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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2020

or

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

Commission file number: 001-36182

Xencor, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

20-1622502

(State or Other Jurisdiction of Incorporation

or Organization)

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

111 West Lemon Avenue, Monrovia, CA

91016

(Address of Principal Executive Offices)

(Zip Code)

(626) 305-5900

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock, par value $0.01 per share

XNCR

NASDAQ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

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

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

Class

Outstanding at April 29, 2020

Common stock, $0.01 par value

57,004,786

Table of Contents

Xencor, Inc.

Quarterly Report on FORM 10-Q for the Quarter Ended March 31, 2020

Table of Contents

Page

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

3

PART I.

FINANCIAL INFORMATION

5

Item 1.

Financial Statements

5

Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019

5

Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2020 and 2019 (unaudited)

6

Statement of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019 (unaudited)

7

Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (unaudited)

8

Notes to Financial Statements (unaudited)

9

Item 2.

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

25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

34

PART II.

OTHER INFORMATION

35

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 6.

Exhibits

37

Signatures

38

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

2

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of federal securities laws. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under Part II, Item 1A, “Risk Factors” in this Quarterly Report. These statements, which represent our current expectations or beliefs concerning various future events, may contain words such as “may,” “will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate” or other words indicating future results. Such statements may include, but are not limited to, statements concerning the following:

These forward-looking statements should, therefore, be considered in light of various important factors, including but not limited to, the following:

the effects of the COVID-19 pandemic on our financial condition, results of operations, cash flows and performance;

our plans to research, develop and commercialize our product candidates;

our ongoing and planned clinical trials;

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

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

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

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

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

significant competition in our industry;

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

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

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

our intellectual property position;

loss or retirement of key members of management;

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

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

our failure to maintain effective internal controls.

3

Table of Contents

The factors, risks and uncertainties referred to above and others are more fully described under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and this Quarterly Report on Form 10-Q. Forward-looking statements should be regarded solely as our current plans, estimates and beliefs. We cannot guarantee future results, events, levels of activity, performance or achievements. We do not undertake and specifically decline any obligation to update, republish or revise forward-looking statements to reflect future events or circumstances or to reflect the occurrences of unanticipated events.

4

Table of Contents

PART I — FINANCIAL INFORMATION

Item1.          Financial Statements

Xencor, Inc.

Balance Sheets

(In thousands, except share amounts)

    

March 31, 

    

December 31, 

2020

2019

(unaudited)

Assets

Current assets

Cash and cash equivalents

$

73,808

$

50,312

Marketable securities

497,841

479,470

Equity securities

2,253

Accounts receivable

6,825

 

21,574

Income tax receivable

904

502

Prepaid expenses and other current assets

6,476

 

6,547

Total current assets

588,107

 

558,405

Property and equipment, net

 

16,799

 

15,805

Patents, licenses, and other intangible assets, net

14,637

 

14,421

Marketable securities - long term

38,232

71,526

Income tax receivable

402

Other assets

 

9,188

 

9,691

Total assets

$

666,963

$

670,250

Liabilities and stockholders’ equity

Current liabilities

Accounts payable

$

10,313

$

10,189

Accrued expenses

7,292

 

8,995

Lease liabilities

2,136

2,169

Deferred revenue

46,176

 

45,205

Total current liabilities

65,917

 

66,558

Lease liabilities, net of current portion

8,041

8,565

Deferred revenue, net of current portion

1,926

Total liabilities

73,958

 

77,049

Commitments and contingencies

Stockholders’ equity

Preferred stock, $0.01 par value: 10,000,000 authorized shares; -0- issued and outstanding shares at March 31, 2020 and December 31, 2019

Common stock, $0.01 par value: 200,000,000 authorized shares at March 31, 2020 and December 31, 2019; 57,001,253 issued and outstanding at March 31, 2020 and 56,902,301 issued and outstanding at December 31, 2019

570

 

569

Additional paid-in capital

895,855

 

887,873

Accumulated other comprehensive income (loss)

1,056

 

1,161

Accumulated deficit

 

(304,476)

 

(296,402)

Total stockholders’ equity

 

593,005

 

593,201

Total liabilities and stockholders’ equity

$

666,963

$

670,250

See accompanying notes.

