payments to employees and non-employees and the period over which these costs are expensed.

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 when 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 the new standard did not have a material impact on our financial statement position or results from operations.

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 (ASC 606). The new guidance for revenue recognition will be adopted in the first quarter of 2018 using the full retrospective method. ASC 606 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and replaces most of the existing revenue recognition standards in U.S. GAAP. A five-step model will be used to achieve the core principle: (1) identify the customer contract, (2) identify the contract’s performance obligations, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations and (5) recognize revenue when or as a performance obligation is satisfied.

The Company’s assessment of the new standard’s impact is substantially complete. Under the new guidance, the timing of revenue recognition from licensing of our intellectual property that are functional and are distinct performance obligations will change from being recognized over the term of access to the license or technology to being recognized at a point in time. The other material change from adoption of ASC 606 relates to the timing of revenue under certain deliverables in our Novartis and Amgen collaborations. ASC 606 provides that revenue recognition for performance obligations related to delivery of certain goods or services occurs when control over the good or service is transferred to the customer. As a result, under ASC 606 we will recognize revenue related to certain deliverables in the Amgen and Novartis collaboration in an earlier period than under current U.S. GAAP standards. Upon adoption the Company will restate its revenues and earnings for the 2016 and 2017 periods. We estimate that the restated revenue and earnings will be $21.5 million higher in 2016 and $10.4 million higher in 2017 than originally reported because of adopting ASC 606. The increase in revenue and earnings from restatement under ASC 606 is primarily related to revenue recognized under our Amgen and Novartis arrangements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Liabilities, which eliminates the available-for-sale classification for equity securities and requires equity securities to be measured at fair value with changes in the fair value recognized through net income. The ASU eliminates the available-for-sale classification for equity investments that recognized changes in the fair value as a component of other comprehensive income. The new standard will be effective for periods beginning after December 15, 2017. Although we intend to adopt the standard on the effective date we do not carry any equity securities in our investment portfolio.

In February 2016, the FASB issued ASU 2016-02 Leases. The new guidance requires lessees to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term for all leases not considered short term. The new standard will be effective for reporting periods beginning after December 15, 2018. In January 2018 the FASB issued an exposure draft of the proposed ASU, Lease (Topic 842): Targeted Improvements, which provides an alternative transition method of adoption, permitting the recognition of cumulative-effect adjustment to retained earnings on the date of adoption. We intend to adopt the standard on the effective date, but have not yet selected a transition method. We are currently evaluating our leases which includes a review of our lease expenses, which are primarily operating lease arrangements for our facilities in Monrovia and San Diego.

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 will adopt the new standard in the first quarter of 2018 and we do not expect the adoption to have a material impact on our statement of cash flows.

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 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 modifications, (2) the vesting conditions of the modified award are the same as the vesting conditions of the award immediately prior to its modifications; 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 Company will adopt the new standard in the first quarter of 2018 but does not anticipate that the standard will have a significant impact on its financial statements.

In February 2018, the FASB issued ASU No. 2018-02. Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, an amendment which permits companies to reclassify the income tax effects of the 2017 Tax Cust and Jobs Act (TCJA) on items within accumulated other comprehensive income to retained earnings. The standard also requires new disclosures about these stranded tax effects and is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted and can be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. The Company is currently evaluating the impact the guidance will have on its financial statements.

There have been no material changes to the significant accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Revenue Recognition

We have, to date, earned revenue from research and development collaborations, which may include research and development services, licenses of our internally-developed technologies, licenses of our internally-developed drug candidates, or combinations of these. We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; transfer of, or access to, the rights of our drug candidates or technologies has been completed or services have been rendered; our price to the customer is fixed or determinable and collectability is reasonably assured.

The terms of our license and research and development and collaboration agreements generally include non-refundable upfront payments, research funding, co-development reimbursements, license fees and, milestone and other contingent payments to us for the achievement of defined collaboration objectives and certain clinical, regulatory and sales‑based events, as well as royalties on sales of any commercialized products.

The terms of our licensing agreements include non‑refundable upfront fees, annual licensing fees, and contractual payment obligations for the achievement of pre‑defined preclinical, clinical, regulatory and sales‑based events by our partners. The licensing agreements also include royalties on sales of any commercialized products by our partners.

Multiple‑Element Revenue Arrangements. Certain of our collaboration and license agreements represent multiple‑element revenue arrangements. To account for such transactions, we determine the elements, or deliverables, included in the arrangement and determine which deliverables are separate units for accounting purposes. We consider delivered items to be separate units of accounting if the delivered items have stand‑alone value to the customer. If the delivered items are separate units we allocate the consideration received or due under the arrangement to the various elements based on each elements’ relative selling price. The identification of individual elements in a multiple‑element arrangement and the estimation of the selling price of each element involve significant judgment, including consideration as to whether each delivered element has standalone value to the customer. We determine the estimated selling price for deliverables within each arrangement using VSOE of selling price, if available, or third‑party evidence of selling price if VSOE is not available, or our best evidence of selling price if neither VSOE nor third‑party evidence is available. To date, we have used our best evidence of selling price for each of our deliverables.

Determining the best estimate of selling price for a deliverable requires significant judgment. We use our best estimate of selling price to estimate the selling price for licenses to our technologies and product candidates, since we do not have VSOE or third‑party evidence of selling price for these deliverables. The basis of our estimate of selling price is the arm’s length negotiation with the licensee that occurs in each transaction. The potential value of our technology to a licensee in a transaction depends on a variety of factors unique to each transaction. Factors that impact the negotiation and hence that we consider in our estimates center on the specific product candidate and include: the product candidate’s potential market size, the product candidate’s stage of development, the existence of competitive technologies that could be substituted for ours by the licensee and the scientific assessment of the product candidate’s likelihood of success at various development stages. The most common deliverable for our licensing transactions is the commercial license for our technology in the product candidate, and frequently a research license with an option for commercial license. We have also entered into multiple arrangements that involve the deliverable of drug candidates at various stages of development. The upfront payments, annual license fees, contingent payments, milestones and royalties relate to these licenses and/or options and depend on the product‑specific factors described above. The other significant deliverable is research and development services and the price for these depends on estimates for our personnel and supply costs and the costs of third‑party contract research organizations necessary to support the services.

