Xencor Inc 10-K

Item 8. Financial Statements and Supplementary Data Xencor, Inc. Financial Statements Audited Financial Statements for the Years Ended December 31, 2021, 2020 and 2019: Report of Independent Registered Public Accounting Firm (PCAOB ID: 49 ) 69 Cons olidated Balance Sheets 72 Consolidated Statements of Income (Loss) 73 C onsolidated Statements of Co mprehensive Income (Loss) 74 Consolidated Statements of Stockholders’ Equity 75 Consolidated Statements of Cash Flows 76 Notes to Consolidated Financial Statements 77 68 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Xencor, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Xencor, Inc. and its subsidiary (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income (loss), comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated February 28, 2024, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements; and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matter did not alter in any way our opinion on the financial statements taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate. Judgement and Complexity of Accounting for the Sale of Future Royalty Streams As described in Note 11 to the financial statements, the Company evaluated the up-front payment received from the sale of the Ultomiris (Alexion) Agreement classified as deferred revenue and evaluated the up-front payment received from the sale of the Monjuvi (Morphosys) Agreement classified as debt under ASC 470. When the sale of future revenue is accounted for as debt, the company continues to recognize revenue based on the terms of the contract with the licensee. When the sale is accounted for as deferred revenue, the company recognizes revenue using the units of revenue method. We identified the related audit effort in evaluating management’s judgements in determining the factors that would indicate whether the transaction should be recorded as debt or deferred revenue as a critical audit matter. The principal consideration for our determination that the judgement and complexity of accounting for the sale of future royalty streams under the Ultomiris and Monjuvi agreements was a critical audit matter is that the related audit effort in evaluating management’s judgements in determining the factors that would indicate whether the transaction should be recorded as debt or deferred revenue required significant audit effort and a high degree of auditor judgment and subjectivity to perform our audit procedures and evaluate the audit evidence obtained. 69 Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. Our procedures included, among others (i) obtaining an understanding of the relevant controls related to the evaluation of the classification of up front payments and tested such controls for design and operating effectiveness (ii) obtaining information regarding the nature and extent of the Royalty Purchase Agreement; (iii) obtaining an understanding detailing the transaction and accounting treatment; and (iv) assessing management’s classification under both agreements, including utilization of a subject matter expert. /s/ RSM US LLP We have served as the Company’s auditor since 2015. Los Angeles, California February 28, 2024 70 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Xencor, Inc. Opinion on the Internal Control Over Financial Reporting We have audited Xencor, Inc. and its subsidiary (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the accompanying consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of income (loss), comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes to the consolidated financial statements (collectively, the financial statements) of the Company and our report dated February 28, 2024 expressed an unqualified opinion. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ RSM US LLP Los Angeles, California February 28, 2024 71 Xencor, Inc. Consolidated Balance Sheets (in thousands, except share and per share data) December 31, 2023 2022 Assets Current assets Cash and cash equivalents $ 53,790 $ 53,942 Marketable debt securities 497,725 526,689 Marketable equity securities 42,210 42,431 Accounts receivable 11,290 28,997 Prepaid expenses and other current assets 18,145 23,283 Total current assets 623,160 675,342 Property and equipment, net 66,124 59,183 Patents, licenses, and other intangible assets, net 18,663 18,500 Restricted cash 380 — Marketable debt securities - long term 145,512 3,826 Equity securities 64,210 54,383 Right of use asset 33,995 34,419 Other assets 648 613 Total assets $ 952,692 $ 846,266 Liabilities and stockholders’ equity Current liabilities Accounts payable $ 13,914 $ 10,088 Accrued expenses 23,564 18,728 Income tax payable 5,782 — Lease liabilities 3,435 4,708 Deferred revenue — 30,320 Deferred income 31,682 — Debt 6,332 — Total current liabilities 84,709 63,844 Lease liabilities, net of current portion 59,025 54,926 Deferred income, net of current portion 125,183 — Debt, net of current portion 14,642 — Total liabilities 283,559 118,770 Commitments and contingencies (see note 9) Stockholders’ equity Preferred stock, $ 0.01 par value: 10,000,000 authorized shares; - 0 - issued and outstanding shares at December 31, 2023 and 2022 — — Common stock, $ 0.01 par value: 200,000,000 authorized shares; 60,998,191 issued and outstanding shares at December 31, 2023 and 59,997,713 issued and outstanding at December 31, 2022 611 601 Additional paid-in capital 1,131,266 1,072,132 Accumulated other comprehensive income 1,291 ( 6,952 ) Accumulated deficit ( 464,372 ) ( 338,285 ) Total stockholders’ equity attributable to Xencor, Inc. 668,796 727,496 Non-controlling interest 337 — Total stockholders' equity 669,133 727,496 Total liabilities and stockholders’ equity $ 952,692 $ 846,266 See accompanying notes to the financial statements. 72 Xencor, Inc. Consolidated Statements of Income (Loss) (in thousands, except share and per share data) Year ended December 31, 2023 2022 2021 Revenue Collaborations, licenses, milestones, and royalties $ 168,338 $ 164,579 $ 275,111 Operating expenses Research and development 253,598 199,563 192,507 General and administrative 53,379 47,489 38,837 Total operating expenses 306,977 247,052 231,344 Income (loss) from operations ( 138,639 ) ( 82,473 ) 43,767 Other income (expense) Interest income, net 18,626 4,817 849 Other expense, net ( 31 ) ( 286 ) ( 1,274 ) Gain (loss) on equity securities, net ( 395 ) 23,434 39,289 Total other income, net 18,200 27,965 38,864 Income (loss) before income tax ( 120,439 ) ( 54,508 ) 82,631 Income tax expense 5,811 673 — Net income (loss) ( 126,250 ) ( 55,181 ) 82,631 Net loss attributable to non-controlling interest ( 163 ) — — Net income (loss) attributable to Xencor, Inc. $ ( 126,087 ) $ ( 55,181 ) $ 82,631 Net income (loss) per common share attributable to Xencor, Inc.: Basic $ ( 2.08 ) $ ( 0.93 ) $ 1.42 Diluted $ ( 2.08 ) $ ( 0.93 ) $ 1.37 Weighted average common shares used to compute net income (loss) per share attributable to Xencor, Inc. Basic 60,503,283 59,652,461 58,379,641 Diluted 60,503,283 59,652,461 60,495,455 See accompanying notes to the financial statements. 73 Xencor, Inc. Consolidated Statements of Comprehensive Income (Loss) (in thousands) Year ended December 31, 2023 2022 2021 Net income (loss) $ ( 126,250 ) $ ( 55,181 ) $ 82,631 Other comprehensive income (loss): Net unrealized gain (loss) on marketable debt securities available-for-sale 8,243 ( 5,442 ) ( 1,584 ) Comprehensive income (loss) ( 118,007 ) ( 60,623 ) 81,047 Comprehensive income (loss) attributable non-controlling interest ( 163 ) — — Comprehensive income (loss) attributable to Xencor, Inc. $ ( 117,844 ) $ ( 60,623 ) $ 81,047 74 Xencor, Inc. Consolidated Statements of Stockholders’ Equity (in thousands, except share data) Common Stock Additional Paid in-Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Non-Controlling Interest Total Stockholders’ Equity Stockholders’ Equity Shares Amount Balance, December 31, 2020 57,873,444 $ 580 $ 937,525 $ 74 $ ( 365,735 ) — $ 572,444 Sale of common stock 748,062 7 28,913 — — — 28,920 Issuance of common stock upon exercise of stock awards 520,240 5 12,276 — — — 12,281 Issuance of common stock under the Employee Stock Purchase Plan 62,257 1 1,836 — — — 1,837 Issuance of restricted stock units 151,555 2 ( 2 ) — — Comprehensive income (loss) — — — ( 1,584 ) 82,631 — 81,047 Stock-based compensation — — 36,975 — — — 36,975 Balance, December 31, 2021 59,355,558 595 1,017,523 ( 1,510 ) ( 283,104 ) — 733,504 Issuance of common stock upon exercise of stock awards 195,485 2 3,608 — — — 3,610 Issuance of common stock under the Employee Stock Purchase Plan 105,597 1 2,091 — — — 2,092 Issuance of restricted stock units 341,073 3 ( 3 ) — — — — Comprehensive loss — — — ( 5,442 ) ( 55,181 ) — ( 60,623 ) Stock-based compensation — — 48,913 — — — 48,913 Balance, December 31, 2022 59,997,713 601 1,072,132 ( 6,952 ) ( 338,285 ) — 727,496 Issuance of common stock upon exercise of stock awards 344,383 3 3,409 — — — 3,412 Issuance of common stock under the Employee Stock Purchase Plan 98,029 1 1,976 — — — 1,977 Issuance of restricted stock units 558,066 6 ( 6 ) — — — — Contribution from non-controlling interest owners — — — — — 500 500 Comprehensive income (loss) — — — 8,243 ( 126,087 ) ( 163 ) ( 118,007 ) Stock-based compensation — — 53,755 — — — 53,755 Balance, December 31, 2023 60,998,191 $ 611 $ 1,131,266 $ 1,291 $ ( 464,372 ) $ 337 $ 669,133 See accompanying notes to the financial statements. 75 Xencor, Inc. Consolidated Statements of Cash Flows (in thousands) Year ended December 31, 2023 2022 2021 Cash flows from operating activities Consolidated net income (loss) $ ( 126,250 ) $ ( 55,181 ) $ 82,631 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 11,498 8,799 7,491 Amortization of premium (accretion of discount) on marketable securities ( 13,635 ) 127 3,160 Stock-based compensation 53,755 48,913 36,975 Abandonment of capitalized intangible assets 1,267 1,510 934 Loss on disposal of assets 1,379 145 462 Equity received in connection with license agreement ( 10,000 ) ( 5,397 ) ( 22,379 ) Equity received in connection with sale of financial assets — — ( 3,300 ) Change in fair value of equity securities 395 ( 23,434 ) ( 20,988 ) Equity securities impairment — 138 762 Noncash interest expense 681 — — Changes in operating assets and liabilities: Accounts receivable and contract assets 17,707 37,387 ( 42,441 ) Interest receivable from marketable debt securities ( 1,028 ) ( 530 ) 655 Prepaid expenses and other assets 5,103 634 ( 13,592 ) Income tax 5,782 — — Accounts payable 3,826 ( 3,913 ) 5,047 Accrued expenses 4,836 ( 715 ) 1,840 Lease liabilities and ROU assets 3,250 22,976 1,211 Deferred revenue ( 30,320 ) ( 6,974 ) ( 55,321 ) Deferred income 156,865 — — Net cash provided by (used in) operating activities 85,111 24,485 ( 16,853 ) Cash flows from investing activities Proceeds from sale and maturities of marketable debt securities available-for-sale 693,090 306,607 485,152 Proceeds from sale of property and equipment 1 — 19 Purchase of marketable securities ( 782,905 ) ( 387,928 ) ( 509,597 ) Purchase of intangible assets ( 2,803 ) ( 4,910 ) ( 2,682 ) Purchase of property and equipment ( 18,448 ) ( 38,494 ) ( 13,299 ) Conversion (purchase) of convertible note — 5,000 ( 5,000 ) Exercise of stock options — — ( 842 ) Net cash used in investing activities ( 111,065 ) ( 119,725 ) ( 46,249 ) Cash flows from financing activities Proceeds from issuance of common stock upon exercise of stock awards 3,412 3,610 12,281 Proceeds from issuance of common stock from Employee Stock Purchase Plan 1,977 2,092 1,837 Proceeds from issuance of common stock — — 28,920 Proceeds from sale of future royalties 20,293 — — Proceeds from non-controlling interest 500 — — Net cash provided by financing activities 26,182 5,702 43,038 Net increase (decrease) in cash, cash equivalents, and restricted cash 228 ( 89,538 ) ( 20,064 ) Cash, cash equivalents, and restricted cash, beginning of year 53,942 143,480 163,544 Cash, cash equivalents, and restricted cash, end of year $ 54,170 $ 53,942 $ 143,480 Supplemental disclosures of cash flow information Cash paid for: Interest $ 22 $ 13 $ 14 Taxes — 700 — Supplemental schedule of noncash activities Net unrealized gain (loss) on marketable securities available-for-sale $ 8,243 $ ( 5,442 ) $ ( 1,584 ) Addition of right-of-use asset 2,462 $ 6,155 $ 24,047 See accompanying notes to the financial statements. 