5

Table of Contents

Xencor, Inc.

Statements of Comprehensive Income (Loss)

(unaudited)

(In thousands, except share and per share data)

Three Months Ended

 

March 31, 

 

    

2020

    

2019

 

Revenue

Collaborations, licenses, milestones, and royalties

$

32,385

$

111,939

Operating expenses

Research and development

 

33,943

 

28,183

General and administrative

 

7,219

 

5,512

Total operating expenses

 

41,162

 

33,695

Income (loss) from operations

 

(8,777)

 

78,244

Other income (expenses)

Interest income, net

 

3,039

 

2,886

Other expense, net

(2,336)

(185)

Total other income, net

 

703

 

2,701

Net income (loss) before income tax expense

(8,074)

80,945

Income tax expense

900

Net income (loss)

(8,074)

80,045

Other comprehensive income (loss)

Net unrealized gain (loss) on marketable securities

(105)

1,316

Comprehensive income (loss)

$

(8,179)

$

81,361

Basic net income (loss) per common share

$

(0.14)

$

1.42

Diluted net income (loss) per common share

$

(0.14)

$

1.38

Basic weighted average common shares outstanding

56,946,714

56,302,967

Diluted weighted average common shares outstanding

56,946,714

58,009,878

See accompanying notes.

6

Table of Contents

Xencor, Inc.

Statement of Stockholders’ Equity

(in thousands, except share data)

Accumulated

Additional

Other

Total

Common Stock

Paid

Comprehensive

Accumulated

Stockholders’

Stockholders’ Equity

Shares

Amount

in-Capital

Income (Loss)

Deficit

Equity

Balance, December 31, 2019

56,902,301

569

887,873

1,161

(296,402)

593,201

Issuance of common stock upon exercise of stock awards

79,930

1

1,470

1,471

Issuance of restricted stock units

19,022

Comprehensive loss

(105)

(8,074)

(8,179)

Stock-based compensation

6,512

6,512

Balance, March 31, 2020

57,001,253

$

570

$

895,855

$

1,056

$

(304,476)

$

593,005

Accumulated

Additional

Other

Total

Common Stock

Paid

Comprehensive

Accumulated

Stockholders’

Stockholders’ Equity

Shares

Amount

in-Capital

Income (Loss)

Deficit

Equity

Balance, December 31, 2018

56,279,542

563

845,366

(971)

(323,277)

521,681

Issuance of common stock upon exercise of stock awards

58,536

1

666

667

Issuance of restricted stock units

11,311

Comprehensive income

1,316

80,045

81,361

Stock-based compensation

5,856

5,856

Balance, March 31, 2019

56,349,389

$

564

$

851,888

$

345

$

(243,232)

$

609,565

See accompanying notes.

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Table of Contents

Xencor, Inc.

Statements of Cash Flows

(unaudited)

(in thousands)

Three Months Ended

March 31, 

    

2020

    

2019

Cash flows from operating activities

Net income (loss)

$

(8,074)

$

80,045

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

Depreciation and amortization

 

1,373

 

996

Accretion of discount on marketable securities

 

(573)

 

(601)

Stock-based compensation

 

6,512

 

5,856

Abandonment of capitalized intangible assets

 

28

 

58

Equity received in connection with license agreement

(4,589)

Change in fair value of equity security

2,336

Changes in operating assets and liabilities:

Accounts receivable

 

14,749

 

(127,489)

Interest receivable

215

31

Prepaid expenses and other assets

 

71

 

942

Accounts payable

 

124

 

1,689

Accrued expenses

 

(1,703)

 

(3,957)

Income taxes

900

Lease liabilities and ROU assets

(54)

(259)

Deferred revenue

 

(955)

 

23,061

Net cash provided by (used in) operating activities

 

9,460

 

(18,728)

Cash flows from investing activities

Purchase of marketable securities

 

(142,477)

 

(49,856)

Purchase of intangible assets

 

(538)

 

(1,051)

Purchase of property and equipment

 