We recognize consideration allocated to an individual element when all other revenue recognition criteria are met for that element. Our multiple‑element revenue arrangements may include the following:

License arrangements The deliverables under our collaboration and license agreements generally include exclusive or non‑exclusive licenses to one or more of our technologies. The technologies can be applied to a collaborator’s product candidates for discovery, development, manufacturing and commercialization. We will also enter into agreements for the exclusive or non‑exclusive licenses to our internally developed product candidates. To account for this element of the arrangement, we evaluate whether the exclusive or non‑exclusive license has standalone value apart from the undelivered elements to the collaboration partner, which may include research and development services or options for commercial licenses, based on the consideration of the facts and circumstances of each arrangement, including the research and development capabilities of the collaboration partner and other market participants. We recognize arrangement consideration allocated to licenses upon delivery of the license, if the facts and circumstances indicate the license has standalone value apart from the undelivered elements. If facts and circumstances indicate that the delivered license does not have standalone value from the undelivered elements, we recognize the revenue as a combined unit of accounting. In those circumstances we recognize revenue from non‑refundable upfront fees in the same manner as the undelivered item(s), which is generally the period over which we provide research and developments services.

Collaboration Arrangements The deliverables under our collaboration arrangements generally involve the license to certain rights to one or more of our product candidates in addition to a license to access one or more of our technologies. These arrangements may require us to apply our technologies to a partner-identified or provided antibody and deliver a drug candidate that incorporates one of our technologies to the partner. To account for the element of the rights to a drug candidate that we have created, we evaluate whether the rights to the drug candidate has standalone value separate from the obligation to apply our technologies to partner-identified antibodies. We recognize arrangement consideration allocated to the rights to the drug candidates upon transfer of the rights to the partner which generally occurs upon execution of the agreement. We recognize arrangement consideration allocated to the obligation to apply our technologies to partner-identified antibodies as the partner accepts the drug candidates that incorporates our technologies, subject to any substitution or replacement provisions.

Research and Development Services The deliverables under our collaboration and license arrangements may include research and development services we perform on behalf of or with the collaboration partner. As the provision of research and development services is an integral part of our operations and we may be principally responsible for the performance of these services under the agreements, we recognize revenue on a gross basis for research and development services as we perform those services. Additionally, we recognize research related funding under collaboration research and development efforts as revenue as we perform or deliver the related services in accordance with contract terms.

Milestone Revenue. Our collaboration and license agreements generally include contingent contractual payments related to achievement of specific research, development and regulatory milestones and sales‑based milestones that are based solely upon the performance of the licensee or collaborator. Research, development and regulatory contingent contractual payments and milestone payments are typically payable under our collaborations when our collaborator selects a compound, or initiates or advances a covered product candidate in preclinical or clinical development, upon submission for marketing approval of a covered product with regulatory authorities, upon receipt of actual marketing approvals of a covered product or for additional indications, or upon the first commercial sale of a covered product. Sales‑based contingent contractual payments are typically payable when annual sales of a covered product reach specific levels.

At the inception of each arrangement that includes contingent contractual payments, we evaluate whether each potential payment and milestone is substantive and at risk to both parties based on the basis of the contingent nature of the milestone event. We evaluate factors such as scientific, regulatory, commercial and other risks that we must overcome to achieve the respective milestone event, whether the contractual payment due at each milestone event is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment and whether the contingent contractual payment relates solely to past performance. Additionally, certain of our product development and technology license arrangements may include milestone payments related to the achievement of specific research and development milestones, which are achieved in whole or in part on our performance.

We recognize any payment that is contingent upon the achievement of a substantive milestone entirely in the period in which the milestone is achieved. A milestone is defined as an event that can only be achieved based in whole or in part either on our performance, or the performance of our collaborators, or the occurrence of a specific outcome resulting from our past performance for which there is a substantive uncertainty at the date the arrangement is entered into that the event will be achieved.

Collaborative Research and Licensing Agreements

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 engineered antibody drug candidates using the Company’s proprietary XmAb® technologies and drug candidates. Pursuant to the Novartis 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 Agreement.

Under the Novartis Agreement, the Company granted Novartis a worldwide co-exclusive license with Xencor to research, develop and manufacture XmAb14045 and XmAb13676. The Company also granted Novartis an exclusive license to commercialize XmAb14045 and XmAb13676 in all worldwide territories outside the United States (U.S.).

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

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

Novartis will assume full responsibility for development and commercialization of each product candidate under each of the Global Discovery Programs.

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

Under the Novartis Agreement, the Company is also granting Novartis a non-exclusive research license to use certain of the Company’s Fc technologies, specifically Cytotoxic, Xtend and Immune Inhibitor to research, develop, commercialize and manufacture antibodies against up to ten targets selected by Novartis, if available for non-exclusive license and not subject to a Xencor internal program. Novartis will assume all research, development and commercialization costs for products that are developed from application of the Fc technologies.

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 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 best estimate of selling price which was allocated 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 estimated selling price for the licensing rights to the XmAb13676 Program are the Company’s best estimate of selling price and was determined based on market conditions, similar arrangements entered into by third parties including the Company’s understanding of pricing terms offered for comparable transactions that involve licensing bispecific antibody development candidates. The Company reviewed recent published market transactions that are comparable to the license of the XmAb13676 Program in the Novartis Agreement. The Company adjusted the value of the published market information to reflect differences in stage of development and rights and potential markets to determine the estimated selling price for the license rights to the XmAb13676 program. This amount represents the value that a third party would be willing to pay for certain rights to the XmAb13676 Program including the exclusive right to commercialize XmAb13676 in all territories outside the U.S.

The Company determined the estimated selling price for the rights to the XmAb14045 Program using the income approach by calculating a risk-adjusted present value of the potential revenue that could be earned from the license reduced by the minimum development costs that the Company is obligated to fund under the Agreement. This amount represents the value that a third party would be willing to pay for certain rights to the XmAb14045 Program including the right to commercialize XmAb14045 in all territories outside the U.S.

The best estimated selling price for each Global Discovery Programs was determined using the income approach by calculating a risk-adjusted net present value of the potential revenue that could be earned from each Global Program license reduced by the estimated cost of the Company’s efforts to deliver the completed Global Program bispecific candidate to Novartis. These amounts represent the value that a third party would be willing to pay as an upfront for access to the Company’s bispecific technology and capabilities.

The Company’s best estimated selling price for the Fc licenses is its best estimate and was determined by considering market and entity-specific factors. The Company has previously licensed its Fc technologies on a limited basis to third parties. The Company considered the term of the Novartis license, scope of the rights granted for each license, the type of technologies subject to the license, and the potential number of targets that may be applied in establishing its best estimate for the Fc license.