76 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 bispecific antibody and cytokine therapeutics to treat patients with cancer and autoimmune diseases who have unmet medical needs. We create our product candidates using our proprietary XmAb technology platforms, which focus on the portion of an 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, can increase antibody immune inhibition, improve cytotoxicity, extend half-life and most recently are used to create bispecific antibodies and cytokines. Our operations are based in Pasadena, California and San Diego, California. Consolidation and Basis of Presentation The Consolidated Financial Statements include the accounts of Xencor, Inc. and its subsidiary Gale Therapeutics Inc., which was incorporated in December 2023. Since we own less than 100% of Gale, the Company records net loss attributable to non-controlling interests in its consolidated statements of income (loss) equal to the percentage of the economic or ownership interests retained in Gale by the non-controlling party. The Company’s consolidated financial statements as of December 31, 2023, 2022, and 2021 and for the years then ended have been prepared in accordance with accounting principles generally accepted in the United States (U.S.). Use of Estimates The preparation of 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, evaluation of intangible assets, investments, leases and other assets for evidence of impairment, fair value measurements, and contingencies. Significant estimates in these financial statements include estimates made for royalty revenue, accrued research and development expenses, stock-based compensation expenses, intangible assets, incremental borrowing rate for right-of-use asset and lease liability, estimated standalone selling price of performance obligations, estimated time for completing delivery of performance obligations under certain arrangements, the likelihood of recognizing variable consideration, the carrying value of equity instruments without a readily determinable fair value, and recoverability of deferred tax assets. Recent Accounting Pronouncements Pronouncements Not yet Effective In June 2022, the Financial Accounting Standards Board (FASB) issued ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restriction s, which is effective for fiscal years beginning on and after December 15, 2023, and interim periods within those fiscal years. The standard clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and is not considered in measuring fair value. The Company does not anticipate that the standard will have a significant impact on its financial statements. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures , which is effective for fiscal years beginning on and after December 15, 2024, and interim periods within those fiscal years. The standard provides more transparency about income tax information through improvements to income tax 77 disclosures primarily related to the rate reconciliation and income taxes paid information.The Company does not anticipate that the standard will have a significant impact on its financial statements. Variable Interest Entity A Variable Interest Entity (VIE) is a legal entity that, by design, 1) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, 2) has equity investors that lack the power to direct the entity's activities, 3) has investors with limited obligation to absorb expected losses, or 4) has investors who do not have the right to receive the residual returns of the entity. The primary beneficiary of a VIE is the party with the controlling financial interest and has the power to direct the activities of the VIE that most significantly impact the entity's economic performance and has the obligation to absorb losses of the VIE, or the right to receive benefits of the VIE that could be potentially significant to the VIE. On December 19, 2023 we entered into the Gale License and Gale Services Agreements. See Note 10 , We consolidated Gale's financial statements in which we have direct controlling financial interest based on the VIE model. We consider all the facts and circumstances, including our role in establishing Gale and our ongoing rights and responsibilities to assess where we have the power to direct the activities of Gale. In general, the parties that make the most significant decisions affecting the VIE and have the right to remove those decision-makers unilaterally or by majority vote are deemed to have the power to direct the activities of a VIE. At Gale's inception, we determined whether we were the primary beneficiary and if Gale should be consolidated based on facts and circumstances. Under the rules of determining whether an entity is a VIE, we determined that Gale is a VIE and we are the primary beneficiary. Liability Related to the Sale of Future Royalties We record a liability related to the sale of future Monjuvi royalties as debt, amortized under the effective interest rate method over the estimated life of the Monjuvi Royalty Sale Agreement. See Note 11 . The amortization of the liability related to the sale of future royalties is based on our current estimate of future royalty payments. Royalty revenue will be recognized as earned, and the payments made will be a reduction of the liability when paid. Non-Cash Interest Expense on the Liability Related to the Sale of Future Royalties The total expected royalty payments less the net proceeds received will be recorded as non-cash interest expense over the life of the liability. Interest is imputed on the unamortized portion using the effective interest method and expense is recorded based on the timing of the payments received over the term of the Monjuvi Royalty Sale Agreement. The actual interest rate will be affected by the timing of royalty payments made and changes in the forecasted revenue. Deferred Income Related to the Sale of Future Royalties We record a liability related to the sale of future Ultomiris royalties as deferred income, amortized under the units-of-revenue method by computing a ratio of the proceeds received to the total expected payments over the term of the Ultomiris Royalty Sale Agreement. See Note 11 . The amortization of the liability related to the sale of future royalties is based on our current estimate of future royalty payments. Royalty revenue will be recognized as earned and the payments made will be a reduction of the liability when paid. 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. The terms of our license, research and development, and collaboration agreements generally include non-refundable upfront payments, research funding, co-development payments and 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. 78 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. We recognize revenue through the five-step process in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers , when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. 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. There was no deferred revenue reported at December 31, 2023. The total amount reported as deferred revenue was $ 30.3 million at December 31, 2022. Accounts Receivable Accounts receivable primarily consists of royalty and milestone revenues receivable from our license and collaboration agreements, as well as receivables arising from cost-sharing development activities. Pursuant to the Ultomiris and Monjuvi Royalty Sale Agreements, a portion of the proceeds we received from the purchasers related to the sale of accounts receivable on royalty and milestone revenue earned at September 30, 2023. Payments for these receivables were paid directly to the purchasers prior to the year-ended December 31, 2023. We did not record an allowance for doubtful accounts at December 31, 2023 or 2022 due to an immaterial allowance as a result of our evaluation of credit risk under ASC 326. We expect to collect all receivables within the terms, which are generally between 30 and 60 days. 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 and 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 they incurred. 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 where such assets have an alternative use 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. Restricted Cash As of December 31, 2023, we had an outstanding letter of credit (LOC) collateralized by a money market account of $ 0.4 million, to the benefit of the landlord related to the Company’s San Diego facility lease. The terms of the lease provide that the amount of the LOC will be reduced on a ratable basis over the term of the lease. The original amount of the LOC was classified as long-term restricted cash as of December 31, 2023. Marketable Debt and Equity Securities 79 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. 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 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 losses and recoveries related to the underlying issuer’s credit standing are recognized within other income (expense), while non-credit related impairment losses and recoveries are recognized within accumulated other comprehensive income (loss). There were no impairment losses or recoveries recorded for the years ended in December 31, 2023 and 2022, respectively. Accrued interest on marketable debt securities is included in marketable securities’ carrying value. Accrued interest was $ 2.3 million and $ 1.3 million at December 31, 2023 and 2022, respectively. 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. During the years ended December 31, 2023 and 2022, the Company recorded an unrealized gain of $ 8.2 million and an unrealized loss of $ 5.4 million, respectively, in its portfolio of marketable debt securities. The unrealized loss was due to the changing interest rate environment and is not due to changes in the credit quality of the underlying securities. The unrealized gain and loss were recorded in other comprehensive income (loss) for the years then ended. The Company receives equity securities in connection with certain licensing transactions with its partners. These investments in an equity security are carried at fair value with changes in fair value recognized each period and reported 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 or 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. The Company also has investments in equity securities without a readily determinable fair value, where the Company elects the measurement alternative to record at their initial cost minus impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company did not record an impairment charge for the year ended December 31, 2023. During the year ended December 31, 2022, the Company recorded an impairment charge of $ 0.1 million in connection with equity securities without a readily determinable fair value. During the years ended December 31, 2023 and 2022, the Company recorded a net loss of $ 0.4 million and net gain of $ 23.4 million, respectively, in connection with its equity investments. Concentrations of Risk Cash, cash equivalents, restricted cash, and marketable debt securities are financial instruments that potentially subject the Company to concentrations of risk. We invest our cash in corporate debt securities and U.S. sponsored agencies with strong credit ratings. We have 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, cash equivalents, and restricted cash 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, 2023 and 2022 approximated $ 53.8 million and $ 53.6 million, respectively. We have payables with two service providers that represent 38 % of our total payables and with two service providers that represented 45 % of our total payables at December 31, 2023 and 2022, respectively. We rely on six 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, 2023 or 2022. We have receivables with three customers and service providers that represent 76 % of our total receivables and with four customers and service providers that represent 91 % of our total receivables at December 31, 2023 and 2022, 80 respectively. The receivables are related to cost share reimbursement and royalty revenues from our licensing and collaboration agreements. No other customer accounted for more than 10% of total receivables at December 31, 2023 or 2022. Fair Value of Financial Instruments Our financial instruments primarily consist of cash and cash equivalents, marketable debt securities, accounts receivable, accounts payable, and accrued expenses. Marketable debt securities and cash equivalents are carried at fair value. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. 