aibioXencor says 2023 and 2024 interim financials can't be relied on, will restate royalty as debt
Tickers XNCR
Xencor's audit committee concluded that a 2023 royalty deal with OMERS Life Sciences should be debt, not deferred income, and the company says its 2023 operating cash flow was overstated by $163.0 million. It also found tax misstatements. The company says cash and marketable debt securities are not affected.
Key facts
- Company
- Xencor, Inc. (NASDAQ: XNCR)
- News type
- Distress
- Primary source
- Xencor Inc Form 8-K filed February 13, 2025 (SEC EDGAR)
Xencor, Inc. (Nasdaq: XNCR) said in a Form 8-K filed February 13, 2025 that several sets of its previously issued financial statements should no longer be relied upon. Its audit committee reached that conclusion on February 11, 2025, after consulting management and RSM US LLP, the company's independent registered public accounting firm. The filing is a non-reliance notice under Item 4.02 of Form 8-K, and Xencor plans to restate the statements.
What is affected
The 8-K lists the audited financial statements in the 2023 Form 10-K, filed February 29, 2024, and the unaudited statements in the quarterly reports for the quarters ended March 31, June 30 and September 30, 2024. Those Forms 10-Q were filed on May 9, August 8 and November 6, 2024. The committee also concluded that management's report on internal control over financial reporting as of December 31, 2023, and RSM's reports on the 2023 statements and controls, should not be relied upon.
The OMERS royalty transaction
The largest error concerns a royalty transaction with OMERS Life Sciences that Xencor entered into in November 2023. The earlier filings accounted for it as deferred income. The company now says it should be accounted for as debt.
The filing estimates the effect at December 31, 2023. Deferred income was overstated by $156.9 million, and debt was understated by $168.5 million. Accounts receivable was understated by $12.4 million, and shareholders' equity was understated by $0.8 million. For 2023, revenue was understated by $6.3 million and interest expense by $5.5 million. The largest cash effect is on the cash flow statement. Cash flow from operating activities was overstated by $163.0 million, and cash flow from financing activities was understated by the same amount. Management found a material weakness in internal control tied to this matter.
Tax misstatements
Management also found that Xencor understated research and experimental expenses that should have been capitalized for tax purposes under Section 174 of the Internal Revenue Code for 2023. It identified an uncertain tax position estimated at $5.6 million owed for 2023. A separate state tax misstatement understated state income tax expense by approximately $2.2 million, net of the federal benefit, for 2023. These amounts exclude interest and penalties.
At December 31, 2023, the uncertain tax position payable was understated by $7.7 million, income tax payable was understated by $0.1 million, and shareholders' equity was overstated by $7.8 million. A second material weakness is tied to this tax matter.
The auditor's notice and the cash claim
Xencor says the matters will have no impact on its cash, cash equivalents and marketable debt securities as reported in the earlier filings. That statement covers cash balances. The same filing puts the 2023 operating cash flow error at $163.0 million.
Under Item 4.02(b), the filing says RSM advised the company on February 7, 2024 that disclosure should be made and action taken to prevent future reliance on its February 28, 2024 reports on internal control and on the completed 2024 interim reviews. RSM has recalled those reports. The company asked RSM for a letter to the SEC stating whether RSM agrees with the company's statements, and that letter, dated February 13, 2025, is attached as Exhibit 7.1. The 8-K gives February 7, 2024 as the date of RSM's notice, although its own date of report is February 7, 2025, and it does not explain the difference.
What comes next
Xencor will file amendments to each prior filing with restated financial statements. The amendments will include plans to remediate the material weaknesses. The company intends to file them before its Form 10-K for the year ended December 31, 2024. Celia Eckert, General Counsel and Corporate Secretary, signed the 8-K for the Pasadena, California company. It says it does not expect a material impact on its future business or operations, but its internal review is ongoing. The company says that review may still identify further required changes to previously reported amounts or control findings.