(2,073)

 

(415)

Proceeds from maturities of marketable securities

157,653

64,995

Net cash provided by investing activities

 

12,565

 

13,673

Cash flows from financing activities

Proceeds from issuance of common stock upon exercise of stock awards

 

1,471

 

667

Net cash provided by financing activities

 

1,471

 

667

Net increase in cash and cash equivalents

 

23,496

 

(4,388)

Cash and cash equivalents, beginning of period

 

50,312

 

26,246

Cash and cash equivalents, end of period

$

73,808

$

21,858

Supplemental disclosure of cash flow information

Cash paid during the period for:

Interest

$

6

$

4

Supplemental disclosures of non-cash investing activities

Unrealized gain (loss) on marketable securities, net of tax

$

(105)

$

1,316

See accompanying notes.

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Xencor, Inc.

Notes to Financial Statements

(unaudited)

March 31, 2020

1. Summary of Significant Accounting Policies

Basis of Presentation

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

The accompanying unaudited interim financial statements and related notes should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 24, 2020.

Use of Estimates

The preparation of interim financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, other comprehensive gain (loss) and the related disclosures. On an ongoing basis, management evaluates its estimates, including estimates related to its accrued clinical trial and manufacturing development expenses, stock-based compensation expense, intangible assets and related amortization. Significant estimates in these interim financial statements include estimates made for royalties and accrued research and development expenses, stock-based compensation expenses, intangible assets and related amortization, estimated standalone selling price of performance obligations, the likelihood of recognizing variable consideration, and recoverability of deferred tax assets.

Intangible Assets

The Company maintains definite-lived intangible assets related to certain capitalized costs of acquired licenses and third-party costs incurred in establishing and maintaining its intellectual property rights to its platform technologies and development candidates. These assets are amortized over their useful lives, which are estimated to be the remaining patent life or the contractual term of the license. The straight-line method is used to record amortization expense. The Company assesses its intangible assets for impairment if indicators are present or changes in circumstances suggest that impairment may exist. There were no impairment charges recorded for the three months ended March 31, 2020 and 2019.

The Company capitalizes certain in-process intangible assets that are then abandoned when they are no longer pursued or used in current research activities. There was no material abandonment of in-process intangible assets during the three months ended March 31, 2020 or 2019.

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 debt securities issued by investment grade institutions.

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The Company considers its marketable debt securities to be available-for-sale and does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell the securities before recovery of the amortized cost basis. These assets are carried at fair value and any impairment gains (losses) related to the underlying issuer’s credit standing are recognized within other income (expense), while non-credit related impairment gains (losses) are recognized within accumulated other comprehensive income (loss). Accrued interest on marketable debt securities is included in marketable securities’ carrying value. Each reporting period, the Company reviews its portfolio of marketable debt securities, using both quantitative and qualitative factors, to determine if each security’s fair value has declined below its amortized cost basis.

The Company also has investments in equity securities that are carried at fair value with changes in fair value recognized within other income (expense). For equity securities with a readily determinable fair value, the Company remeasures these equity investments at each reporting period until such time that the investment is sold or disposed. If the Company sells an investment, any realized gains and losses on the sale of the securities will be recognized within other income (expense) in the Statement of Comprehensive Income (Loss) in the period of sale.

Recent Accounting Pronouncements

Pronouncements Adopted in 2020

Effective January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as well as ASU No, 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. The standard amends guidance on reporting credit losses for assets held at amortized cost basis and also provides an available-for-sale (AFS) debt security impairment model that is a modified version of the other-than-temporary-impairment (OTTI) model. The AFS debt security impairment model no longer allows consideration of the length of time during which the fair value has been less than its amortized cost when determining whether a credit loss exists. The adoption of this standard did not have any impact on the Company’s financial statements.

Effective January 1, 2020, the Company adopted ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosures for transfers between Level 1 and Level 2 of the fair value hierarchy, modifies the Level 3 disclosure requirements for non-public entities and requires additional disclosure for Level 3 fair value hierarchy. The adoption of this standard did not have any impact on the Company’s financial statements.