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 ASC 820, Fair Value Measurements and Disclosures . ASC 820 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value, and requires expanded disclosure about fair value measurements. The ASC 820 hierarchy ranks the quality of reliable inputs, or assumptions, used in the determination of fair value and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories: Level 1— Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets or liabilities. Level 2— Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in markets that are not active. Related inputs can also include those used in valuation or other pricing models, such as interest rates and yield curves that can be corroborated by observable market data. Level 3— Fair value is determined by inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgments to be made by the reporting entity – e.g. determining an appropriate discount factor for illiquidity associated with a given security. The Company measures the fair value of financial assets using the highest level of inputs that are reasonably available as of the measurement date. The assets recorded at fair value are classified within the hierarchy as follows for the periods reported (in thousands): December 31, 2023 Total Fair Value Level 1 Level 2 Money Market Funds in Cash and Cash Equivalents $ 25,520 $ 25,520 $ — Corporate Securities 228,723 — 228,723 Government Securities 414,514 — 414,514 $ 668,757 $ 25,520 $ 643,237 December 31, 2022 Total Fair Value Level 1 Level 2 Money Market Funds in Cash and Cash Equivalents $ 40,967 $ 40,967 $ — Corporate Securities 200,626 — 200,626 Government Securities 329,889 — 329,889 $ 571,482 $ 40,967 $ 530,515 81 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 years ended December 31, 2023 and 2022, there were no transfers between Level 1 and Level 2. 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 1 to 20 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 2 to 27 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 2023, 2022, and 2021, we abandoned previously capitalized patent and licensing related charges of $ 1.3 million, $ 1.5 million, and $ 0.9 million, respectively. The carrying amount and accumulated amortization of patents, licenses, and other intangibles is as follows (in thousands): December 31, 2023 2022 Patents, definite life $ 15,340 $ 14,535 Patents, pending issuance 9,723 9,328 Licenses and other amortizable intangible assets 4,007 3,908 Nonamortizable intangible assets (trademarks) 399 399 Total gross carrying amount 29,469 28,170 Accumulated amortization—patents ( 8,663 ) ( 7,781 ) Accumulated amortization—licenses and other ( 2,143 ) ( 1,889 ) Total intangible assets, net $ 18,663 $ 18,500 Amortization expense for patents, licenses, and other intangible assets was $ 1.3 million, $ 1.4 million, and $ 1.2 million for the years ended December 31, 2023, 2022, and 2021, respectively. 82 Future amortization expense for patents, licenses, and other intangible assets recorded as of December 31, 2023, and for which amortization has commenced, is as follows: Year ended December 31, (in thousands) 2024 $ 1,076 2025 1,059 2026 961 2027 908 2028 776 Thereafter 3,760 Total $ 8,540 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, 2023, the Company has $ 9.7 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, 2023, 2022, or 2021. 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, 2023 or 2022. 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 of 2017 (TCJA) enacted on December 22, 2017 included several key provisions impacting the accounting for and reporting of income taxes. The most significant provisions reduced the U.S. corporate statutory tax rate from 35% to 21%, eliminated the corporate Alternative Minimum Tax (AMT) system, and made changes to the carryforward of net operating losses beginning on January 1, 2018. The TCJA changed the income tax treatment of research and development expenses requiring such costs to be capitalized and amortized over several years beginning 83 effective January 1, 2022. We recorded a federal tax expense of $ 5.8 million and $ 0.7 million for the years ended December 31, 2023 and 2022, respectively. Stock-Based Compensation We recognize compensation expense using a fair-value-based method for costs related to all share-based payments, including stock options, restricted stock units (RSUs), 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 $ 53.8 million, $ 48.9 million, and $ 37.0 million for the years ended December 31, 2023, 2022, and 2021, respectively. Net Income (Loss) Per Share Basic net income (loss) per common share attributable to Xencor is computed by dividing the net income (loss) attributable to Xencor by the weighted-average number of common shares outstanding during the period without consideration of common stock equivalents. Diluted net income (loss) per common share attributable to Xencor is computed by dividing the net income (loss) attributable to Xencor by the weighted-average number of common stock equivalents outstanding for the period. Potentially dilutive securities consisting of stock issuable pursuant to outstanding options and restricted stock units (RSUs), and stock issuable pursuant to the 2013 Employee Stock Purchase Plan (ESPP) are not included in the per common share calculation in periods when the inclusion of such shares would have an anti-dilutive effect. Basic and diluted net income (loss) per common share attributable to Xencor is computed as follows: Basic net income (loss) per common share is computed by dividing the net income or loss attributable to Xencor by the weighted-average number of common shares outstanding during the period. Potentially dilutive securities were included in the calculation of diluted net income per common share attributable to Xencor for 2021. In 2023 and 2022, we excluded all options and awards from the calculations because we reported net losses in the period, and the inclusion of such shares would have had an antidilutive effect. Year Ended December 31, 2023 2022 2021 (in thousands, except share and per share data) Basic Numerator: Net income (loss) attributable to Xencor, Inc. $ ( 126,087 ) $ ( 55,181 ) $ 82,631 Denominator: Weighted-average common shares outstanding 60,503,283 59,652,461 58,379,641 Basic net income (loss) per common share attributable to Xencor, Inc. $ ( 2.08 ) $ ( 0.93 ) $ 1.42 Diluted Numerator: Net income (loss) attributable to Xencor, Inc. $ ( 126,087 ) $ ( 55,181 ) $ 82,631 Denominator: Weighted average number of common shares outstanding used in computing basic net income (loss) per common share 60,503,283 59,652,461 58,379,641 Dilutive effect of employee stock options, RSUs, and ESPP — — 2,115,814 Weighted-average number of common shares outstanding used in computing diluted net income (loss) per common share 60,503,283 59,652,461 60,495,455 Diluted net income (loss) per common share attributable to Xencor, Inc. $ ( 2.08 ) $ ( 0.93 ) $ 1.37 84 For the years ended December 31, 2023 and 2022, all outstanding potentially dilutive securities were excluded from the calculation as the effect of including such securities would have been anti-dilutive. For the year ended December 31, 2021, we excluded 1,196,268 shares of options and RSUs from the calculation of diluted net income per common share because the inclusion of such shares would have had an anti-dilutive effect. 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. 2. Comprehensive Income (Loss) Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). For the years ended December 31, 2023, 2022, and 2021, the only component of other comprehensive income (loss) is net unrealized gain (loss) on marketable debt securities. There were no material reclassifications out of accumulated other comprehensive loss during the year ended December 31, 2023. 3. Marketable Debt and Equity Securities The Company’s marketable debt securities held as of December 31, 2023 and 2022 are summarized below: December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Money Market Funds $ 25,520 $ — $ — $ 25,520 Corporate Securities 228,382 342 ( 1 ) 228,723 Government Securities 413,553 1,037 ( 76 ) 414,514 $ 667,455 $ 1,379 $ ( 77 ) $ 668,757 Reported as Cash and cash equivalents $ 25,520 Marketable securities 643,237 Total investments $ 668,757 December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Money Market Funds $ 40,967 $ — $ — $ 40,967 Corporate Securities 201,752 — ( 1,126 ) 200,626 Government Securities 335,705 3 ( 5,819 ) 329,889 $ 578,424 $ 3 $ ( 6,945 ) $ 571,482 Reported as Cash and cash equivalents $ 40,967 Marketable securities 530,515 Total investments $ 571,482 85 The maturities of the Company’s marketable debt securities as of December 31, 2023 are as follows: Amortized Cost Estimated Fair Value (in thousands) Mature in one year or less $ 497,326 $ 497,725 Mature within two years 144,609 145,511 $ 641,935 $ 643,236 The unrealized losses on available-for-sale investments and their related fair values as of December 31, 2023 and 2022 are as follows: December 31, 2023 Less than 12 months 12 months or greater Fair value Unrealized losses Fair value Unrealized losses (in thousands) Corporate Securities $ 8,073 $ ( 1 ) $ — $ — Government Securities 66,546 ( 77 ) — — $ 74,619 $ ( 78 ) $ — $ — December 31, 2022 Less than 12 months 12 months or greater Fair value Unrealized losses Fair value Unrealized losses (in thousands) Corporate Securities $ 132,658 $ ( 1,121 ) $ 3,826 $ ( 5 ) Government Securities 324,933 ( 5,819 ) — — $ 457,591 $ ( 6,940 ) $ 3,826 $ ( 5 ) 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. The Company’s equity securities include securities with a readily determinable fair value. These investments are carried at fair value with changes in fair value recognized each period and reported within other income (expense). Equity securities with a readily determinable fair value and their fair values (in thousands) as of December 31, 2023 and 2022 are as follows: Fair Value December 31, 2023 Fair Value December 31, 2022 Astria Common Stock $ 5,360 $ 9,529 INmune Common Stock 21,231 11,954 Viridian Common Stock 15,619 20,948 $ 42,210 $ 42,431 The Company also has an investment in an equity security without a readily determinable fair value. The Company elects the measurement alternative to record these investments at their initial cost and evaluates such investments at each reporting period for evidence of impairment or observable price changes in orderly transactions for the identical or a similar investment of the same issuer. During the year ended December 31, 2022, the Company recorded an impairment 86 charge of $ 0.1 million related to the Astria preferred stock. Equity securities without a readily determinable fair value and their carrying values (in thousands) as of December 31, 2023 and 2022 are as follows: Carrying Value December 31, 2023 Carrying Value December 31, 2022 Astria Preferred Stock $ — $ 174 Zenas Preferred Stock 64,210 54,209 $ 64,210 $ 54,383 In 2018, the Company received common and preferred stock in Astria (formerly Quellis Biosciences, Inc.) in connection with a licensing transaction. In January 2023, the Company exchanged its preferred shares for additional shares of common stock in Astria. The common stock has a readily determinable fair value, and difference in the fair value of the common stock and the carrying value of the preferred stock has been recorded as a gain in equity securities for the year ended December 31, 2023. The Company accounts for the shares in Astria common stock at their fair value each reporting period and the adjustment in the fair value of the Astria common stock has been recorded in unrealized gain (loss) on equity securities for the year ended December 31, 2023. The Company records its investment in the shares of Astria preferred stock as an equity interest without a readily determinable fair value. The Company elected to record the original shares of preferred stock at their initial cost and to review the carrying value for impairment or other changes in carrying value at each reporting period. The Company subsequently recorded impairment charges of $ 0.1 million and $ 0.8 million related to its investment in Astria’s preferred stock in 2022 and 2021, respectively. In 2017, the Company received shares of common stock of INmune Bio, Inc. (INmune) and an option to acquire additional shares of INmune’s common stock in connection with a licensing transaction. In June 2021, the Company entered into an Option Cancellation Agreement with INmune and received $ 15.0 million in proceeds and an additional shares of INmune common stock in exchange for the initial option. During 2021, the Company determined that it should no longer account