XOMA CORPORATION 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 theSEC . 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 endedDecember 31, 2020 .
Overview
XOMA Corporation ("XOMA"), aDelaware 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
InApril 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
OnMarch 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 DenovoBiopharma . 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
OnApril 15, 2021 , we announced our portfolio of potential future milestone and royalty assets had increased with the addition of threeAffimed 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. OnMay 3, 2021 , we announced we earned a$0.5 million milestone fromJanssen 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 endedMarch 31, 2021 , as compared with those previously disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onMarch 10, 2021 . 37 Table of Contents
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 endedMarch 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 endedMarch 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
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
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 endedMarch 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
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 endedMarch 31, 2020 as a result of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act which was enacted onMarch 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 endedMarch 31, 2021 , we received$1.5 million in cash for our income tax receivable. We made no tax provision for the three months endedMarch 31, 2021 since we incurred net operating losses. We continue to maintain a full valuation allowance against our remaining net deferred tax assets. 39
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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 ChangeNet 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 endedMarch 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
Cash Used in Financing Activities
Net cash used in financing activities for the three months ended
Net cash used in financing activities for the three months endedMarch 31, 2020 of$1.1 million was primarily related to the$0.9 million in debt principal payments under theSilicon 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
InDecember 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 aboutApril 15, 2021 . As ofMarch 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 paidonApril 15, 2021 .
Public Offering of Depositary Shares
InApril 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 aboutJuly 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 . InMarch 2019 , we and SVB amended the Loan Agreement to extend the draw period fromMarch 31, 2019 toMarch 31, 2020 . Our draw period lapsed onMarch 31, 2020 with no further extension. In connection with the amendment inMarch 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 ofMarch 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
OnDecember 18, 2018 , we entered into an At The Market Issuance Sales Agreement (the "2018 ATM Agreement") withH.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. OnMarch 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 ofMarch 31, 2021 . As ofMarch 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 41 Table of Contents 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 inthe 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 endedDecember 31, 2020 , as filed with theSEC . There have been no material changes from the commitment and contingencies previously disclosed in our Annual Report on Form 10-K for the year endedDecember 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.
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