Effective January 1, 2020, the Company adopted ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, which provides guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the revenue recognition standard. The adoption of this standard did not have any impact on the Company’s financial statements.

Pronouncements Not Yet Effective

In December 2019, the Financial Accounting Standards Board (FASB) issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is effective for fiscal years beginning and after December 15, 2020, and interim periods within those fiscal years. The standard removes specific exceptions to the general principles in Topic 740 and simplifies the accounting for income taxes. The Company does not anticipate that the standard will have a significant impact on its financial statements.

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Table of Contents

In January 2020, the FASB issued ASU No. 2020-01, which clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investment – Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendment is effective for fiscal years beginning after December 15, 2020. The Company does not anticipate that the standard will have a significant impact on its financial statements.

There have been no other material changes to the significant accounting policies previously disclosed in the Company’s 2019 Annual Report on Form 10-K.

2. Fair Value of Financial Instruments

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

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

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

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

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

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

March 31, 2020

December 31, 2019

  

Total

  

  

  

Total

  

  

Fair Value

Level 1

Level 2

Fair Value

Level 1

Level 2

Money Market Funds

$

49,800

$

49,800

$

$

32,009

$

32,009

$

Corporate Securities

332,691

332,691

281,751

281,751

Government Securities

203,382

203,382

269,245

269,245

Equity Securities with Readily Determinable Fair Value

2,253

2,253

$

588,126

$

52,053

$

536,073

$

583,005

$

32,009

$

550,996

Our policy is to record transfers of assets between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. During the three months ended March 31, 2020 and 2019, there were no transfers between Level 1 and Level 2. The Company does not have any Level 3 assets or liabilities.

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3. Net Income (Loss) Per Share

We compute basic net income (loss) per common share by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period without consideration of common stock equivalents. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common stock equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of the Company’s stock option grants, employee stock purchase plan (ESPP) and restricted stock units (RSUs). Potentially dilutive securities consisting of stock issuable under options, ESPP and RSUs are not included in the per common share calculation in periods when the inclusion of such shares would have an antidilutive effect.

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

Three Months Ended

 

March 31, 

    

2020

    

2019

    

(in thousands, except share and per share data)

Numerator:

Net income (loss) attributable to common stockholders

$

(8,074)

$

80,045

Denominator:

Weighted-average common shares outstanding used in computing basic net income (loss)

 

56,946,714

 

56,302,967

Effect of dilutive securities

1,706,911

Weighted-average common shares outstanding used in computing diluted net income (loss)

56,946,714

58,009,878

Basic net income (loss) per common share

$

(0.14)

$

1.42

Diluted net income (loss) per common share

$

(0.14)

$

1.38

For the three months ended March 31, 2020, all outstanding potentially dilutive securities have been excluded from the calculation of diluted net loss per common share as the effect of including such securities would have been antidilutive. For the three months ended March 31, 2019, potentially dilutive securities consisting of 964,743 shares of stock awards are excluded from the calculation for the same period because the inclusion of such shares would have had an antidilutive effect.

4. Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). For the three months ended March 31, 2020 and 2019, the only component of other comprehensive income (loss) is net unrealized gain (loss) on marketable securities. There were no material reclassifications out of accumulated other comprehensive income (loss) during the three months ended March 31, 2020 and 2019.

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5. Marketable Securities

The Company’s marketable debt securities held as of March 31, 2020 and December 31, 2019 are summarized below:

Gross

Gross

    

Amortized

    

Unrealized

Unrealized

    

March 31, 2020

Cost

Gains

Losses

Fair Value

(in thousands)

Money Market Funds

$

49,800

$

$

$

49,800

Corporate Securities

333,259

22

(590)

332,691

Government Securities

201,748

1,634

203,382

$

584,807

$

1,656

$

(590)

$

585,873

Reported as

Cash and cash equivalents

$

49,800

Marketable securities

536,073

Total investments

$

585,873

Gross

Gross

    

Amortized

    

Unrealized

Unrealized

    

December 31, 2019

Cost

Gains

Losses

Fair Value

(in thousands)

