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OFFON

XOMA CORPORATION

(XOMA)
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XOMA : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/06/2021 | 08:37am EDT

Forward Looking Statements


This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended,
or the Exchange Act, and the Private Securities Litigation Reform Act of 1995,
which are subject to the "safe harbor" created by those sections.
Forward-looking statements are based on our management's beliefs and assumptions
and on information currently available to them. In some cases you can identify
forward-looking statements by words such as "may," "will," "should," "could,"
"would," "expects," "plans," "anticipates," "believes," "estimates," "projects,"
"predicts," "potential," "intend" and similar expressions intended to identify
forward-looking statements. Examples of these statements include, but are not
limited to, statements regarding: our future operating expenses, our future
losses, the success of our strategy as a royalty aggregator, extent to which our
issued and pending patents may protect our products and technology, the
potential of our existing product candidates to lead to the development of
commercial products, our ability to receive potential milestone or royalty
payments under license and collaboration agreements and the timing of receipt of
those payments, and the impact of the recent and evolving COVID-19 pandemic.
These statements are based on assumptions that may not prove accurate. Actual
results could differ materially from those anticipated due to certain risks
inherent in the biotechnology industry and for our licensees engaged in the
development of new products in a regulated market. Among other things: our
product candidates subject to our out-license agreements are still being
developed, and our licensees' may require substantial funds to continue
development which may not be available; we may not be successful in entering
into out-license agreements for our product candidates; if our therapeutic
product candidates do not receive regulatory approval, our third-party licensees
will not be able to manufacture and market them; products or technologies of
other companies may render some or all of our product candidates noncompetitive
or obsolete; we do not know whether there will be, or will continue to be, a
viable market for the products in which we have an ownership or royalty
interest; even once approved, a product may be subject to additional testing or
significant marketing restrictions, its approval may be withdrawn or it may be
voluntarily taken off the market; we and our licensees are subject to various
state and federal healthcare related laws and regulations that may impact the
commercialization of our product candidates and could subject us to significant
fines and penalties; and certain of our technologies are in-licensed from third
parties, so our capabilities using them are restricted and subject to additional
risks. These and other risks, including those related to current economic and
financial market conditions, are contained principally in Part II, Item 1A of
this Quarterly Report on Form 10-Q and our other filings with the SEC. You
should not place undue reliance on these forward-looking statements, which apply
only as of the date of this Quarterly Report on Form 10-Q. You should read this
Quarterly Report on Form 10-Q completely and with the understanding that our
actual future results may be materially different from those we expect. Except
as required by law, we assume no obligation to update these forward-looking
statements, whether as a result of new information, future events or otherwise.

The following discussion and analysis should be read in conjunction with the
unaudited financial statements and notes thereto included in Part I, Item 1 of
this Quarterly Report on Form 10-Q and with the audited consolidated financial
statements and related notes thereto included as part of our Annual Report on
Form 10-K for the year ended December 31, 2020.

Overview


XOMA Corporation ("XOMA"), a Delaware corporation, is a biotech royalty
aggregator. We have a sizable portfolio of economic rights to future potential
milestone and royalty payments associated with partnered pre-commercial
therapeutic candidates. Our portfolio was built through licensing our
proprietary products and platforms from our legacy discovery and development
business, combined with acquisitions of rights to future milestones and
royalties that we have made since our royalty aggregator business model was
implemented in 2017. Our drug royalty aggregator business is focused on early to
mid-stage clinical assets primarily in Phase 1 and 2 with blockbuster potential
licensed to large-cap partners. We expect that most of our future revenue will
be based on payments we may receive for milestones and royalties related to
these programs.

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Recent Business Developments

Public Offering of Depositary Shares

In April 2021, we closed a public offering of 1,600,000 depositary shares, each
representing a 1/1000th fractional interest in a share of our 8.375% Series B
cumulative, perpetual preferred stock ("Series B Preferred Stock") at the price
of $25.00 per depositary share. Total gross proceeds from the offering were
$40.0 million. Total offering costs of approximately $2.8 million were offset
against the proceeds from the sale of depositary shares, for net proceeds of
approximately $37.2 million.