for its investment in INmune under the equity method. In September 2021, the Company exercised its second option to purchase 108,000 shares of INmune common stock for $ 0.8 million and the Company recorded a gain of $ 0.9 million on the purchase. The Company's current share holdings, which consist of common stock of INmune, have a readily determinable fair value, and the adjustment in the fair value of the shares of INmune common stock was recorded in gain (loss) on equity securities for the year ended December 31, 2023. In December 2021, the Company received shares of common stock of Viridian Therapeutics, Inc. (Viridian) in connection with the Viridian Agreement. In December 2022, the Company received additional shares of common stock of Viridian in connection with the Second Viridian Agreement (defined below). The shares of Viridian common stock are classified as equity securities with a readily determinable fair value and the adjustment in the fair value of the shares of Viridian common stock was recorded in gain (loss) on equity securities for the year ended at December 31, 2023. In 2020, the Company received an equity interest in Zenas BioPharma (Cayman) Limited (Zenas), in connection with the Zenas Agreement (defined below). The Company elected the measurement alternative to carry the Zenas equity at cost minus impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or a similar investment of the same issuer. In 2021, the Company received a warrant to receive equity from Zenas in connection with the Second Zenas Agreement (defined below). In 2021, the Company purchased a convertible promissory note from Zenas. In 2022, the Zenas warrant was exchanged for additional equity in Zenas. In 2022, the convertible note and accrued interest through the conversion date were exchanged for equity shares in Zenas. During 2022, the Company recognized an unrealized gain of $ 21.9 million from the warrant exchange and the conversion of the promissory note. In 2023, Zenas initiated a Phase 3 trial and we received a milestone of additional equity in Zenas with a fair value of $ 10.0 million. The Company recorded the additional equity at its fair value. During the year ended December 31, 2023, there was no impairment related to this investment. 87 Unrealized gains and losses recognized on equity securities (in thousands) during the year ended December 31, 2023 and 2022 consist of the following: Year Ended December 31, 2023 2022 2021 Net (losses) gains recognized on equity securities $ ( 395 ) $ 23,434 $ 39,289 Less: net gains recognized on equity securities redeemed — — 18,301 Unrealized (losses) gain recognized on equity securities $ ( 395 ) $ 23,434 $ 20,988 4. Sale of Additional Common Stock Under the terms of the Stock Purchase Agreement (defined below), Johnson & Johnson Innovation, JJDC, Inc. (JJDC), purchased $ 25.0 million of newly issued unregistered shares of the Company’s common stock, priced at a 30 -day volume-weighted average price of $ 33.4197 per share as of October 1, 2021. The Company issued 748,062 shares of common stock to JJDC on November 12, 2021. The issued shares are subject to customary resale restrictions pursuant to Rule 144 of the Securities Act of 1933. 5. Property and Equipment Property and equipment consist of the following: December 31, 2023 2022 (in thousands) Computers, software and equipment $ 49,782 $ 45,159 Furniture and fixtures 158 539 Leasehold and tenant improvements 52,410 41,774 Total gross carrying amount 102,350 87,472 Less accumulated depreciation and amortization ( 36,226 ) ( 28,289 ) Total property and equipment, net $ 66,124 $ 59,183 Leasehold and tenant improvements consist primarily of leasehold construction at our new Pasadena headquarters. Depreciation expense related to property and equipment in 2023, 2022, and 2021 was $ 10.1 million, $ 7.4 million, and $ 6.3 million, respectively. 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 current federal income taxes for the years ended December 31, 2023 and 2022 were $ 5.8 million and $ 0.7 million, respectively. There was no provision for taxes for the years ended December 31, 2021. There is no state income tax provision for the years ended December 31, 2023, 2022 and 2021, respectively. 88 A reconciliation of the federal statutory income tax to our effective income tax is as follows (in thousands): Year Ended December 31, 2023 2022 2021 Federal statutory income tax $ ( 25,258 ) $ ( 11,447 ) $ 17,352 State and local income taxes ( 569 ) ( 615 ) 783 Research and development credit ( 15,821 ) ( 9,366 ) ( 10,492 ) Stock-based compensation 3,131 3,384 2,424 Foreign-derived intangible income ( 1,188 ) ( 1,449 ) — Other 417 ( 74 ) 95 Change in state rate 234 44 2,599 Net change in valuation allowance 44,865 20,196 ( 12,761 ) Income tax provision $ 5,811 $ 673 $ — The tax effect of temporary differences that give rise to a significant portion of the deferred tax assets and liabilities at December 31, 2023 and 2022 is presented below (in thousands): December 31, 2023 2022 Deferred income tax assets Net operating loss carryforwards $ 22,466 $ 32,898 Research credits 53,198 54,825 Unrealized (gain) loss on securities ( 278 ) 1,573 Capitalized lease assets 6,161 5,564 Accrued compensation 18,172 14,484 Deferred revenue 34,405 3,225 Capitalized research and development costs 45,783 21,338 Gross deferred income tax assets 179,907 133,907 Valuation allowance ( 158,099 ) ( 115,010 ) Net deferred income tax assets 21,808 18,897 Deferred income tax liabilities Patent costs ( 2,218 ) ( 2,885 ) Licensing costs ( 136 ) ( 124 ) Capitalized legal costs ( 6 ) ( 9 ) Depreciation ( 10,664 ) ( 6,532 ) Unrealized gain on securities ( 8,784 ) ( 9,347 ) Gross deferred income tax liabilities ( 21,808 ) ( 18,897 ) Net deferred income tax asset $ — $ — The Tax Cuts and Jobs Act of 2017 (TCJA) was enacted in December 2017 and made substantial changes in the U.S. tax system. The significant changes made by the TCJA include a reduction in the maximum corporate income tax rate and the requirement that research and development costs incurred after December 31, 2021 to be capitalized and amortized over several years. We have recorded a deferred asset for each year ended December 31, 2023 and 2022, respectively. for such capitalized research and development costs. We have net deferred tax assets relating primarily to capitalized research and development costs, net operating loss carryforwards and research and development tax credit carryforwards. 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, 2023 and 2022. 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 89 income and cumulative losses that have resulted over the years. During the year ended December 31, 2023, the valuation allowance increased by $ 43.1 million. The Company’s tax years starting in 2019 through 2022 remain open to potential examination by the U.S. and state taxing authorities due to carryforwards of net operating losses and income tax credits. As of December 31, 2023, we had cumulative net operating loss carryforwards for federal and state income tax purposes of $ 54.2 million and $ 158.8 million, respectively, and available tax credit carryforwards of approximately $ 33.6 million for federal income tax purposes and $ 24.8 million for state income tax purposes, which can be carried forward to offset future taxable income, if any. All of the federal net operating loss carryforwards were incurred prior to January 1, 2018, which are subject to carryforward limitations. To the extent allowed by law, taxing authorities may examine prior periods where net operating losses were carried forwards and were claimed and offset against current year taxable income, and make adjustments up to the amount of the net operating loss carryforward amount. Our federal net operating loss carryforwards expire starting in 2027, state net operating loss carryforwards expire starting in 2035, and federal tax credit carryforwards begin to expire in 2034. Utilization of our net operating loss and tax credit carryforwards are subject to a substantial annual limitation under Section 382 of the Code due to the fact that we have experienced ownership changes. As a result of these changes, certain of our net operating loss and tax credit carryforwards may expire before we can use them. 7. Stock-Based Compensation In 2013 , our Board of Directors and our stockholders approved the 2013 Equity Incentive Plan (the 2013 Plan). The 2013 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other stock awards. The 2013 Plan had a ten-year term and would expire on December 3, 2023. In June 2023, the Board and shareholders approved the 2023 Equity Incentive Plan (the 2023 Plan), which became effective as of June 14, 2023. We suspended the 2013 Plan, and no additional award may be granted under the 2013 Plan. The 2023 Plan reserve consists of 3,000,000 shares and the remaining available shares from the 2013 Plan as of the effective date of the 2023 Plan. In addition, any shares of common stock covered by awards granted under the 2013 Plan that terminate on or after June 14, 2023 by expiration, forfeiture, cancellation, or other means without the issuance of such shares will be added to the 2023 Plan reserve. The 2013 Plan provided for an automatic increase in the number of shares annually on January 1 by 4 % of the total number of issued and outstanding shares of common stock as of December 31 of the immediately preceding year. On January 1, 2023, pursuant to approval by the Board, the total number of shares of common stock available for issuance under the 2013 Plan was increased by 2,399,908 shares. The 2023 Plan does not include a provision for an automatic increase in shares, also known as an Evergreen provision. As of December 31, 2023, the total number of shares of common stock available for issuance under the 2023 Plan was 19,434,971 , which includes 16,932,548 shares of common stock that were available for issuance under the Prior Plans as of the effective date of the 2023 Plan. As of December 31, 2023, a total of 16,616,038 options have been granted under the 2013 Plan and 2023 Plan. As of December 31, 2023, the Company has awarded 2,994,168 RSUs to certain employees pursuant to the 2013 Plan and 2023 Plan. Vesting of these awards will be annually over equal installments, either a two or three-year vesting period, and is contingent on continued employment terms. 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. In November 2013, our Board of Directors and stockholders approved the 2013 Employee Stock Purchase Plan (2013 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 shares of the Company’s common stock at a discount. The ESPP had an initial two-year term that included four six-month purchase periods, and employee withholding amounts could 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, subsequent two-year terms began automatically upon the end of the previous 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 common stock price at the initial offering date or 85 % of the Company’s stock price at each purchase date. 90 As of December 31, 2023, the total number of shares of common stock available for issuance under the ESPP is 1,041,340 . Under the 2013 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. Pursuant to approval by our board, the total number of shares of common stock available for issuance under the ESPP was increased by 599,977 shares on January 1, 2023. As of December 31, 2023, we have issued a total of 733,478 shares of common stock under the ESPP. Total employee, director and non-employee stock-based compensation expense recognized was as follows: Year Ended December 31, (in thousands) 2023 2022 2021 General and administrative $ 19,239 $ 17,281 $ 12,813 Research and development 34,516 31,632 24,162 $ 53,755 $ 48,913 $ 36,975 Year Ended December 31, (in thousands) 2023 2022 2021 Stock options $ 29,345 $ 29,758 $ 27,909 ESPP 1,243 1,174 992 RSUs 23,167 17,981 8,074 $ 53,755 $ 48,913 $ 36,975 Information with respect to stock options outstanding is as follows: December 31, 2023 2022 2021 Exercisable options 7,761,829 6,679,948 5,576,430 Weighted average exercise price per share of exercisable options $ 28.79 $ 26.99 $ 24.15 Weighted average grant date fair value per share of options granted during the year $ 15.98 $ 15.45 $ 21.65 Options available for future grants 6,801,945 3,622,319 3,597,371 Weighted average remaining contractual life 6.03 6.30 6.65 91 The following table summarizes stock option activity for the years ended December 31, 2023 and 2022: Number of Shares Weighted- Average Exercise Price (Per Share) (1) Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) (2) Balances at December 31, 2020 7,751,789 $ 26.23 7.00 $ 134,941 Options granted 1,827,234 41.22 Options forfeited ( 382,454 ) 36.15 Options exercised (3) ( 520,240 ) 23.61 Balances at December 31, 2021 8,676,329 29.11 6.65 $ 100,057 Options granted 2,135,233 29.45 Options forfeited ( 533,435 ) 34.09 Options exercised (3) ( 195,485 ) 18.46 Balances at December 31, 2022 10,082,642 29.12 6.30 $ 27,141 Options granted 2,080,732 30.02 Options forfeited ( 676,005 ) 33.19 Options exercised (3) ( 344,383 ) 9.91 Balances at December 31, 2023 11,142,986 $ 29.60 6.03 $ 9,977 As of December 31, 2023 Options vested and expected to vest 11,142,986 $ 29.60 6.03 $ 9,977 Exercisable 7,761,829 $ 28.79 4.90 $ 9,907 ______________________________ (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, 2023 and 2022. (3) The total intrinsic value of stock options exercised was $ 4.8 million, $ 1.6 million, and $ 9.2 million for the years ended December 31, 2023, 2022 and 2021 respectively. 