Money Market Funds

$

32,009

$

$

$

32,009

Corporate Securities

281,586

195

(30)

281,751

Government Securities

268,239

1,006

269,245

$

581,834

$

1,201

$

(30)

$

583,005

Reported as

Cash and cash equivalents

$

32,009

Marketable securities

550,996

Total investments

$

583,005

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

Amortized

    

Estimated

March 31, 2020

Cost

Fair Value

(in thousands)

Mature in one year or less

$

496,586

$

497,841

Mature within two years

38,421

38,232

$

535,007

$

536,073

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The unrealized losses on available-for-sale investments and their related fair values as of March 31, 2020 and December 31, 2019 are as follows:

Less than 12 months

12 months or greater

Unrealized

Unrealized

March 31, 2020

Fair value

losses

Fair value

losses

(in thousands)

Corporate Securities

$

141,723

$

(401)

$

38,232

$

(189)

Less than 12 months

12 months or greater

Unrealized

Unrealized

December 31, 2019

Fair value

losses

Fair value

losses

(in thousands)

Corporate Securities

$

46,303

$

(24)

$

13,992

$

(6)

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

In connection with the Aimmune Agreement (as defined below) executed in February 2020, the Company received shares of Aimmune common stock which are classified as equity securities with a readily determinable fair value as of March 31, 2020. The Company recorded $2.3 million of unrealized losses related to these securities in other income (expense) during the three months ended March 31, 2020. We did not hold any equity securities in our investment portfolio at December 31, 2019.

6. Stock Based Compensation

Our Board of Directors (the Board) and the requisite stockholders previously approved the 2010 Equity Incentive Plan (the 2010 Plan). In October 2013, the Board approved the 2013 Equity Incentive Plan (the 2013 Plan) and in November 2013 our stockholders approved the 2013 Plan which became effective as of December 3, 2013. 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 March 31, 2020, the total number of shares of common stock available for issuance under the 2013 Plan is 12,300,969, which includes 2,684,456 shares of common stock that were available for issuance under the 2010 Plan as of the effective date of the 2013 Plan. Unless otherwise determined by the Board, beginning January 1, 2014, and continuing until the expiration of the 2013 Plan, the total number of shares of common stock available for issuance under the 2013 Plan will automatically increase annually on January 1 of each year by 4% of the total number of issued and outstanding shares of common stock as of December 31 of the immediate preceding year. Pursuant to approval by the Board on January 1, 2020, the total number of shares of common stock available for issuance under the 2013 Plan was increased by 1,138,046 shares. As of March 31, 2020, a total of 10,030,935 options have been granted under the 2013 Plan.

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Table of Contents

In November 2013, the Board and our stockholders approved the 2013 Employee Stock Purchase Plan (ESPP), which became effective as of December 5, 2013. We have reserved a total of 581,286 shares of common stock for issuance under the ESPP. Unless otherwise determined by the Board, beginning on January 1, 2014, and continuing until the expiration of the ESPP, the total number of shares of common stock available for issuance under the ESPP will automatically increase annually on January 1 by the lesser of (i) 1% of the total number of issued and outstanding shares of common stock as of December 31 of the immediately preceding year, or (ii) 621,814 shares of common stock. Pursuant to approval by our Board of Directors, there was no increase in the number of authorized shares in the ESPP from 2015 to 2020. As of March 31, 2020, we have issued a total of 417,277 shares of common stock under the ESPP.

During the three months ended March 31, 2020, the Company awarded 221,604 RSUs to certain employees. Vesting of these awards is in three equal annual installments and is contingent on continued service to the Company. The fair value of these awards is determined based on the intrinsic value of the stock on the date of grant and will be recognized as stock-based compensation expense over the requisite service period. As of March 31, 2020, we have granted a total of 327,103 shares of common stock subject to RSUs.