Viracta Royalty Purchase Agreement


On March 22, 2021, we entered into a royalty purchase agreement (the "Viracta
Royalty Purchase Agreement") with Viracta Therapeutics, Inc. ("Viracta"). Under
the Viracta Royalty Purchase Agreement, we purchased from Viracta the right to
receive future royalties, milestones, and other payments related to two clinical
stage drug candidates. The first candidate, DAY101 (pan-RAF kinase inhibitor),
is being developed by Day One Biopharmaceuticals, and the second candidate,
vosaroxin (topoisomerase II inhibitor), is being developed by Denovo
Biopharma. Under the terms of the Viracta Royalty Purchase Agreement, we paid
Viracta $13.5 million upon closing of the transaction. Under the Viracta Royalty
Purchase Agreement, we acquired the right to receive (i) royalties on potential
sales related to DAY101, if approved, up to $54.0 million in potential
milestones, and other payments related to DAY101 excluding up to $20.0 million
consideration retained by Viracta; and (ii) royalties on potential sales related
to vosaroxin, if approved, and up to $57.0 million in potential regulatory and
commercial milestones, subject to certain payment provisions to a third party.



Portfolio Updates


On April 15, 2021, we announced our portfolio of potential future milestone and
royalty assets had increased with the addition of three Affimed N.V. innate cell
engager programs ("ICE"). We are eligible to receive royalty payments on future
commercial sales of each of the three ICE molecules and milestones for each
program achieving marketing approval.

On May 3, 2021, we announced we earned a $0.5 million milestone from Janssen
Biotech, Inc. (Janssen), as a result of the first patient dosed in a Phase 3
clinical trial evaluating one of Janssen's biologic assets, cetrelimab.



COVID-19


The COVID-19 pandemic continues to pose risks to our business as clinical trials
industry-wide have slowed. Our business is dependent on the continued
development and commercialization efforts of our licensees and our royalty
agreement counterparties and their licensees. We have been monitoring and
continue to monitor our portfolio programs for potential delays in underlying
research programs and elections of our partners to continue or cease
development. Delays in clinical trials and underlying research programs may lead
to delayed revenue from milestones from our licensees and royalty agreement
counterparties or, if certain research programs are discontinued, we may
recognize impairment charges for our royalty receivables. COVID-19, the related
variants, and the timing of vaccine distribution may impact our underlying
programs in a variety of ways which are unknown in length and scope at this
time.



Critical Accounting Policies


Critical accounting policies are those that require significant judgment and/or
estimates by management at the time that the financial statements are prepared
such that materially different results might have been reported if other
assumptions had been made. We consider certain accounting policies including
those related to legal contingencies, revenue recognition under units-of-revenue
method and stock-based compensation to be critical policies. There have been no
significant changes in our critical accounting policies during the three months
ended March 31, 2021, as compared with those previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on
March 10, 2021.

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Our significant accounting policies are included in "Part I - Item 1 - Condensed Consolidated Financial Statements - Note 2 - Basis of Presentation and Significant Accounting Policies."

Results of Operations

Revenues


Total revenues for the three months ended March 31, 2021 and 2020, were as
follows (in thousands):




                                                       Three Months Ended
                                                           March 31,
                                                      2021           2020       Change
Revenue from contracts with customers               $      19      $     500    $ (481)
Revenue recognized under units-of-revenue method          356            304         52
Total revenues                                      $     375      $     804    $ (429)



Revenue from Contracts with Customers


Revenue from contracts with customers includes upfront fees, milestone payments
and royalties related to the out-licensing of our product candidates and
technologies. The decrease for the three months ended March 31, 2021, as
compared to the same period in 2020, was primarily due to $0.5 million in
revenue recognized in the first quarter of 2020 related to a milestone event
under our license agreement with Compugen.

The generation of future revenues related to licenses, milestones, and royalties
is dependent on the achievement of milestones or product sales by our existing
licensees. Due to the impact of COVID-19 on clinical trial activities of our
licensees, potential milestone payments may be delayed.