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 the XmAb14045 Program,

$31.4 million 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 XmAb13676 and XmAb14045 Programs upon delivery of the exclusive license to Novartis both of which were transferred as of the effective date of the 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 Global Discovery Programs were delivered in 2016. In 2017, we delivered bispecific antibodies under a Global Discovery Program.

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 Agreement.

During the year ended December 31, 2017 and 2016, we recognized $2.3 million and $59.7 million of revenue respectively. As of December 31, 2017 there is a receivable of $1.1 million and $88.0 million in deferred revenue related to the arrangement.

Amgen Inc.

2015 Agreement

In September 2015, the Company entered into a research and license agreement (the 2015 Agreement) with Amgen Inc. (Amgen) to develop and commercialize bispecific antibody product candidates using the Company’s proprietary XmAb® bispecific Fc technology. Under the 2015 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 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.

Following the Company’s transfer of the DNA sequences, constructs and preclinical 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.

Under the 2015 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. 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 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.

The Company evaluated the 2015 Agreement with Amgen and determined that it is a revenue arrangement with multiple deliverables or performance obligations. The Company’s substantive performance obligations under the 2015 Agreement include delivery of the DNA sequences, constructs and preclinical 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 2015 Agreement with Amgen 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. In order to determine the best estimate of selling price for the CD38 Program, the Company determined the value of the CD38 Program by calculating a risk-adjusted present value of the potential revenue from the future development and regulatory milestones under the 2015 Agreement. This amount represents the value that a third party would be willing to pay as an upfront fee to license the Company’s CD38 Program.

The Company determined the value of each of the Discovery Programs by calculating a risk-adjusted net present value of the potential revenue from future development and regulatory milestones reduced by the estimated cost of the Company’s efforts to apply its bispecific technology to the Amgen targets and deliver the five bispecific product candidates. These amounts represent the value that a third party would be willing to pay as an upfront fee for access to the Company’s bispecific technology and capabilities.

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

During the fourth quarter of 2015 we delivered the CD38 DNA sequences, constructs and preclinical data to Amgen. At the time that each bispecific Discovery Program is accepted by Amgen, the Company will recognize as collaboration revenue $6.25 million for each program. Since Amgen has substitution rights for up to three targets, revenue recognition may be delayed until the earlier that Amgen initiates non-human primate studies for a delivered bispecific Discovery Program or the right to substitute the target lapses.

During 2016, the Company recognized as collaboration revenue the amount of consideration for delivery of three Discovery Programs. The Company completed delivery of bispecific antibody candidates for all five Discovery Programs by the September 15, 2016 one-year anniversary date of the 2015 Agreement. Amgen elected to substitute one of the originally identified antibody candidates in the first quarter of 2016.

There were no additional Discovery Programs delivered during 2017. In 2017 Amgen exercised its option to substitute one of the originally identified candidates and its option to substitute a third candidate lapsed effective September 15, 2017.

In the fourth quarter of 2017, Amgen notified the Company of its IND filing for a CD38 bispecific drug candidate (AMG 424) for which we earned a $10 million milestone.

During the years ended December 31, 2017, 2016 and 2015, we recognized $16.2 million, $18.75 million and $13.75 million in revenue, respectively, under this arrangement. As of December 31, 2017 there was $6.25 million in deferred revenue related to the arrangement.

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, IIb, Xtend and others during a two year research term. We received an upfront payment of $2.5 million and received research funding of $1.6 million per year over 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.

The total revenue recognized under this agreement was zero, $2.7 million and $2.9 million for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017 we have no deferred revenue related to the agreement.

MorphoSys Ag

In June 2010, we entered into a Collaboration and License Agreement with MorpohSys AG (MorphoSys), which we subsequently amended in March 2012. The agreement provided us an upfront payment of $13 million in exchange for an exclusive worldwide license to our patents and know‑how to research, develop and commercialize our XmAb5574 product candidate (subsequently renamed MOR208) with the right to sublicense under certain conditions. Under the agreement, we agreed to collaborate with MorphoSys to develop and commercialize XmAb5574/MOR208. If certain developmental, regulatory and sales milestones are achieved, we are eligible to receive future milestone payments and royalties.

In June 2017, MorphoSys initiated a Phase III clinical trial under the arrangement for which we received a milestone payment of $12.5 million. We recognized the payment as revenue in the period that the milestone event occurred.

We recognized $12.5 million of revenue for the year end December 31, 2017. There were no revenues recognized under this arrangement for the years ended December 31, 2016 and 2015. As of December 31, 2017, we have no deferred revenue related to this agreement.

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.

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 plus additional maintenance fees of $2 million if the term is extended. In addition, if certain development, regulatory and commercial milestones are achieved, we are eligible to receive up to $66.5 million for the first product to achieve such milestones on a target‑by‑target basis. If licensed products are successfully commercialized, we are also entitled to receive royalties based on a percentage of net sales of such products sold by Alexion, its affiliates or its sub licensees, which percentage is in the low single digits. Alexion’s royalty obligations continue on a product‑by‑product and country‑by‑ country basis until the expiration of the last‑to‑expire valid claim in a licensed patent covering the applicable product in such country.

In the third quarter of 2014, Alexion achieved a clinical development milestone with ALXN1210. In the fourth quarter of 2015, Alexion exercised its option to take an exclusive commercial license and achieved a further clinical development milestone for ALXN1210. In December 2016, Alexion achieved a Phase 3 clinical development milestone for ALXN1210.

The total revenue recognized under this arrangement was $1.0 million, $6.0 million and $8.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017 there was $83,000 of deferred revenue under this agreement.

Boehringer Ingelheim International GmbH

In 2007 we entered into a Research Licensee and Collaboration Agreement with Boehringer Ingelheim International GmbH (BI). Under the agreement, we provided BI with a three‑year research license to one of our technologies and commercial options. We identified the deliverables under the agreement at inception as the research licenses and options to acquire commercial licenses to up to two compounds. Upon exercise of an option to a commercial license, we are eligible to receive future milestone payments and royalties. We determined that the future milestones and related payments were substantive and contingent and we did not allocate any of the upfront consideration to the milestones. The upfront payment and the annual license fees were recognized ratably into income over the research license term which expired in 2011 and payments for the commercial options were recognized in the period the commercial option was exercised since the options were contingent and substantive. During 2012, BI advanced a compound that incorporates our technology into clinical development and we received a milestone payment of $1.2 million and recognized the payment as revenue in the period the milestone event occurred. No revenue related to this arrangement was recognized in 2017, 2016 or 2015. There is no deferred revenue related to this agreement at December 31, 2017.