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 are issued at the fair market value of our stock on the date of grant. The fair value of employee stock options was estimated using the following weighted average assumptions for the years ended December 31, 2023, 2022 and 2021: Options 2023 2022 2021 Common stock fair value per share $ 20.14 - 36.02 $ 19.74 - 38.08 $ 30.65 - 49.47 Expected volatility 49.75 % - 52.48 % 51.51 % - 54.36 % 53.91 % - 56.82 % Risk-free interest rate 3.50 % - 4.55 % 1.57 % - 4.34 % 0.47 % - 1.33 % Expected dividend yield — — — Expected term (in years) 6.00 - 6.59 6.00 - 7.65 6.00 - 7.65 92 ESPP 2023 2022 2021 Expected term (years) 0.5 - 2.0 0.5 - 2.0 0.5 - 2.0 Expected volatility 38.24 % - 55.72 % 43.19 % - 55.72 % 46.08 % - 66.37 % Risk-free interest rate 0.13 % - 5.39 % 0.13 % - 4.72 % 0.04 % - 1.65 % Expected dividend yield — — — 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, 2023, 2022, and 2021 was determined using a blended volatility by examining the historical volatility for industry peer companies and the volatility of our stock from the effective date that our shares were publicly traded on a national stock exchange. We determined the average expected life of stock options based on the anticipated time period between the measurement date and the exercise date by examining the option holders’ past exercise patterns. The risk-free interest rate assumption is based on the U.S. Treasury instruments, for which the 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. We have not paid dividends and did not have any dividend payout at December 31, 2023. The following table summarizes RSU activity for the years ended December 31, 2023: Number of Shares Weighted- Average Grant Date Fair Value (Per Unit) Unvested at December 31, 2020 358,825 $ 33.04 Granted 670,700 39.11 Vested ( 151,555 ) 32.76 Forfeited ( 51,822 ) 36.68 Unvested at December 31, 2021 826,148 $ 37.79 Granted 875,330 29.45 Vested ( 341,073 ) 37.37 Forfeited ( 127,854 ) 33.66 Unvested at December 31, 2022 1,232,551 $ 32.41 Granted 994,351 30.33 Vested ( 558,066 ) 33.61 Forfeited ( 178,796 ) 31.64 Unvested at December 31, 2023 1,490,040 $ 30.66 As of December 31, 2023 and 2022, the unamortized compensation expense related to unvested stock options was $ 49.2 million and $ 52.6 million, respectively. The remaining unamortized compensation expense will be recognized over the next 2.39 years. At December 31, 2023 and 2022, the unamortized compensation expense was $ 1.8 million and $ 1.2 million respectively under our ESPP. The remaining unamortized expense will be recognized over the next 1.94 years. At December 31, 2023 and 2022, the unamortized compensation expense related to unvested restricted stock units was $ 29.6 million and $ 28.3 million, respectively. The remaining unamortized compensation expense will be recognized over the next 1.90 years. 8. Leases The Company leases office and laboratory space in Monrovia, California under two separate leases; one lease expired in January 2023, and a second lease will expire in December 2025. The second lease includes an option to renew 93 for an additional five years at then market rates. The initial lease expired in January 2023, and the Company has assessed that it is unlikely to exercise the lease term extension option for the second lease that will expire in December 2025. For the year ended December 31, 2023, there were no ROU assets obtained in exchange for new operating lease liabilities. The Company leases additional office space in San Diego, California under a lease that expired December 31, 2023. In August 2023, the Company entered into a Sublease Agreement for office space in San Diego, California. The term of the Sublease Agreement begins in September 2023 and ends in December 2027. For the year ended December 31, 2023, ROU assets obtained in exchange for new operating lease liabilities were $ 2.5 million. In connection with the Sublease Agreement, the Company provided a $ 0.4 million Letter of Credit (LOC) to the landlord. The Letter of Credit will decline ratably over the term of the lease. In connection with the LOC, Company entered into a Cash Collateral Agreement for $ 0.4 million, which is classified as restricted cash in the Consolidated Balance Sheets. In June 2021, the Company entered into an 18 -month lease for office space in Monrovia, California. The lease began August 1, 2021 and terminated January 31, 2023. For the year ended December 31, 2023, there were no ROU assets obtained in exchange for new operating lease liabilities. In June 2021, the Company entered into an Agreement of Lease (the Halstead Lease) relating to 129,543 rentable square feet, for laboratory and office space, in Pasadena, California. The term of the Halstead Lease became effective in two phases. The first phase commenced on July 14, 2021 and encompasses 83,083 square feet while the second phase commences no later than July 1, 2025 and encompasses an additional 46,460 square feet. The term of the Halstead Lease is 13 years from the first phase commencement date. The Company received delivery of the first phase premises on July 1, 2021 and completed construction of office, laboratory, and related improvements in 2023. The Company placed the new facility into service in February 2023. The Halstead Lease provides the Company with improvement allowances of up to $ 17.0 million and $ 3.3 million in connection with the Phase 1 and Phase 2 building improvements, respectively. The initial base monthly rent is $ 386,336 , or $ 4.65 per square foot, and includes increases of three percent annually. The Company will also be responsible for its proportionate share of operating expenses, tax expense, and utility costs. In July 2021, the Halstead Lease was amended to clarify the start date of the new lease to August 1, 2022 and to amend other provisions of the Halstead Lease to reflect the new start date of the lease. In August 2022, the Halstead lease was amended to increase the amount of the tenant allowance by $ 5.0 million with a corresponding increase in total rental payments. The Company is eligible to receive total tenant allowance under the lease for the phase 1 space of $ 22.0 million and the initial base rent is increased to $ 416,246 , or $ 5.01 per square foot. The second phase premises was made available on December 1, 2022. For the year ended December 31, 2023, there were no ROU assets obtained in exchange for new operating lease liabilities. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants. 94 The following table reconciles the undiscounted cash flows for the operating leases at December 31, 2023 to the operating lease liabilities recorded on the balance sheet (in thousands): Years ending December 31, 2024 $ 6,128 2025 8,022 2026 9,238 2027 9,560 2028 9,076 Thereafter 66,435 Total undiscounted lease payments 108,459 Less: Tenant allowance ( 3,252 ) Less: Imputed interest ( 42,747 ) Present value of lease payments $ 62,460 Lease liabilities - short-term $ 3,435 Lease liabilities - long-term 59,025 Total lease liabilities $ 62,460 The following table summarizes lease costs, cash, and other disclosures for the years ended December 31, 2023, 2022, and 2021 (in thousands): Year Ended December 31, 2023 2022 2021 Operating lease cost $ 8,459 $ 6,588 $ 4,342 Variable lease cost 906 506 58 Total lease costs $ 9,365 $ 7,094 $ 4,400 Cash paid for amounts included in the measurement of lease liabilities $ 3,253 $ 2,869 $ 2,773 Weighted-average remaining lease term —operating leases (in years) 11.0 12.0 12.3 Weighted-average discount rate —operating leases 8.9 % 8.9 % 5.8 % 9. Commitments and Contingencies 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. 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. 95 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 we did not record a liability as of December 31, 2023 and 2022. 10. Collaboration and Licensing Agreements Following is a summary description of the material revenue arrangements, including arrangements that generated revenue in the period ended December 31, 2023, 2022, and 2021. The revenue reported for each agreement has been adjusted to reflect the adoption of ASC 606 for each period presented. Alexion Pharmaceuticals, Inc. In January 2013, the Company entered into an option and license agreement with Alexion Pharmaceuticals, Inc. (Alexion). Under the terms of the agreement, the Company granted to Alexion an exclusive research license, with limited sublicensing rights, to make and use our Xtend technology. Alexion exercised its rights to include our technology in ALXN1210, which is now marketed as Ultomiris. The Company is eligible 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 2022 and 2021, the Company recorded royalty revenue of $ 29.4 million and $ 22.2 million, respectively in connection with reported net sales of Ultomiris by Alexion. In 2023, Alexion completed certain sales milestones for Ultomiris, and the Company received a milestone payment of $ 20.0 million and recorded royalty revenue of $ 38.6 million on net sales. On November 3, 2023, the Company entered into the Ultomiris Royalty Sale Agreement with OMERS, in which OMERS acquired the rights to certain royalties associated with the existing license relating to Ultomiris in exchange for an upfront payment of $ 192.5 million. Included in the proceeds is $ 29.5 million of accounts receivable the Company sold for royalties and milestone receivable recorded at September 30, 2023. For the year ended December 31, 2023, the Company earned and recognized $ 38.6 million in royalty revenue, $ 6.2 million of which was non-cash royalty revenue under the Ultomiris Royalty Sale Agreement The total revenue recognized under this arrangement was $ 58.6 million, $ 29.4 million, and $ 22.2 million for the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, there is no receivable and no deferred revenue related to this agreement. Astellas Pharma Inc. Effective March 2019, the Company entered into a Research and License Agreement (Astellas Agreement) with Astellas Pharma Inc. (Astellas) pursuant to which the Company and Astellas conducted 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. 96 The Company received an upfront payment and is eligible to receive development, regulatory and 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. Astellas has advanced an antibody that was delivered into development, and we received a milestone related to the candidate in 2020. Astellas advanced the candidate into Phase 1 studies in 2022 and we received a $ 5.0 million milestone. No revenue was recognized for the year ended December 31, 2023 or 2021.The Company recognized $ 5.0 million of revenue for the year ended December 31, 2022 under the agreement. There is no deferred revenue as of December 31, 2023. Astria Therapeutics, Inc. In May 2018, the Company entered into an agreement with Quellis, pursuant to which the Company provided Quellis a non-exclusive license to its Xtend Fc technology. The Company received an equity interest in Quellis and is eligible to receive development, regulatory and sales milestones. The Company is also eligible to receive royalties in the mid-single digit percentage range on net sales of approved products. In January 2021, Quellis merged into Astria (formerly Catabasis), and the Company received common stock and preferred stock of Aastria in exchange for its equity in Quellis. The Company recognized an increase in the fair value of its equity interest for the exchange of shares, which was recorded as unrealized gain for the three months ended March 31, 2021. In June 2021, a portion of the Company’s preferred stock in Astria was converted to common stock. The remaining Astria preferred stock was converted to common stock in 2023. The Company recorded an impairment charge of $ 0.1 million and $ 0.8 million for its investment in Astria preferred stock for the year ended December 31, 2022 and 2021, respectively. The Company recognized unrealized (loss) gain of $( 4.3 ) million, $ 6.1 million, and $ 4.5 million related to its equity interest in Astria for the years ended December 31, 2023, 2022, and 2021 respectively. There is no deferred revenue as of December 31, 2023 related to this agreement. Genentech, Inc., and F. Hoffmann-La Roche Ltd. 