Revenue recognized under units-of-revenue method


Revenues recognized under the units-of-revenue method include the amortization
of unearned revenue from the sale of royalty interests to HealthCare Royalty
Partners II, L.P ("HCRP") in 2016. The increase in revenues for the three months
ended March 31, 2021, as compared to the same period in 2020, was primarily due
to the increase in sales of products underlying the agreements with HCRP.

Research and Development Expenses

Research and development ("R&D") expenses were $61,000 for the three months ended March 31, 2021, which was consistent with $62,000 for the same period in 2020.

We do not expect to incur substantial R&D expenses in 2021 due to the focus on our royalty aggregator business model.

General and Administrative Expenses


General and administrative ("G&A") expenses include salaries and related
personnel costs, professional fees, and facilities costs. G&A expenses were $6.7
million for the three months ended March 31, 2021, compared with $6.4 million
for the same period in 2020. The increase of $0.3 million for the three months
ended March 31, 2021, as compared to the same periods of 2020, was primarily due
to a $1.4 million increase in salary and related expenses (including an increase
of $1.1 million in non-cash stock compensation expense) and $0.3 million
increase in consulting and deal costs, partially offset by a $1.4 million
decrease in bad debt expense.



To support our royalty aggregator business model, we engage third parties to
assist in our evaluation of potential acquisitions of milestone and royalty
streams. While we expect our personnel related costs to be comparable in 2021
with

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2020, consulting expenses may increase in response to an increase in the volume of acquisition targets evaluated or completed.



Other Income (Expense)

Interest Expense

Amortization of debt issuance costs and discounts are included in interest expense. Interest expense is shown below for the three months ended March 31, 2021 and 2020 (in thousands):




                             Three Months Ended
                                 March 31,
                            2021           2020       Change
SVB loan                  $     238      $     383    $ (145)
Novartis note                    51            158      (107)
Other                             -              1        (1)
Total interest expense    $     289      $     542    $ (253)



The decrease in interest expense for the three months ended March 31, 2021 as
compared with the same period of 2020 is primarily due to lower interest rates
and decreased loan balances. If market interest rates increase in the near term,
or if we elect to obtain additional financing, our interest expense may
increase.

Other Income (Expense), Net

The following table shows the activity in other income (expense), net for the three months ended March 31, 2021 and 2020 (in thousands):




                                               Three Months Ended
                                                   March 31,
                                                2021         2020      Change
Other expense, net
Change in fair value of equity securities    $    (672)     $ (273)    $ (399)
Investment income                                    10         147      (137)
Other                                                 5           -          5
Total other expense, net                     $    (657)     $ (126)    $ (531)




We own equity securities consisting of shares of Rezolute's common stock which
are remeasured at fair value at each reporting period. During the three months
ended March 31, 2021 and 2020 we remeasured the fair value of the equity
securities and recognized losses of $0.7 million and losses of $0.3 million,
respectively. Investment income decreased during the three months ended March
31, 2021 as compared to the three months ended March 31, 2020 due to decreased
interest rates received on our cash balances.

Provision for Income Taxes


We recorded an income tax benefit of $1.5 million for the three months ended
March 31, 2020 as a result of the Coronavirus Aid, Relief, and Economic Security
("CARES") Act which was enacted on March 27, 2020. The CARES Act includes a
five-year net operating loss ("NOL") carryback provision which enabled us to
recognize the tax benefits on the carry back of our net operating losses from
2018 to offset income in 2017. During the three months ended March 31, 2021, we
received $1.5 million in cash for our income tax receivable. We made no tax
provision for the three months ended March 31, 2021 since we incurred net
operating losses. We continue to maintain a full valuation allowance against our
remaining net deferred tax assets.