CSL Limited

2009 Agreement

In 2009 we entered into a Research License and Commercialization Agreement with CSL Limited (CSL-2009). Under the agreement, we provided CSL with a research license to one of our technologies and up to five commercial options. The upfront payment of $0.75 million received at inception and the annual research license renewal payments were recognized as revenue ratably over the five‑year term of the research license.

In 2013 CSL sublicensed CSL362 (now called JNJ-56022473) to Janssen Biotech Inc. (Janssen Biotech). In March 2017, CSL, through its sublicensee, Janssen Biotech, initiated a Phase 3 clinical trial for CSL362 for which we received a $3.5 million milestone payment.

Total revenue recognized for the years ended December 31, 2017, 2016 and 2015 was $3.5 million, zero and $2.5 million, respectively. As of December 31, 2017 we have no deferred revenue related to this agreement.

Merck Sharp & Dohme Corp.

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. We also provided Merck with contingent options to take additional non‑exclusive commercial licenses. The contingent options provide Merck an opportunity to take non‑exclusive commercial licenses at an amount less than the amount paid for the original license. 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.

In the first quarter of 2014, Merck initiated a Phase 1 clinical trial which triggered a $0.5 million milestone payment to us. For each of the years ended December 31, 2017, 2016 and 2015 total revenue recognized was $0.1 million. In February 2018, Merck provided notice that it is terminating the agreement. As of December 31, 2017, we had deferred revenue of $50,000 related to this agreement.

Potential Milestones

As of December 31, 2017, the Company may be eligible to receive the following maximum payments from its collaborative partners and licensees based upon contractual terms in the agreements assuming all options are exercised and all milestones are achieved:


	Potential Milestones (in millions)
							Total
Partner	Development-based		Regulatory-based		Sales-based		Milestones
Alexion (1)	$	—	$	28.0	$	30.0	$	58.0
Amgen		222.5		345.0		1,080.0		1,647.5
BI (1)		9.0		6.0		12.0		27.0
CSL Janssen 2009 (1)		—		4.0		5.0		9.0
Janssen (1)		6.0		—		4.0		10.0
MorphoSys (1)		49.5		187.0		50.0		286.5
Novartis		540.0		920.0		950.0		2,410.0
Total	$	827.0	$	1,490.0	$	2,131.0	$	4,448.0

(1)

The payments are solely dependent upon activities of the collaborative partner or licensee.

Revenue earned

The $35.7 million, $87.5 million and $27.8 million of revenue recorded for the years ended December 31, 2017, 2016 and 2015, respectively, was earned principally from the following licensees (in millions):


	Year Ended
	December 31,
	2017		2016		2015
Amgen	$	16.2	$	18.7	$	13.8
Alexion		1.0		6.0		8.5
MorphoSys		12.5		—		—
Novo Nordisk		—		2.7		2.9
Novartis		2.3		59.7		—
CSL		3.5		—		2.5
Other		0.2		0.4		0.1
Total	$	35.7	$	87.5	$	27.8

A portion of our revenue is earned from collaboration partners outside the United States. Non‑U.S. revenue is denominated in U.S. dollars. A breakdown of our revenue from U.S. and Non‑U.S. sources for the years ended December 31, 2017, 2016 and 2015 is as follows (in millions):


	Year Ended
	December 31,
	2017		2016		2015
U.S. Revenue	$	19.7	$	84.8	$	22.4
Non-U.S. Revenue		16.0		2.7		5.4
Total	$	35.7	$	87.5	$	27.8

Deferred Revenue

Deferred revenue arises from payments received in advance of the culmination of the earnings process. We have classified deferred revenue for which we stand ready to perform within the next 12 months as a current liability. We recognize deferred revenue as revenue in future periods when the applicable revenue recognition criteria have been met. The total amounts reported as deferred revenue were $94.4 million and $103.4 million at December 31, 2017 and 2016, respectively.

Research and Development Expenses

Research and development expenses include costs we incur for our own and for our collaborators research and development activities. Research and development costs are expensed as incurred. These costs consist primarily of salaries and benefits, including associated stock‑based compensation, laboratory supplies, facility costs, and applicable overhead expenses of personnel directly involved in the research and development of new technology and products, as well as fees paid to other entities that conduct certain research development activities on our behalf. We estimate preclinical study and clinical trial expenses based on the services performed pursuant to the contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on our behalf based on the actual time and expenses incurred by them. Further, we accrue expenses related to clinical trials based on the level of patient enrollment and activity according to the related agreement. We monitor patient enrollment levels and related activity to the extent reasonably possible and adjust estimates accordingly.

We capitalize acquired research and development technology licenses and third‑party contract rights and amortize the costs over the shorter of the license term or the expected useful life. We review the license arrangements and the amortization period on a regular basis and adjust the carrying value or the amortization period of the licensed rights if there is evidence of a change in the carrying value or useful life of the asset.

Cash and Cash Equivalents

We consider cash equivalents to be only those investments which are highly liquid, readily convertible to cash and which mature within three months from the date of purchase.

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”, as defined by authoritative guidance issued by the FASB. 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. Accrued interest was $1.7 million and $1.4 million at December 31, 2017 and 2016, respectively. 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.

Concentrations of Risk

Cash, cash equivalents and marketable securities are financial instruments that potentially subject the Company to concentrations of risk. Xencor invests its cash in corporate debt securities and U.S. sponsored agencies with strong credit ratings. Xencor has established guidelines relative to diversification and maturities that are designed to help ensure safety and liquidity. These guidelines are periodically reviewed to take advantage of trends in yields and interest rates.

Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances. Amounts on deposit in excess of federally insured limits at December 31, 2017 and 2016 approximated $16.0 million and $14.0 million, respectively.

We have payables with two service providers that represent 40% of our total payables and three service providers that represented 28% of our total payables at December 31, 2017 and 2016, respectively. We rely on three critical suppliers for the manufacture of our drug product for use in our clinical trials. While we believe that there are alternative vendors available, a change in manufacturing vendors could cause a delay in the availability of drug product and result in a delay of conducting and completing our clinical trials. No other vendor accounted for more than 10% of total payables at December 31, 2017 or 2016.