Total employee, director and non-employee stock-based compensation expense recognized for the three months ended March 31, 2020 and 2019 are as follows (in thousands):

Three Months Ended

 

March 31, 

 

    

2020

    

2019

 

General and administrative

$

2,291

$

1,854

Research and development

 

4,221

 

4,002

$

6,512

$

5,856

Three Months Ended

March 31, 

2020

    

2019

Stock options

$

5,882

$

5,525

ESPP

194

217

Restricted stock units

436

114

$

6,512

$

5,856

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

    

    

    

Weighted

 

Weighted

Average

 

Average

Number of

Exercise

 

Remaining

Aggregate

Shares subject

Price

 

Contractual

Intrinsic

to outstanding

(Per

 

Term

Value

options

Share)

 

(in years)

(in thousands)

Balances at December 31, 2019

 

7,174,319

$

24.03

7.32

Options granted

 

1,137,420

$

32.36

Options forfeited

 

(69,654)

$

30.71

Options exercised

 

(79,930)

$

18.40

Balances at March 31, 2020

 

8,162,155

$

25.19

7.38

$

55,326

Exercisable

4,429,727

$

19.50

6.07

$

49,866

We calculate the intrinsic value as the difference between the exercise price of the options and the closing price of common stock of $29.88 per share as of March 31, 2020.

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Table of Contents

Weighted average fair value of options granted during the three-month periods ended March 31, 2020 and 2019 were $16.64 and $21.20 per share, respectively. There were 1,342,447 options granted during the three-month period ended March 31, 2019. We estimated the fair value of each stock option using the Black-Scholes option-pricing model based on the date of grant of such stock option with the following weighted average assumptions for the three months ended March 31, 2020 and 2019:

Options

Three Months Ended

March 31, 

    

2020

    

2019

    

Expected term (years)

6.3

 

6.1

Expected volatility

53.9

%

61.3

%

Risk-free interest rate

1.71

%

2.53

%

Expected dividend yield

%  

%  

ESPP

Three Months Ended

March 31, 

    

2020

    

2019

    

Expected term (years)

 

0.5 - 2.0

 

0.5 - 2.0

Expected volatility

50.8

%

57.0 - 71.4

%

Risk-free interest rate

 

1.56 - 1.65

%

1.47 - 2.70

%

Expected dividend yield

%

%

As of March 31, 2020, the unamortized compensation expense related to unvested stock options was $62.2 million. The remaining unamortized compensation expense will be recognized over the next 2.9 years. As of March 31, 2020, the unamortized compensation expense under our ESPP was $1.3 million. The remaining unamortized expense will be recognized over the next 1.7 years.

The following table summarizes the RSU activity for the three-month period ended March 31, 2020:

Weighted

Restricted

Average Grant

Stock

Date Fair Value

Units

(Per unit)

Unvested at December 31, 2019

 

90,006

$

34.66

Granted

 

221,604

31.87

Vested

 

(19,022)

31.72

Forfeited

 

(3,404)

31.21

Unvested at March 31, 2020

 

289,184

$

32.76

As of March 31, 2020, the unamortized compensation expense related to unvested RSUs was $9.0 million. The remaining unamortized expense will be recognized over the next 2.8 years.

7. Leases

The Company leases office and laboratory space in Monrovia, CA under a lease that continues through June 2020, with an option to renew for an additional five years. In April 2020, the Company entered into an amendment to the lease to extend the term of the lease under the original terms through September 2020. In July 2017, the Company entered into an amended lease agreement for additional space in the same building with a lease that continues through September 2022, also with an option to renew for an additional five years. The Company assesses that it is likely to exercise both options of the lease term extensions.

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The Company also leases office space in San Diego, CA through July 2020 which includes an option to renew for an additional five years. The Company assesses that it is unlikely to exercise the option to extend this lease.

The Company leases additional office space in San Diego, CA through August 2022, with an option to extend for an additional five years. The Company assesses that it is unlikely to exercise the option to extend the lease term.

The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants. As of March 31, 2020, the Company did not have additional operating leases that have not yet commenced.