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Table of Contents

Liquidity and Capital Resources

The following table summarizes our cash, working capital and cash flow activities for each of the periods presented (in thousands):




                    March 31,       December 31,
                       2021             2020           Change
Cash               $     67,808    $       84,222    $ (16,414)
Working capital    $     57,143    $       75,763    $ (18,620)





                                                          Three Months Ended March 31,
                                                             2021                 2020           Change
Net cash used in operating activities                  $          (914)      $      (2,280)    $    1,366
Net cash used in investing activities                          (13,500)                   -      (13,500)
Net cash used in financing activities                           (2,000)    
        (1,096)         (904)
Net decrease in cash                                   $       (16,414)      $      (3,376)    $ (13,038)



Cash Used in Operating Activities

Net cash used in operating activities for the three months ended March 31, 2021
of $0.9 million was primarily due to the $7.4 million net loss incurred,
partially offset by stock-based compensation expense of $2.9 million, change in
assets and liabilities of $2.6 million which includes $1.5 million in cash
refund for income tax receivables and a change in fair value of equity
securities of $0.7 million. The net cash used in operating activities in 2020 of
$2.3 million was primarily due to the $4.8 million net loss incurred, partially
offset by stock-based compensation expense of $1.8 million.

Cash Used in Investing Activities

Net cash used in investing activities for the three months ended March 31, 2021 of $13.5 million was due to the $13.5 million payment pursuant to Viracta Royalty Purchase Agreement executed in March 2021.

Cash Used in Financing Activities

Net cash used in financing activities for the three months ended March 31, 2021 of $2.0 million was primarily related to principal payments of debt.

Net cash used in financing activities for the three months ended March 31, 2020
of $1.1 million was primarily related to the $0.9 million in debt principal
payments under the Silicon Valley Bank ("SVB") loan agreements and $0.2 million
payment of issuance costs related to the rights offering completed in 2019.

Public Offering of Series A Preferred Shares




In December 2020, we sold 984,000 shares of 8.625% Series A cumulative,
perpetual preferred stock (the "Series A Preferred Stock") at the price of
$25.00 per share, through a public offering for aggregate gross proceeds of
$24.6 million. Total offering costs of $2.0 million were offset against the
proceeds from the sale of Series A Preferred Stock, for net proceeds of $22.6
million. Holders of our Series A Preferred Stock are entitled to receive, when
and as declared by our Board of Directors, out of funds legally available for
the payment of dividends, cumulative cash dividends at the rate of 8.625% of the
$25.00 liquidation preference per year (equivalent to $2.15625 per share of
Series A Preferred Stock per year). Dividends on the Series A Preferred Stock
will accumulate and be cumulative from, and including, the date of original
issue by us of the Series A Preferred Stock. Dividends will be payable in
arrears on or about the 15th day of January, April, July and October beginning
on or about April 15, 2021. As of March 31, 2021, we held restricted cash of
$2.1 million in a segregated account that may only be used to pay dividends
on
the Series A Preferred Stock.



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On March 17, 2021, our Board of Directors declared the initial quarterly
dividend to be paid in cash at a rate of $0.71875 per share to holders of record
of the Series A Preferred Stock as of April 2, 2021. The dividend was paid
on
April 15, 2021.




Public Offering of Depositary Shares

In April 2021, we closed a public offering of 1,600,000 depositary shares, each
representing a 1/1000th fractional interest in a share of our Series B Preferred
Stock at the price of $25.00 per depositary share. Total gross proceeds from the
offering were $40.0 million. Total offering costs of approximately $2.8 million
were offset against the proceeds from the sale of depositary shares, for net
proceeds of approximately $37.2 million.



Holders of depositary shares representing interests in the Series B Preferred
Stock are entitled to receive, when and as declared by our Board of Directors,
out of funds legally available for the payment of dividends, cumulative cash
dividends at the rate of 8.375% of the $25,000 liquidation preference per share
of Series B Preferred Stock ($25.00 per depositary share) per year (equivalent
to $2,093.75 per year or $2.09375 per depositary share). Dividends on the Series
B Preferred Stock will accumulate and be cumulative from, and including, the
date of original issue by us of the Series B Preferred Stock. Dividends will be
payable in arrears on or about the 15th day of January, April, July and October
beginning on or about July 15, 2021. Of the proceeds, $3.4 million is held as
restricted cash in a segregated account that may only be used to pay dividends
on the Series B Preferred Stock underlying the depositary shares.