Fair Value of Financial Instruments

Our financial instruments primarily consist of cash and 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 approximate 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). 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):


	December 31, 2017
	Total
	Fair Value		Level 1		Level 2

Money Market Funds in Cash and Cash Equivalents	$	5,175	$	5,175	$	—
Corporate Securities		123,270		—		123,270
Government Securities		223,530		—		223,530
	$	351,975	$	5,175	$	346,800

	December 31, 2016
	Total
	Fair Value		Level 1		Level 2

Money Market Funds in Cash and Cash Equivalents	$	12,137	$	12,137	$	—
Corporate Securities		181,483		—		181,483
Government Securities		207,465		—		207,465
	$	401,085	$	12,137	$	388,948

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight‑line method over the estimated useful lives of the assets. Expenditures for repairs and maintenance are charged to expense as incurred while renewals and improvements are capitalized. Useful lives by asset category are as follows:



Computers, software and equipment		3 - 5 years
Furniture and fixtures		5 - 7 years
Leasehold improvements		5 - 7 years or remaining
		lease term, whichever is less

Patents, Licenses, and Other Intangible Assets

The cost of acquiring licenses is capitalized and amortized on the straight‑ line basis over the shorter of the term of the license or its estimated economic life, ranging from five to 25 years. Third‑party costs incurred for acquiring patents are capitalized. Capitalized costs are accumulated until the earlier of the period that a patent is issued or we abandon the patent claims. Cumulative capitalized patent costs are amortized on a straight‑line basis from the date of issuance over the shorter of the patent term or the estimated useful economic life of the patent, ranging from 13 to 20 years. Our senior management, with advice from outside patent counsel, assesses three primary criteria to determine if a patent will be capitalized initially: i) technical feasibility, ii) magnitude and scope of new technical function covered by the patent compared to the company’s existing technology and patent portfolio, particularly assessing the value added to our product candidates or licensing business, and iii) legal issues, primarily assessment of patentability and prosecution cost. We review our intellectual property on a regular basis to determine if there are changes in the estimated useful life of issued patents and if any capitalized costs for unissued patents should be abandoned. Capitalized patent costs related to abandoned patent filings are charged off in the period of the decision to abandon. During 2017, 2016 and 2015, we abandoned previously capitalized patent and licensing related charges of $396,000 $356,000 and $296,000, respectively.

The carrying amount and accumulated amortization of patents, licenses, and other intangibles is as follows (in thousands):


	December 31,
	2017		2016
Patents, definite life	$	8,915	$	7,570
Patents, pending issuance		4,360		4,134
Licenses and other amortizable intangible assets		2,011		2,011
Nonamortizable intangible assets (trademarks)		399		399
Total gross carrying amount		15,685		14,114
Accumulated amortization—patents		(3,413)		(2,792)
Accumulated amortization—licenses and other		(1,124)		(960)
Total intangible assets, net	$	11,148	$	10,362

Amortization expense for patents, licenses, and other intangible assets was $784,000, $755,000 and $594,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

Future amortization expense for patent, licenses, and other intangible assets recorded as of December 31, 2017, and for which amortization has commenced, is as follows:


	Year ended
	December 31,
	(in thousands)
2018	$	838
2019		827
2020		780
2021		704
2022		676
Thereafter		2,364
Total	$	6,189

The above amortization expense forecast is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets, and other events. As of December 31, 2017, the Company has $4.4 million of intangible assets which are in‑process and have not been placed in service and, accordingly amortization on these assets has not commenced.

Long‑Lived Assets

Management reviews long‑lived assets which include fixed assets and amortizable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

We did not recognize a loss from impairment for the years ended December 31, 2017, 2016 or 2015.

Income Taxes

We account for income taxes in accordance with accounting guidance which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where there is greater than 50% likelihood that a tax benefit will be sustained, we have recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is a 50% or less likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. We did not have any material uncertain tax positions at December 31, 2017 or 2016.

Our policy is to recognize interest and penalties on taxes, if any, as a component of income tax expense.

The Tax Cuts and Jobs Act (tax reform) was enacted on December 22, 2017 and has several key provisions impacting accounting for and reporting of income taxes. The most significant provision reduces the U.S. corporate statutory tax rate from 35% to 21% and eliminate the Alternative Minimum Tax (AMT) system beginning on January 1, 2018. Although most provisions of the tax reform are not effective until 2018, we are required to record the effect of a change in tax law in the period of enactment (2017).

Stock‑Based Compensation

We recognize compensation expense using a fair‑value‑based method for costs related to all share‑based payments, including stock options and shares issued under our Employee Stock Purchase Plan (ESPP). Stock‑based compensation cost related to employees and directors is measured at the grant date, based on the fair‑value-based measurement of the award using the Black‑Scholes method, and is recognized as expense over the requisite service period on a straight‑line basis. We account for forfeitures when they occur. We recorded stock‑based compensation and expense for stock‑based awards to employees, directors and consultants of approximately $13.7 million, $7.8 million and $4.9 million for the years ended December 31, 2017, 2016 and 2015 respectively. Included in the 2017 and 2016 balances for total compensation expense is $498,000 and $378,000, respectively, relating to our ESPP.

Options granted to individual service providers that are not employees or directors are accounted for at estimated fair value using the Black‑Scholes option‑pricing method and are subject to periodic re‑measurement over the period during which the services are rendered.

Net Income (Loss) Per Share

Basic net income (loss) per common share is computed by dividing the net income or loss by the weighted‑average number of common shares outstanding during the period. Potentially dilutive securities consisting of stock options for 2017 and 2015, and stock purchases under the Employee Stock Purchase Plan were not included in the diluted net loss per common shares calculation because the inclusion of such shares would have had an antidilutive effect as follows:


	Year Ended
	December 31,
	2017	2016	2015
	(in thousands)
Options to purchase common stock	1,291	—	1,281
Employee stock purchase plan shares	—	—	75
Total	1,291	—	1,356


	Year Ended December 31,
	2017		2016		2015
	(in thousands, except
	share and per share data)
Basic
Numerator:
Net income (loss) attributable to common stockholders for basic net income (loss) per share	$	(48,925)	$	23,625	$	(17,592)
Denominator:
Weighted-average common shares outstanding		46,817,756		41,267,329		39,015,131
Basic net income (loss) per common share	$	(1.05)	$	0.57	$	(0.45)
Diluted
Numerator:
Net income (loss) attributable to common stockholders for diluted net income (loss) per share	$	(48,925)	$	23,625	$	(17,592)
Denominator:
Weighted average number of common shares outstanding used in computing basic net income (loss) per common share		46,817,756		41,267,329		39,015,131
Dilutive effect of employee stock options and ESPP		—		1,121,538		—
Weighted-average number of common shares outstanding used in computing diluted net income (loss) per common share		46,817,756		42,388,867		39,015,131
Diluted net income (loss) per common share	$	(1.05)	$	0.56	$	(0.45)

Segment Reporting

The Company determines its segment reporting based upon the way the business is organized for making operating decisions and assessing performance. The Company has only one operating segment related to the development of pharmaceutical products.