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 XmAb306, the Company’s IL-15/IL15Rα-Fc candidate. Under the terms of the Genentech Agreement, Genentech received an exclusive worldwide license to XmAb306 and we share in 45 % of development and commercialization costs of Collaboration Products, and we are eligible to share in 45 % of net profits and losses from the sale of approved products. However, in the fourth quarter of 2023, we agreed with Genentech to convert our current development cost and profit-sharing arrangement into a royalty and milestone payment-based arrangement. Pursuant to the terms of the amended agreement with Genentech, effective June 1, 2024, Genentech will assume sole responsibility over all clinical, regulatory and commercial activities. We are eligible to receive up to $ 600.0 million in milestones, including $ 115.0 million in development milestones, $ 185.0 million in regulatory milestones and $ 300.0 million in sales-based milestones and tiered royalties ranging from low double-digit to mid-teens percentages. The Company determined that the transaction price of the Genentech Agreement at inception was $ 120.0 million consisting of the upfront payment, and allocated the transaction price to each of the separate performance obligations using the relative standalone selling price with $ 111.7 million allocated to the license to XmAb306, $ 4.1 million allocated to the additional program and $ 4.2 million allocated to the research services. 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, and the $ 8.3 million allocated to the research activities was recognized over a period of time through the end of the research term or the time that a program is delivered to Genentech. The research term expired in the first half of 2021, and the balance in deferred revenue related to the Genentech Agreement was recognized as the Company is no longer required to render services. No revenue was recognized for the years ended December 31, 2023, and 2022. For the year ended December 31, 2021, we recognized $ 2.5 million of income from the Genentech Agreement. As of December 31, 2023, there was a $ 3.3 97 million payable related to cost-sharing development activities during the fourth quarter of 2023. There is no deferred revenue as of December 31, 2023. Gilead Sciences, Inc. In January 2020, the Company entered into a Technology License Agreement (the Gilead Agreement) with Gilead Sciences, Inc. (Gilead), in which the Company provided Gilead an exclusive license to its Cytotoxic Fc and Xtend Fc technologies for an initial identified antibody and options for up to three additional antibodies directed to the same molecular target. Gilead is responsible for all development and commercialization activities for all target candidates. The Company received an upfront payment and is eligible to receive development, regulatory and, sales milestones for each product incorporating the antibodies selected. In addition, the Company is eligible to receive royalties in the low-single digit percentage range on net sales of approved products. The Company recognized $ 6.0 million in milestone revenue for the year ended December 31, 2023. No revenue was recognized for the years ended December 31, 2022 and 2021. There is no deferred revenue as of December 31, 2023 related to this agreement. INmune Bio, Inc. In October 2017, the Company entered into a License Agreement (the INmune Agreement) with INmune. Under the terms of the INmune Agreement, the Company provided INmune with an exclusive license to certain rights to a proprietary protein, XPro1595. In connection with the agreement the Company received shares of INmune common stock and an option to acquire additional shares of INmune. The Company also received a second option to acquire additional shares of INmune common stock with a designee appointed by us serving on the board of directors of INmune. The Company initially recorded its equity interest in INmune, including its option to acquire additional INmune shares, at cost pursuant to ASC 323. In June 2021, the Company entered into the First Amendment to License Agreement (the Amended INmune Agreement) and an Option Cancellation Agreement (the Option Agreement) with INmune.The Option Agreement provided for the sale of the initial option to INmune for the total consideration of $ 18.3 million which includes $ 15.0 million in cash and additional shares of INmune common stock. The Company recorded a realized gain of $ 18.3 million according to ASC 860, Transfer and Servicing , and recorded the additional shares of INmune common stock according to ASC 321, Investments – Equity Securities . During 2021, the Company determined that it should no longer record its investment in INmune under the equity method and recorded its investment in INmune pursuant to ASC 321. The Company adjusted the carrying value of this investment by recognizing an unrealized gain of $ 27.8 million as other income during 2021. During 2021, the Company exercised its second to purchase additional shares of INmune common stock for $ 0.8 million, and the Company recognized an unrealized gain of $ 2.0 million, which consists of $ 1.1 million of fair value of the option and $ 0.9 million gain on the purchase. For the year ended December 31, 2023, the Company recorded $ 9.3 million of unrealized gain related to its investment in INmune. For the year ended December 31, 2022, the Company recorded $ 7.3 million of unrealized loss related to its investment in INmune. For the year ended December 31, 2021, the Company recorded $ 15.1 million of unrealized gain and $ 18.3 million of realized gain related to its investment in INmune. No revenue was recognized for the years ended December 31, 2023, 2022, or 2021. Janssen Biotech, Inc., a Johnson & Johnson company J&J Agreement In November 2020, the Company entered into a Collaboration and License Agreement (the J&J Agreement) with Janssen Biotech, Inc., a Johnson & Johnson company, pursuant to which Xencor and J&J conducted research and development activities to discover novel CD28 bispecific antibodies for the treatment of prostate cancer. Xencor together with J&J conducted joint research activities to discover XmAb bispecific antibodies against CD28 and against an 98 undisclosed prostate tumor-target with J&J maintaining exclusive worldwide rights to develop and commercialize Licensed Products identified from the research activities. Under the J&J Agreement, the Company conducted research activities and apply its bispecific Fc technology to antibodies targeting prostate cancer provided by J&J. Upon completion of the research activities Janssen will have a candidate selection option to advance an identified candidate for development and commercialization. The activities will be conducted under a research plan agreed to by both parties. J&J will assume full responsibility for development and commercialization of the CD28 bispecific antibody candidate. Pursuant to the J&J Agreement, the Company received an upfront payment and is eligible to receive development, regulatory and, 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. Pursuant to the J&J Agreement, upon development of a bispecific candidate by J&J through proof of concept, we have the right to opt-in to fund 20 % of development costs and to perform 30 % of detailing efforts in the U.S. If we exercise this right, we will be eligible to receive tiered royalties in the low-double digit to mid-teen percentage range. The Company allocated the transaction price to the single performance obligation, delivery of CD28 bispecific antibodies to J&J. The Company recognized the $ 50.0 million transaction price as it satisfied its performance obligation to deliver CD28 bispecific antibodies to J&J. The Company recognized revenue related to the performance obligation over the expected period of time to complete and deliver the CD28 bispecific antibodies to J&J using the expected input method which considers an estimate of the Company’s efforts to complete the research activities outlined in the J&J Agreement. In November 2021, the Company completed its performance obligations under the research activities and delivered CD28 bispecific antibodies to J&J. In December 2021, J&J selected a bispecific CD28 candidate for further development, and we received a milestone of $ 5.0 million. For the year ended December 31, 2021 the Company recognized as revenue the $ 50.0 million transaction price in connection with the completion of the research activities and the $ 5.0 million milestone for selection of an antibody candidate by J&J. No revenue was recognized under this agreement for the year ended December 31, 2022. In 2023, J&J completed filing of regulatory submission for a CD28 candidate and initiated Phase 1 clinical trial, and the Company received $ 17.5 million in milestone payments. For the year ended December 31, 2023, the Company recognized $ 17.5 million in milestones under the J&J Agreement. There is no deferred revenue related to the Agreement at December 31, 2023. Second J&J Agreement On October 1, 2021, the Company entered into a second Collaboration and License Agreement (the Second J&J Agreement) with J&J pursuant to which the Company granted J&J an exclusive worldwide license to develop, manufacture, and commercialize plamotamab, the Company’s CD20 x CD3 development candidate, and pursuant to which Xencor and J&J will conduct research and development activities to discover novel CD28 bispecific antibodies. The parties will conduct joint research activities for up to a two-year period to discover XmAb bispecific antibodies against CD28 and undisclosed B cell tumor-targets with J&J receiving exclusive worldwide rights, subject to certain Xencor opt-in rights, to develop, manufacture and commercialize pharmaceutical products that contain one or more of such discovered antibodies (CD28 Licensed Antibodies). The Agreement became effective on November 5, 2021. Pursuant to the Second J&J Agreement, the Company received an upfront payment of $ 100.0 million and is eligible to receive up to $ 1,187.5 million in milestones which include $ 289.4 million in development milestones, $ 378.1 million in regulatory milestones and $ 520.0 million in sales milestones. Under the terms of the Stock Purchase Agreement, Johnson & Johnson Innovation, JJDC, Inc. (JJDC), agreed to purchase $ 25.0 million of newly issued unregistered shares of the Company’s common stock, priced at a 30 -day volume-weighted average price of $ 33.4197 per share as of October 1, 2021. The Company issued JJDC 748,062 shares of its common stock which had a fair market value of $ 28.9 million when the shares were transferred. The Company will collaborate with J&J on further clinical development of plamotamab with J&J and share development costs with J&J paying 80 % and the Company paying 20 % of certain development costs. The Company is generally responsible for conducting research activities under the Second J&J Agreement, and J&J is generally responsible for all development, manufacturing, and commercialization activities for CD28 Licensed Antibodies that are advanced. 99 Under the Second J&J Agreement, the Company granted J&J an exclusive worldwide right to its plamotamab program and the Company will conduct research activities and apply its CD28 bispecific Fc technology to antibodies targeting B-cells. Upon completion of the research activities J&J will have options to advance up to four identified candidates for development and commercialization. The activities will be conducted under a research plan agreed to by both parties. J&J will assume full responsibility for development and commercialization of the CD28 bispecific antibody candidate. 