Silicon Valley Bank Loan Agreement


Under our Loan Agreement with SVB, upon our request, SVB made advances available
to us up to $20.0 million. In March 2019, we and SVB amended the Loan Agreement
to extend the draw period from March 31, 2019 to March 31, 2020. Our draw period
lapsed on March 31, 2020 with no further extension. In connection with the
amendment in March 2019, we issued a second warrant to SVB which is exercisable
in whole or in part for up to an aggregate of 4,845 shares of common stock with
an exercise price of $14.71 per share. The warrant may be exercised on a
cashless basis and is exercisable within 10 years from the date of issuance or
upon the consummation of certain acquisitions of XOMA. As of March 31, 2021, we
had an outstanding principal balance of $10.1 million under the Loan Agreement,
and a net carrying value of $9.8 million, $7.2 million of which was classified
as current portion of long-term debt.

2018 ATM Agreement




On December 18, 2018, we entered into an At The Market Issuance Sales Agreement
(the "2018 ATM Agreement") with H.C. Wainwright & Co., LLC ("HCW"), under which
we may offer and sell from time to time at our sole discretion shares of our
common stock through HCW as our sales agent, in an aggregate amount not to
exceed $30.0 million. HCW may sell the shares by any method permitted by law
deemed to be an "at the market" offering as defined in Rule 415 of the
Securities Act, and will use its commercially reasonable efforts consistent with
its normal trading and sales practices to sell the shares up to the amount
specified. We are required to pay HCW a commission of up to 3% of the gross
proceeds of any shares of common stock sold under the 2018 ATM Agreement. On
March 10, 2021, we amended the 2018 ATM Agreement with HCW to increase the
aggregate amount of shares of our common stock that we could sell through HCW as
our sales agent to $50.0 million. We have not sold any shares of common stock
under the 2018 ATM Agreement.

                                      ***
We have incurred significant operating losses since our inception and have an
accumulated deficit of $1.2 billion as of March 31, 2021. As of March 31, 2021,
we had $67.8 million and $2.1 million in unrestricted and restricted cash, which
we anticipate will enable us to maintain our operations for a period of at least
12 months following the filing date of this report.

We have taken and continue to take steps to manage our resources by reducing
and/or deferring certain discretionary expenditures to mitigate the adverse
impact of the COVID-19 pandemic. Future impacts of COVID-19, related variants,
and vaccine distribution may require further actions to improve our cash
position, which may include

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reducing or delaying acquisitions of additional royalty and milestone rights or
obtaining additional funds through debt arrangements, the 2018 ATM Agreement, or
other equity issuances. Our ability to raise additional capital in the equity
and debt markets, should we choose to do so, is dependent on a number of
factors, including, but not limited to, the market demand for our common stock,
which itself is subject to a number of development and business risks and
uncertainties, our creditworthiness and the uncertainty that we would be able to
raise such additional capital at a price or on terms that are favorable to us.
In addition, our ability to raise additional funds may be adversely impacted by
deteriorating global economic conditions and the recent disruptions to and
volatility in the credit and financial markets in the United States and
worldwide resulting from the ongoing COVID-19 pandemic.

Changes in Commitments and Contingencies


Our commitments and contingencies were reported in our Annual Report on
Form 10-K for the year ended December 31, 2020, as filed with the SEC. There
have been no material changes from the commitment and contingencies previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2020.

Off-balance Sheet Arrangements

We have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2021 11,3 M - -
Net income 2021 -14,8 M - -
Net Debt 2021 - - -
P/E ratio 2021 -23,9x
Yield 2021 -
Capitalization 346 M 346 M -
Capi. / Sales 2021 30,5x
Capi. / Sales 2022 24,4x
Nbr of Employees 10
Free-Float 94,5%
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NameTitle
James R. Neal Chief Executive Officer & Director
Thomas Burns Chief Financial Officer & Senior VP-Finance
W. Denman van Ness Chairman
Jack L. Wyszomierski Independent Director
Joseph M. Limber Independent Director
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