The following table reconciles the undiscounted cash flows for the operating leases at March 31, 2020 to the operating lease liabilities recorded on the balance sheet (in thousands):

Years ending December 31,

For the remainder of 2020

$

2,001

2021

 

2,587

2022

2,208

2023

1,352

2024

1,371

2025

1,044

Thereafter

1,238

Total undiscounted lease payments

11,801

Less: Imputed interest

(1,624)

Present value of lease payments

$

10,177

Lease liabilities - short-term

$

2,136

Lease liabilities - long-term

8,041

Total lease liabilities

$

10,177

Our operating lease costs and payments were $0.7 million for each of the three months ended March 31, 2020 and 2019. At March 31, 2020, the weighted-average remaining lease term for operating leases was 5.3 years, and the weighted average discount rate for operating leases is 5.5%.

8. Commitments and 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.

The Company is 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 the Company’s balance sheet. The Company has 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.

9. Collaboration and Licensing Agreements

The following is a summary description of the material revenue arrangements, including arrangements that generated revenue in the three months ended March 31, 2020 and 2019.

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Genentech

In February 2019, the Company entered into a collaboration and license agreement (the Genentech Agreement) with Genentech, Inc. and F. Hoffman-La Roche Ltd (collectively, Genentech) for the development and commercialization of novel IL-15 collaboration products (Collaboration Products), including XmAb24306 (also named RG6323), the Company’s IL-15/IL-15Ra candidate. The Genentech Agreement became effective March 8, 2019.

Under the terms of the Genentech Agreement, Genentech received an exclusive worldwide license to XmAb24306 and other Collaboration Products, including any new IL-15 programs identified during the joint research collaboration. Genentech and Xencor will jointly collaborate on worldwide development of XmAb24306 and potentially other Collaboration Products with Genentech maintaining all worldwide commercialization rights, subject to Xencor having an option to co-promote in the United States. Xencor has the right to perform clinical studies of Collaboration Products in combination with other therapeutic agents at its own cost, subject to certain requirements.

The Company received a $120.0 million upfront payment and is eligible to receive up to an aggregate of $160.0 million in clinical milestone payments for each Collaboration Product that advances to Phase 3 clinical trials. The Company is also eligible to receive 45% share of net profits for sales of XmAb24306 and other Collaboration Products, while also sharing in net losses at the same percentage rate. The parties will jointly share in development and commercialization costs for all programs designated as a development program under the Genentech Agreement at the same percentage rate, while Genentech will bear launch costs entirely. The initial 45% profit-cost share percent is subject to ratchet down at the Company’s discretion and convertible to a royalty under certain restrictions.

Pursuant to the Genentech Agreement, XmAb24306 is designated as a development program and all costs incurred for developing XmAb24306 from March 8, 2019, the effective date of the Genentech Agreement, are being shared with Genentech under the initial cost-sharing percentage.

Pursuant to the Genentech Agreement, the Company and Genentech will conduct joint research activities for a two-year period to identify and discover additional IL-15 candidates developed from the Company’s cytokine and bispecific technologies. The two-year research term may be extended an additional year if both parties agree. The Company and Genentech are each responsible for their own costs in conducting the research activities. The Company is eligible for clinical milestone payments for new Collaboration Products identified from the research efforts.

The Company recognized the $111.7 million allocated to the license when it satisfied its performance obligation and transferred the license to Genentech in March 2019. A total of $8.3 million of the transaction price was allocated to the research activities and is being recognized over a period of time through the end of the research term that services are rendered. A total of $0.7 million of revenue related to the research activities was recognized in the three-month period ended March 31, 2020.

For the three months ended March 31, 2020 and March 31, 2019, the Company recognized $0.7 million and $112.0 million of income, respectively, from the Genentech Agreement. As of March 31, 2020, there is a $1.4 million payable related to cost-sharing development activities during the first quarter of 2020 for the XmAb24306 program. There is $5.4 million in deferred revenue as of March 31, 2020 which reflects the obligation to perform research services during the remaining research term.

Astellas

Effective March 29, 2019, the Company entered into a Research and License Agreement (Astellas Agreement) with Astellas Pharma Inc. (Astellas) pursuant to which the Company and Astellas will conduct a discovery program to characterize compounds and products for development and commercialization. Under the Astellas Agreement, Astellas was granted a worldwide exclusive license, with the right to sublicense products in the field created by the research activities.