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 evaluated the Second J&J Agreement under the provisions of ASC 606. We have determined that J&J is a customer for purposes of the delivery of specific performance obligations under the Second Janssen Agreement and applied the provisions of ASC 606 to the transaction. The Company identified the following performance obligations under the Second Janssen Agreement: (i) the license to the plamotamab program, and (ii) research services during a two-year period to create up to four CD28 bispecific candidates targeting B-cell antigens. The Company determined that the license and the research services are separate performance obligations because they are capable of being distinct and are distinct in the context of the Second J&J Agreement. The Company determined the standalone selling price of the license to be $ 58.5 million using the adjusted market assessment approach considering similar collaboration and license agreements and transactions. The standalone selling price for the research services to be performed during the research term was determined to be $ 37.6 million using the market approach which was derived from the Company’s experience and information from providing similar research services. The Company determined that the transaction price of the Second J&J Agreement at inception was $ 96.1 million consisting of the $ 100.0 million upfront payment reduced by the $ 3.9 million discount on the proceeds received from the sale of Company common stock to J&J. The potential milestones are not included in the transaction price as these are contingent on future events and the Company would not recognize these in revenue until it is not probable that these would not result in significant reversal of revenue amounts in future periods. The Company will re-assess the transaction price at each reporting period and when event outcomes are resolved or changes in circumstances occur. The Company allocated the transaction price to each of the separate performance obligations using the relative standalone selling price with $ 58.5 million allocated to the license to the plamotamab program and $ 37.6 million allocated to the research services. The Company recognized the $ 58.5 million allocated to the license when it satisfied its performance obligation and transferred the license to J&J in November 2021. The $ 37.6 million allocated to the research services is being recognized over a period of time through the end of the research term that services are rendered as we determine that the input method is the appropriate approach to recognize income for such services. The Company completed its performance obligations under the research agreement in December 2023. During 2023, J&J exercised its options on three CD28 candidates developed under the collaboration, and it completed regulatory submissions for a selected candidate and initiated a Phase 1 study for it. During the year ended December 31, 2023, we received $ 30.0 million in milestone revenue and recognized $ 30.3 million in revenue related to completion of the research services. A total of $ 30.3 million, $ 7.0 million, and $ 0.3 million of revenue related to the research services was recognized in each of the years ended December 31, 2023, 2022, and 2021, respectively. The Company recognized $ 77.8 million, $ 7.0 million, and $ 113.8 million of revenue related to the two J&J agreements for the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, there was a $ 2.9 million receivable related to cost-sharing development activities during the fourth quarter of 2023. There is no in deferred revenue as of December 31, 2023 related to our obligation to complete research activities and deliver CD28 bispecific antibodies under the Second J&J Agreement. 100 MorphoSys AG/Incyte Corporation In June 2010, the Company entered into a Collaboration and License Agreement with MorphoSys AG (MorphoSys), which was subsequently amended in March 2012 and in 2020. The agreement provides MorphoSys with an exclusive worldwide license to the Company’s patents and know-how to research, develop, and commercialize the Company’s 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. On November 3, 2023, the Company entered into the Monjuvi Royalty Sale Agreement with OMERS, pursuant to which OMERS acquired the rights to certain royalties earned after July 1, 2023 associated with the existing license relating to Monjuvi in exchange for an upfront payment of $ 22.5 million. The upfront payment included $ 2.2 million of accounts receivable we recorded as a royalty receivable at September 30, 2023. The payment for the receivable was received by OMERS. In February 2024, Incyte Corporation acquired exclusive global development and commercialization rights to tafasitamab. The Company recognized a total of $ 8.7 million and $ 7.8 million of royalty revenue on net sales of Monjuvi for the years ended December 31, 2023 and 2022. Of the $ 8.7 million royalty revenue earned in 2023, $ 2.1 million was non-cash royalty revenue from the Monjuvi Royalty Sale Agreement.The Company recognized a total of $ 12.5 million of milestone revenue related to clinical studies and royalties of $ 5.9 million on net sales of Monjuvi for the year ended December 31, 2021. As of December 31, 2023, the Company has no deferred revenue related to this agreement and has recorded a receivable of $ 2.1 million for royalties due. Novartis Institute for Biomedical Research, Inc. 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. Pursuant to the Novartis Agreement: • The Company granted Novartis certain exclusive rights to research, develop and commercialize XmAb14045 (vibecotamab) 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. In August 2021, Novartis notified the Company it was terminating its rights with respect to the vibecotamab program, which became effective in February 2022. Under the Novartis Agreement, Novartis is responsible for its share of vibecotamab development costs through August 2022. We completed delivery of two Global Discovery Programs under the Agreement. Under ASC 606, revenue is recognized at the time that the Company’s performance obligation for each Global Discovery is completed upon delivery of each discovery program to Novartis. The Company delivered two discovery programs to Novartis and recognized $ 40.1 million of revenue in the period that each program was delivered. The Company’s obligations to provide research services under the Agreement for additional Global Discovery Programs expired in 2021, and we recognized $ 40.1 million of research revenue from deferred revenue. In June 2021, Novartis selected an Fc candidate and received a non-exclusive license to the Company’s Fc technology. Novartis will assume full responsibility for development and commercialization of the licensed Fc product candidate. The Company is eligible to receive development, clinical, and sales milestones and royalties on net sales of approved products for the licensed Fc candidate. During the year ended December 31, 2021, Novartis advanced the Fc candidate into development and initiated clinical studies and the Company recognized $ 3.0 million of revenue related to the milestones. 101 No revenue was recognized during the years ended December 31, 2023 and 2022. During the year ended December 31, 2021, the Company recognized $ 43.1 million of revenue. There is no receivable and no deferred revenue as of December 31, 2023 related to the arrangement. Omeros Corporation In August 2020, the Company entered into a Technology License Agreement (the Omeros Agreement) with Omeros Corporation (Omeros), in which the Company provided Omeros a non-exclusive license to its Xtend Fc technology, an exclusive license to apply its Xtend technology to an initial identified antibody and options to apply its Xtend technology to three additional antibodies. Omeros is responsible for all development and commercialization activities for all target candidates. The Company received an upfront payment and is eligible to receive development, regulatory and, sales milestones for each product incorporating the antibodies selected. In addition, the Company is eligible to receive royalties in the mid-single digit percentage range on net sales of approved products. During 2023, Omeros advanced a candidate that incorporates the Company's Xtend Fc technology into a Phase 2 study, and the Company received a $ 5.0 million milestone. The Company recognized $ 5.0 million of revenue related to the Omeros Agreement for the year ended December 31, 2023. There was no revenue recognized for the years ended December 31, 2022 and 2021. There is no deferred revenue as of December 31, 2023 related to this agreement. Vir Biotechnology, Inc. In 2019, the Company entered into a Patent License Agreement (the Vir Agreement) with Vir Biotechnology, Inc. (Vir) pursuant to which the Company provided a non-exclusive license to its Xtend technology for up to two targets. In March 2020, the Company entered into a second Patent License Agreement (the Second Vir Agreement) with Vir pursuant to which the Company provided a non-exclusive license to its Xtend technology to extend the half-life of novel antibodies Vir developed as potential treatments for patients with COVID-19. Under the terms of the Second Vir Agreement, Vir is responsible for all research, development, regulatory and commercial activities for the antibody, and the Company is eligible to receive royalties on the net sales of approved products in the mid-single digit percentage range.Vir and its marketing partner, GSK, began recording sales for sotrovimab beginning in June 2021. In 2023, 2022, and 2021, we recognized royalty revenue of $ 2.2 million, $ 114.9 million, and $ 52.2 million , respectively related to this agreement. In June 2021, Vir announced its plan to initiate a Phase 2 study for VIR-3434 and subsequently completed dosing of the first patient in such study in July 2021. The Company recorded a $ 0.5 million contract asset in connection with this milestone event, and the payment was received in August 2021. In October 2022, Vir completed dosing of the first patient in Phase 2 study for VIR-2482, and the Company recorded $ 0.5 million revenue in connection with this milestone event. The Company recognized $ 2.2 million , $ 115.4 million, and $ 52.7 million of revenues related to the agreement for the years ended December 31, 2023, 2022, and 2021, respectively. There is no deferred revenue as of December 31, 2023 related to this agreement. As of December 31, 2023, the Company has recorded a receivable of $ 0.6 million for royalties due related to this agreement. Viridian Therapeutics, Inc. In December 2020, we entered into a Technology License Agreement (Viridian Agreement) with Viridian Therapeutics, Inc. (Viridian), in which we provided Viridian a non-exclusive license to our Xtend Fc technology and an exclusive license to apply our Xtend Fc technology to antibodies targeting IGF-1R. We received an upfront payment of shares of Viridian common stock originally valued at $ 6.0 million and are eligible to receive development, regulatory and sales milestones. We are also eligible to receive royalties in the mid-single digit percentage range on net sales of approved products. The Company allocated $ 6.0 million of the transaction price to the licenses to the Xtend Fc technology and recognized income for the licenses at inception of the arrangement when Viridian began benefiting access to it. During 2023, Viridian terminated the license agreement. In December 2021, we entered into a second Technology License Agreement (Second Viridian Agreement) with Viridian for a non-exclusive license to certain antibody libraries developed by us. Under the Second Viridian Agreement, 102 Viridian received a one-year research license to review the antibodies and the right to select up to three antibodies for further development. We received an upfront payment shares of Viridian common stock originally valued at $ 7.5 million and are eligible to receive up to $ 24.8 million in milestones, which include $ 1.8 million in development milestones, $ 3.0 million in regulatory milestones and $ 20.0 million in sales milestones in addition to royalties on net sales of approved products under the Second Viridian Agreement. The Company evaluated the Second Viridian Agreement under the revenue recognition standard ASC 606 and identified the following performance obligation that it deemed to be distinct at the inception of the contract: • non-exclusive license to certain antibody libraries created by the Company The Company considered the license as functional intellectual property as Viridian has the right to use the materials and license at the time that the Company