Marketable Securities

12 Months Ended

Dec. 31, 2017

Marketable Securities

Marketable Securities

3. Marketable Securities

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


	December 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
(in thousands)
Money Market Funds	$	5,175	$	—	$	—	$	5,175
Corporate Securities		123,860		—		(590)		123,270
Government Securities		224,739		—		(1,209)		223,530
	$	353,774	$	—	$	(1,799)	$	351,975

Reported as
Cash and cash equivalents							$	5,175
Marketable securities								346,800
Total investments							$	351,975


	December 31, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized
	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

The maturities of the Company’s marketable securities as of December 31, 2017 are as follows:


	Amortized		Estimated
	Cost		Fair Value
(in thousands)
Mature in one year or less	$	208,200	$	207,603
Mature after one year through five years		140,399		139,197
	$	348,599	$	346,800

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


	December 31, 2017
	Less than 12 months				12 months or greater
		Fair value		Unrealized losses		Fair value		Unrealized losses
(in thousands)
Corporate Securities	$	79,290	$	(137)	$	43,980	$	(453)
Government Securities		128,313		(461)		95,217		(748)
	$	207,603	$	(598)	$	139,197	$	(1,201)


	December 31, 2016
	Less than 12 months				12 months or greater
		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)
	$	99,788	$	(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.

Sale of Additional Common Stock	12 Months Ended
Sale of Additional Common Stock	Dec. 31, 2017
Sale of Additional Common Stock
Sale of Additional Common Stock	4. Sale of Additional Common Stock In March 2015, we completed the sale of 8,625,000 shares of common stock which included shares we issued pursuant to our underwriters’ exercise of their over-allotment option pursuant to a follow-on offering. We received net proceeds of $115.2 million, after underwriting discounts, commissions and estimated offering expenses. In December 2016, we completed the sale of 5,272,750 shares of common stock which included shares we issued pursuant to our underwriters’ exercise of their over-allotment option pursuant to a follow-on financing. We received net proceeds of $119.3 million after underwriting discounts, commissions and offering expenses. On September 19, 2016, we entered into an Equity Distribution Agreement (the Distribution Agreement) with Piper Jaffray & Co (Piper Jaffray) pursuant to which we may sell from time to time, at our option, up to an aggregate of $40 million of common stock through Piper Jaffray as sales agent. The issuance and sale of these shares by Xencor under the Distribution Agreement will be pursuant to our shelf registration statement on Form S-3 (File No.333-213700) declared effective by the SEC on October 5, 2016. We are not obligated sell any shares of common stock under the Agreement and to date, we have not sold any shares under the Distribution Agreement.

Property and Equipment

12 Months Ended

Dec. 31, 2017

Property and Equipment

Property and Equipment

5. Property and Equipment

Property and equipment consist of the following:


	December 31,
	2017		2016
	(In thousands)
Computers, software and equipment	$	10,874	$	6,735
Furniture and fixtures		152		125
Leasehold and tenant improvements		4,010		3,790
		15,036		10,650
Less accumulated depreciation and amortization		(7,948)		(7,545)
	$	7,088	$	3,105

Depreciation and amortization expense related to property and equipment in 2017, 2016 and 2015 was $1.2 million, $712,000 and $519,000, respectively.

Income Taxes

12 Months Ended

Dec. 31, 2017

Income Taxes

Income Taxes

6. Income Taxes

Our effective tax rate differs from the statutory federal income tax rate, primarily as a result of the changes in valuation allowance. The provision for income taxes is a benefit of $0.5 million and a charge of $1.0 million for the years ended December 31, 2017 and 2016 respectively. Current tax expense for each year represents federal and state alternative minimum tax. For the year ended December 31, 2015 there was no current provision for federal or state income taxes due to taxable losses subject to a valuation allowance incurred in each of the years.

A reconciliation of the federal statutory income tax to our effective income tax is as follows (in thousands):


	Year Ended
	December 31,
	2017		2016		2015
Federal statutory income tax	$	(16,917)	$	7,718	$	(6,157)
State and local income taxes		(2,436)		1,451		—
Research and development credit		(5,554)		(2,544)		708
Stock based compensation		2,709		733		651
Effect of the 2017 Tax Cut and Jobs Act		23,859		—		—
Other		262		8		14
Net change in valuation allowance		(2,386)		(6,366)		4,784
Income tax provision (benefit)	$	(463)	$	1,000	$	—

The tax effect of temporary differences that give rise to a significant portion of the deferred tax assets and liabilities at December 31, 2017 and 2016 is presented below (in thousands):


	2017		2016
Deferred income tax assets
Net operating loss carryforwards	$	25,564	$	54,860
Research credits		16,642		11,561
Depreciation		437		668
Unrealized loss on securities		504		573
Accrued compensation		748		719
Deferred revenue		26,442		5,236
State taxes		(2)		97
Gross deferred income tax assets		70,335		73,714
Valuation allowance		(67,284)		(69,670)
Net deferred income tax assets		3,051		4,044
Deferred income tax liabilities
Patent costs		(2,873)		(3,725)
Licensing costs		(142)		(261)
Capitalized legal costs		(36)		(58)
Gross deferred income tax liabilities		(3,051)		(4,044)
Net deferred income tax asset	$	—	$	—

The Tax Cuts and Jobs Act (TCJA) was enacted in December 2017 and made substantial changes in the US tax system. One of the changes was elimination of the AMT tax system for corporations and allowance of an income tax refund for AMT tax credit carryforwards as of December 31, 2017. We have reported an income tax receivable of $1.5 million as of December 31, 2017 to reflect the U.S. AMT credit carryforwards we have available. Due to the uncertainty surrounding the realization of the benefits of our deferred tax assets in future tax periods, we have placed a valuation allowance against our deferred tax assets at December 31, 2017. The Company recognizes valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company’s net deferred income tax asset is not more likely than not to be realized due to the lack of sufficient sources of future taxable income and cumulative losses that have resulted over the years. As a result of the reduction in the U.S. statutory rate from 35% to 21% beginning in 2018, our total deferred assets at December 31, 2017 were reduced by $23.9 million. Upon analysis, there were changes in ownership under Section 382 of the Internal Revenue Code and related state provisions as a result of our sale of preferred stock and sale of common stock during 2013. Section 382 limits the amount of net operating losses and tax credit forwards that may be available after a change in ownership. The Company has adjusted its net operating loss and tax credit carryforwards to reflect the impact of the section 382 limitations. The Company’s tax returns remain open to potential inspection for the years 2013 and onwards for federal purposes and 2012 and onwards for state purposes.