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Pursuant to the Astellas Agreement, the Company will apply its bispecific Fc technology to research antibodies provided by Astellas to generate bispecific antibody candidates and will conduct limited testing and characterization of the bispecific candidates and return the candidates to Astellas for development and commercialization. The activities will be conducted under a research plan agreed to by both parties to the Astellas Agreement. Astellas will assume full responsibility for development and commercialization of the antibody candidate. Pursuant to the Astellas Agreement, the Company received an upfront payment of $15.0 million and is eligible to receive up to $240.0 million in milestones which include $32.5 million in development milestones, $57.5 million in regulatory milestones and $150.0 million in sales milestones. If commercialized, the Company is eligible to receive royalties on net sales that range from the high-single to low-double digit percentages.

The Company recognized the $13.6 million allocated to the bispecific antibodies when it satisfied its performance obligation and transferred the bispecific antibodies to Astellas in June 2019. The $1.4 million allocated to the research activities is being recognized as the research services are being completed over the period of time the Company expects to complete the activities under the research plan.

For the three months ended March 31, 2020, the Company recognized $0.3 million revenue related to the arrangement, and no revenue was recognized under this arrangement for the three months ended March 31, 2019. There is $0.7 million in deferred revenue as of March 31, 2020 related to the obligation to complete research activities under the Astellas Agreement.

Novartis

In June 2016, the Company entered into a Collaboration and License Agreement (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. The Company received an upfront payment of $150.0 million and is eligible to receive additional development, regulatory and sales milestones.

Pursuant to the Novartis Agreement:

The Company granted Novartis certain exclusive rights to research, develop and commercialize vibecotamab (XmAb14045) and plamotamab (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.

Under the Novartis Agreement, the Company and Novartis are co-developing vibecotamab worldwide and sharing development costs.

In December 2018, Novartis notified the Company it was terminating its rights with respect to the plamotamab, which became effective June 2019.

No revenue was recognized during the three months ended March 31, 2020 or 2019. As of March 31, 2020, there is a receivable of $0.6 million related to cost-sharing of development activities for the first quarter of 2020 for the vibecotamab program, and $40.1 million in deferred revenue related to the obligation to deliver two additional Global Discovery Programs to Novartis under the arrangement.

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Amgen Inc.

In September 2015, the Company entered into a research and license agreement (the Amgen Agreement) with Amgen Inc. (Amgen) to develop and commercialize bispecific antibody product candidates using the Company’s proprietary XmAb bispecific Fc technology. Under the Amgen Agreement, the Company granted an exclusive license to Amgen to develop and commercialize bispecific drug candidates from the Company’s preclinical program that bind the CD38 antigen and the cytotoxic T cell binding domain CD3 (the CD38 program). The Company also agreed to apply its bispecific technology to five previously identified Amgen provided targets (each a Discovery Program). The Company has received a total of $60.5 million in upfront payments and milestone payments and is eligible to receive up to $600.0 million in future development, regulatory and sales milestone payments in total for programs in development and is eligible to receive royalties on any global net sales of products.

No revenue was recognized under the arrangement during the three months ended March 31, 2020 or 2019. As of March 31, 2020, there was no deferred revenue related to the arrangement.

MorphoSys AG

In June 2010, the Company entered into a Collaboration and License Agreement with MorphoSys AG (MorphoSys), which was subsequently amended in March 2012. Under the agreement, we granted MorphoSys an exclusive worldwide license to the Company’s patents and know-how to research, develop and commercialize the XmAb5574 product candidate (subsequently renamed MOR208 and tafasitamab) with the right to sublicense under certain conditions. If certain developmental, regulatory and sales milestones are achieved, the Company is eligible to receive future milestone payments and royalties.

In February 2020, the U.S. Food and Drug Administration (FDA) accepted MorphoSys’ Biologics License Application (BLA) for tafasitamab and the Company received a milestone payment of $12.5 million. The Company recognized the payment as revenue in the period that the milestone event occurred.

The Company recognized $12.5 million of milestone revenue for the three months ended March 31, 2020, and no revenue was recognized under this arrangement for the three months ended March 31, 2019. As of March 31, 2020, the Company has