transfers such rights. The total transaction price is $ 7.5 million, which includes the upfront payment of Viridian common stock at their fair value at the date of the Agreement. The milestone payments are variable consideration to which the Company applied the “most likely amount” method and concluded at inception of the Viridian Agreement it is unlikely that the Company will collect such payments. The milestone payments were not included in the transaction price, and the Company will review this conclusion and update at each reporting period. The Company allocated $ 7.5 million of the transaction price to the licenses to the antibody libraries and recognized income for the licenses at inception of the arrangement when Viridian received the materials and began accessing them. In 2023, the research term under the second Viridian license expired. No revenue related to the Viridian Agreement was recognized for the years ended December 31, 2023 and 2022. The Company recognized $ 7.5 million of revenue related to the Viridian Agreement for the year ended December 31, 2021. There is no deferred revenue as of December 31, 2023 related to this agreement. Zenas BioPharma, Inc. In November 2020, the Company entered into a License Agreement (Zenas Agreement) with Zenas BioPharma (Cayman) Limited, now Zenas BioPharma, Inc., (Zenas) pursuant to which the Company granted Zenas exclusive worldwide rights to develop and commercialize three preclinical-stage Fc-engineered drug candidates: XmAb6755, Xpro9523, and XmAb10171. The Company received an upfront payment in equity in Zenas with a fair value of $ 16.1 million and the Company is eligible to receive royalties on net sales of approved products in the mid-single digit to mid-teen percentage range. In November 2021, the Company entered into a second License Agreement (Second Zenas Agreement) with Zenas, in which we licensed the exclusive worldwide rights to develop and commercialize the Company’s obexelimab (XmAb5871) drug candidate. The Company received a warrant to acquire additional equity in Zenas with a fair value of $ 14.9 million, and the Company is eligible to receive royalties on net sales of approved products in the mid-single digit to mid-teen percentage range. The total transaction price is $ 14.9 million, which includes the upfront payment of a warrant to acquire up to 15 % of the equity of Zenas in connection with a future financing at its fair value at the date of the Second Zenas Agreement. The Second Zenas Agreement includes variable consideration for potential future royalties that were contingent on future success factors for the licensed programs. The Company used the “most likely amount” method to determine the variable consideration. None of the royalties were included in the transaction price. The Company will re-evaluate the transaction price in each reporting period as uncertain events are resolved or other changes in circumstances occur. The Company determined the transaction price at inception of the Second Zenas Agreement and allocated it to the performance obligation, delivery of the obexelimab license. The Company completed delivery of its performance obligations in December 2021. The licenses to obexelimab were transferred to Zenas at inception of the Second Zenas Agreement, and the related research data and documentation was transferred to Zenas in December 2021. 103 In 2021, the Company purchased a convertible promissory note from Zenas which would automatically convert to equity in a financing transaction. In November 2022, Zenas completed a financing transaction, pursuant to which a warrant to purchase Zenas equity that was held by the Company was automatically exercised, and a convertible note issued to the Company by Zenas was automatically converted with both converting into shares of Zenas’ preferred stock. After the financing transaction, we continued to record our investment in Zenas at fair value adjusted at each reporting period for impairment or other evidence of change in value. The equity shares in Zenas received from exercise of the warrant and conversion of the notes have an estimated fair value of $ 34.5 million and $ 7.7 million, respectively. As a result of the Zenas financing transaction, the estimated fair value of our investment in equity securities increased by $ 17.9 million. In 2022, this amount has been recorded in other income. In 2023, Zenas initiated a Phase 3 study with obexelimab, and we received additional equity in Zenas as a milestone payment. We recorded milestone revenue of $ 10.0 million, which is the fair value of the equity shares at the date of issuance. No revenue was recognized for the year ended December 31, 2022. The Company recognized $ 10.0 million and $ 14.9 million of revenue related to the two Zenas Agreements for the years ended December 31, 2023 and 2021, respectively. There is no deferred revenue as of December 31, 2023 related to this agreement. Technology License Agreement and Services Agreement with Gale Therapeutics Inc. In the fourth quarter of 2023, the Company formed a subsidiary, Gale Therapuetics Inc. (Gale), to develop novel drug candidates with its Fc technologies. On December 19, 2023, the Company entered into the Gale License Agreement and the Gale Services Agreement with Gale. Under the Gale License Agreement, Gale received an exclusive license to certain preclinical candidates and related Xencor technologies. The Company also has an option on future compounds Gale will develop. Under the Gale Services Agreement, the Company will provide research and development services as well as accounting and administrative support. Pursuant to the Gale Agreement, the Company acquired a majority stake in Gale. The Company is deemed to be the primary beneficiary of Gale, a VIE, and they are under common control; therefore, the assets, liabilities and non-controlling interests of Gale are initially recorded at their previous carrying amounts, with no adjustment to current fair values and no gain or loss is recognized. The value of the preclinical assets and technology had no value on Xencor's financial statements, and the license to Gale at inception had no carrying value. The Company would not recognize license revenue related to the transfer for the year ended December 31, 2023. Total charges under the Services Agreement during 2023 of $ 1.0 million have been eliminated in consolidation. 104 Revenue Earned The $ 168.3 million, $ 164.6 million, and $ 275.1 million of revenue recorded for the years ended December 31, 2023, 2022, and 2021, respectively, were earned principally from the following licensees (in millions): Year Ended December 31, 2023 2022 2021 Alexion 58.6 29.4 22.2 Astellas — 5.0 — Genentech — — 2.5 Gilead 6.0 — — Janssen 77.8 7.0 113.8 MorphoSys 8.7 7.8 18.4 Novartis — — 43.1 Omeros 5.0 — — Vir 2.2 115.4 52.7 Viridian — — 7.5 Zenas 10.0 — 14.9 Total $ 168.3 $ 164.6 $ 275.1 The table below summarizes the disaggregation of revenue recorded for the years ended December 31, 2023, 2022, and 2021 (in millions): Year Ended December 31, 2023 2022 2021 Research collaboration $ 30.3 $ 7.0 $ 93.0 Milestone 88.5 5.5 21.0 Licensing — — 80.8 Royalties 49.5 152.1 80.3 Total $ 168.3 $ 164.6 $ 275.1 Remaining Performance Obligations and Deferred Revenue There is no remaining performance obligation under the Company's arrangements as of December 31, 2023. The Company's performance obligation as of December 31, 2022 was completing research activities pursuant to the Second J&J Agreement. As of December 31, 2022, we have deferred revenue of $ 30.3 million. All of the deferred revenue was classified as short term as of December 31, 2022, as the Company’s obligations to perform research services are due on demand when requested by J&J under the Second J&J Agreement. 11. Sale of Future Royalties Ultomiris Royalty Sale Agreement On November 3, 2023, the Company and OMERS entered into the Ultomiris Royalty Sale Agreement. Pursuant to the Ultomiris Royalty Sale Agreement, OMERS acquired the rights to a portion of royalties and milestones earned after July 1, 2023 associated with the existing license relating to Ultomiris® (ravulizumab) in exchange for an upfront payment of $ 192.5 million. Pursuant to the Ultomiris Royalty Sale Agreement and subject to the Company’s existing license with Alexion, OMERS has acquired the right to receive: (i) 100 % of royalties payable on past and potential sales related to Ultomiris® that occur from July 1, 2023 through December 31, 2025; (ii) up to $ 35.0 million annually in royalties on potential sales 105 related to Ultomiris® that occur from January 1, 2026 through December 31, 2028 with any royalties in excess of $ 35.0 million reverting to the Company; (iii) up to $ 12.0 million annually in royalties on potential sales related to Ultomiris® that occur from and after January 1, 2029, with any royalties in excess of $ 12.0 million reverting to the Company; and (iv) $ 18.0 million of a certain potential sales based milestone payment pursuant to the existing license with Alexion. OMERS will pay an additional $ 12.0 million in 2024 to the Company if certain potential sales based milestones have been reached. The Company determined that $ 29.5 million of the upfront payment is for a recorded receivable for royalties and a milestone earned in the third quarter of 2023 and $ 163.0 million is for the sale of future royalties. The Company evaluated the arrangement and determined that the proceeds from the sale of future royalties should be recorded as deferred income on the balance sheets as none of the criteria for classification as debt had been met in accordance with ASC 470. The Company records the non-cash royalty revenue under the “units-of-revenue” method in the consolidated statements of income (loss). For the year ended December 31, 2023, the Company recognized $ 6.2 million of non-cash royalty revenue. Monjuvi Royalty Sale Agreement On November 3, 2023, the Company and OMERS entered into the Monjuvi Royalty Sale Agreement. Pursuant to the Monjuvi Royalty Sale Agreement, OMERS acquired the rights to a portion of royalties earned after July 1, 2023 associated with the existing license relating to Monjuvi®/Minjuvi® (tafasitamab-cxix) in exchange for an upfront payment of $ 22.5 million. Pursuant to the Monjuvi Royalty Sale Agreement and subject to the Company’s existing license with MorphoSys, OMERS has acquired the right to receive up to $ 29.3 million in royalties earned after July 1, 2023 related to sales of Monjuvi®/Minjuvi®, with any royalties in excess of $ 29.3 million paid to OMERS reverting to the Company. The Company determined that $ 2.2 million of the upfront payment is for a recorded receivable for royalties earned in the third quarter of 2023 and $ 20.3 million is from the sale of future royalties. The Company evaluated the arrangement and determined that the proceeds from the sale of future royalties should be classified as debt according to ASC 470. As of December 31, 2023, the estimated effective rate under the agreement was 21.1 %. The Company will reassess the estimate of total future royalty payment and prospectively adjust the imputed interest rate and related amortization if the estimate is materially different. For the year ended December 31, 2023, the Company recognized $ 2.1 million of non-cash royalty revenue and $ 0.7 million of non-cash interest expense. The following table shows the activity within debt for the year ended December 31, 2023 (in thousands): December 31, 2023 Beginning balance of debt related to sale of future royalties $ — Proceeds from sale of future royalties 20,293 Royalties paid to OMERS — Non-cash interest expense recognized 681 Ending balance of debt related to sale of future royalties $ 20,974 Debt - short-term 6,332 Debt - long-term 14,642 Total debt $ 20,974 12. 401(k) Plan We have a 401(k) plan covering all full-time employees. Employees may make pre-tax contributions up to the maximum allowable by the Internal Revenue Code. Effective March 31, 2020, the Company contributes 100 % of the first 1 % of participating employees’ contribution and 50 % of the next 6 % of participating employees’ contribution, for a maximum of 4.0 % of employer contribution. Participants are immediately vested in their employee contributions; employer contributions are vested over a three-year period with one-third for each year of a participating employee’s service. 106 Employer contributions made for the years ended December 31, 2023, 2022, and 2021 were $ 1.7 million, $ 1.4 million, and $ 1.1 million, respectively. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.