As of December 31, 2017, we had cumulative net operating loss carryforwards for federal and state income tax purposes of $104.8 million and $50.9 million respectively, and available tax credit carryforwards of approximately $10.0 million for federal income tax purposes and $6.6 million for state income tax purposes, which can be carried forward to offset future taxable income, if any.

Our federal net operating loss carryforwards expire starting in 2026, state net operating losses expire starting in 2032, and federal tax credit carryforwards expire starting in 2019. Utilization of the net operating losses and tax credits are subject to a substantial annual limitation due to ownership changes which occurred. As a result of these changes, provisions in the Internal Revenue Code of 1986 under Section 382 and similar state provisions may result in the expiration of certain of our net operating losses and tax credits before we can use them.

Stock-Based Compensation

12 Months Ended

Dec. 31, 2017

Stock-Based Compensation

Stock-Based Compensation

7. 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 IPO. As of December 2, 2013, we suspended the 2010 Plan and no additional awards may be granted under the 2010 Plan. Any shares of common stock covered by awards granted under the 2010 Plan that terminate after December 2, 2013 by expiration, forfeiture, cancellation or other means without the issuance of such shares will be added to the 2013 Plan reserve.

As of December 31, 2017, the total number of shares of common stock available for issuance under the 2013 Plan was 8,526,465. 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 by 4% of the total number of issued and outstanding shares of common stock as of December 31 of the immediate preceding year. On January 1, 2017, the total number of shares of common stock available for issuance under the 2013 Plan was automatically increased by 1,862,719 shares, which number is included in the number of shares available for issuance above. As of December 31, 2017 a total of 4,945,350 options have 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. Under the ESPP our employees may elect to have between 1-15% of their compensation withheld to purchase Company stock at a discount. The ESPP had an initial two-year term that includes four six-month purchase periods and employee withholding amounts may be used to purchase Company stock during each six-month purchase period. The initial two-year term ended in December 2015 and pursuant to the provisions of the ESPP, the second two-year term began automatically upon the end of the initial term. The total number of shares that can be purchased with the withholding amounts are based on the lower of 85% of the Company’s stock price at the initial offering date or, 85% of the Company’s stock price at each purchase date. 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 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. On January 1, 2014, the total number of shares of common stock available for issuance under the ESPP was automatically increased by 313,545 shares, which number is included in the number of shares reserved for issuance above. Pursuant to approval by our board, there was no increase in the number of authorized shares in the ESPP in 2017, 2016 or 2015. As of December 31, 2017 and 2016, we have issued a total of 292,393 and 221,486 shares of common stock, respectively, under the ESPP.

Information with respect to stock options outstanding is as follows:


	December 31,
	2017		2016		2015
Exercisable options		2,558,941		1,743,765		1,600,351
Weighted average exercise price per share of exercisable options	$	11.06	$	8.87	$	3.99
Weighted average grant date fair value per share of options granted during the year	$	16.92	$	10.30	$	10.66
Options available for future grants		3,394,651		2,943,216		2,917,182
Weighted average remaining contractual life		6.58		7.82		6.98

The following table summarizes stock option activity for the years ended December 31, 2017 and 2016:


				Weighted-
		Weighted-		Average
		Average		Remaining
		Exercise		Contractual	Aggregate
	Number of	Price		Term	Intrinsic Value
	Shares	(Per Share)(1)		(in years)	(in thousands)(2)
Balances at December 31, 2015	3,370,901	$	8.50	6.98
Options granted	1,429,500		15.08
Options forfeited	(54,503)		12.21
Options expired	(1,031)		15.69
Options exercised(3)	(699,066)		1.66
Balances at December 31, 2016	4,045,801		11.95	7.82	$	58,131
Options granted	1,511,100		22.61
Options forfeited	(96,856)
Options expired	(3,000)
Options exercised(3)	(363,603)
Balances at December 31, 2017	5,093,442	$	15.32		$
As of December 31, 2017
Options vested and expected to vest	5,093,442	$	15.32	7.62	$	35,495
Exercisable	2,558,941	$	11.06	6.58	$	28,017

(1)

The weighted average exercise price per share is determined using exercise price per share for stock options.

(2)

The aggregate intrinsic value is calculated as the difference between the exercise price of the option and the fair value of our common stock for in‑ the‑money options at December 31, 2017 and 2016.

(3)

The total intrinsic value of stock options exercised was $5.7 million, $11.2 million and $5.4 million for the years ended December 31, 2017, 2016 and 2015 respectively.

The stock options outstanding and exercisable by exercise price at December 31, 2017 are as follows:


Stock Options Outstanding					Stock Options Exercisable
		Weighted-
		Average
		Remaining	Weighted-			Weighted-
Range of		Contractual	Average			Average
Exercise	Number of	Term	Exercise Price		Number of	Exercise Price
Prices	Shares	(in years)	Per Share		Shares	Per Share
$0.59 – $4.25	622,046	4.82	$	3.17	622,046	$	3.17
$9.26 – $13.89	1,781,232	7.26	$	11.87	1,205,142	$	11.64
$14.10 – $21.15	968,314	7.40	$	15.8	634,199	$	15.68
$21.28 – $26.76	1,721,850	9.13	$	23.0	97,554	$	24.13
	5,093,442	7.62	$	15.32	2,558,941	$	11.06

We estimated the fair value of employee and non‑employee awards using the Black‑Scholes valuation model. The fair value of employee stock options is being amortized on a straight‑line basis over the requisite service period of the awards. Management estimates the probability of non‑employee awards being vested based upon an evaluation of the non‑employee achieving their specific performance goals.

Options granted after our Initial Public Offering, are issued at the fair market value of our stock at the date the grant is approved by our board of directors.

The fair value of employee stock options was estimated using the following weighted average assumptions for the years ended December 31, 2017, 2016 and 2015:


	Options
	2017		2016		2015
Common stock fair value per share	$	19.61 - 25.67	$	11.50 - 26.76	$	11.82 - 22.35
Expected volatility		77.42% - 96.73%		75.77% - 90.83%		69.17% - 86.46%
Risk-free interest rate		.96% - 2.37%		1.03% - 2.18%		1.44% - 1.84%
Expected dividend yield		—		—		—
Expected term (in years)		5.23 - 6.08		5.23 - 6.08		5.23 - 6.08


	ESPP
	2017	2016	2015
Expected term (years)	0.5 - 2.0	0.5 - 2.0	0.5 - 2.0
Expected volatility	67.8% - 79.8%	67.8% - 79.8%	67.8% - 82.9%
Risk-free interest rate	.47% - 1.8%	.47% - .93%	.07% - .93%
Expected dividend yield	—	—	—

Total employee, director and non‑employee stock‑based compensation expense recognized was as follows:


	Year Ended
	December 31,
(In thousands)	2017		2016		2015
General and administrative	$	5,617	$	3,592	$	2,218
Research and development		8,034		4,256		2,650
	$	13,651	$	7,848	$	4,869

The expected term of stock options represents the average period the stock options are expected to remain outstanding. The expected stock price volatility for our stock options for the years ended December 31, 2017, 2016 and 2015 was determined by examining the historical volatilities for industry peers and adjusting for differences in our life cycle and financing leverage. Industry peers consist of several public companies in the biopharmaceutical industry.

We determined the average expected life of stock options based on the simplified method because our common stock has not been publicly traded for an extended period and we do not have a track record of our stock being traded on the public markets for sufficient time to establish the volatility of our stock.

The risk‑free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of our stock options.

The expected dividend assumption is based on our history and expectation of dividend payouts.

As of December 31, 2017 and 2016, the unamortized compensation expense related to unvested stock options was $30.7 million and $18.1 million, respectively. The remaining unamortized compensation expense will be recognized over the next 2.76 years. At December 31, 2017 and 2016, the unamortized compensation expense was $1.1 million and $481,000 respectively under our ESPP. The remaining unamortized expense will be recognized over the next 23.3 months.

Commitments and Contingencies

12 Months Ended

Dec. 31, 2017

Commitments and Contingencies

Commitments and Contingencies

8. Commitments and Contingencies

Operating leases

The Company leases office and laboratory space in Monrovia, CA through June 2020. In July 2017, the Company entered into an amended lease agreement for additional space in the same building. The amended lease has a 64-month term with an option to renew for an additional five years. The lease terms for the original space were not amended.

The Company also leases office space in San Diego, CA through June 2020. In June 2017, the Company entered into a new lease agreement for an additional office space. The new lease has a 61-month term beginning from the date of occupancy and includes an option to renew for an additional five years. At December 31, 2017 the future minimum lease payments under the operating leases were as follows:


	Operating
Years ending December 31,	Leases
2018	$	2,546
2019		2,726
2020		2,388
2021		1,980
2022		1,406
Thereafter		—

Rent expense for the years ended December 31, 2017, 2016 and 2015 was $1.7 million, $638,000 and $558,000 respectively.

Contingencies

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

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

On December 14, 2015, the 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 cost of $950,000 net of insurance proceeds of $187,500 which has been reflected as a charge in our 2015 operations.

On September 27, 2016, the parties engaged in voluntary mediation and agreed to settle the complaint’s remaining claims for a total payment of $2.375 million to the class certified by the Delaware Court of Chancery. The settlement was reached without any party admitting wrongdoing. Under the terms of the settlement, no payment 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 recognized legal costs related to the litigation as incurred and offset any insurance proceeds when approved and issued. For the year ended December 31, 2017 no amount of loss related to the settlement has been accrued. At December 31, 2016, we reported the outstanding settlement amount of $2.355 million as a payable and reflected a receivable of the same amount for the insurance coverage. This amount was paid by the insurance carrier on our behalf in May 2017.

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. We have also entered into agreements with third party vendors which will require us to make future payments upon the delivery of goods and services in future periods.

Guarantees

In the normal course of business, we indemnify certain employees and other parties, such as collaboration partners and other parties that perform certain work on behalf of, or for the Company or take licenses to our technologies. We have agreed to hold these parties harmless against losses arising from our breach of representations or covenants, intellectual property infringement or other claims made against these parties in performance of their work with us.

These agreements typically limit the time within which the party may seek indemnification by us and the amount of the claim. It is not possible to prospectively determine the maximum potential amount of liability under these indemnification agreements since we have not had any prior indemnification claims on which to base the calculation. Further, each potential claim would be based on the unique facts and circumstances of the claim and the particular provisions of each agreement. We are not aware of any potential claims and did not record a liability as of December 31, 2017 and 2016.

Condensed Quarterly Financial Data (unaudited)

12 Months Ended

Dec. 31, 2017

Condensed Quarterly Financial Data (unaudited)

Condensed Quarterly Financial Data (unaudited)

10. Condensed Quarterly Financial Data (unaudited)

The following table contains selected unaudited financial data for each quarter of 2017 and 2016. The unaudited information should be read in conjunction with the Company’s financial statements and related notes included elsewhere in this report. The Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.

Quarterly Financial Data (in thousands, except per share data):


	2017 Quarter Ended
	March 31,		June 30,		September 30,		December 31,
Total revenue	$	4,340	$	13,340	$	7,090	$	10,941
Loss from operations		(15,519)		(7,670)		(16,490)		(13,882)
Net loss		(14,635)		(6,885)		(15,562)		(11,843)
Basic net loss per common share		(0.31)		(0.15)		(0.33)		(0.25)
Diluted net loss per common share	$	(0.31)	$	(0.15)	$	(0.33)	$	(0.25)


	2016 Quarter Ended
	March 31,		June 30,		September 30,		December 31,
Total revenue	$	7,252	$	66,007	$	7,821	$	6,440
Income (loss) from operations		(6,733)		48,556		(9,255)		(10,028)
Net income (loss)		(6,398)		47,156		(8,077)		(9,065)
Basic net income (loss) per common share		(0.16)		1.16		(0.20)		(0.21)
Diluted net income (loss) per common share	$	(0.16)	$	1.13	$	(0.20)	$	(0.21)

Summary of Significant Accounting Policies (Polices)