Exhibit 99.1
Index
to Consolidated Financial Statements
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated
Balance Sheets
|
F-3
|
|
|
Consolidated
Statements of Operations
|
F-4
|
|
|
Consolidated
Statements of Shareholders’ Equity (Net Capital Deficiency)
|
F-5
|
|
|
Consolidated
Statements of Cash Flows
|
F-6
|
|
|
Notes
to the Consolidated Financial Statements
|
F-7
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Shareholders of XOMA Ltd.:
We have
audited the accompanying consolidated balance sheets of XOMA Ltd. as of December
31, 2008 and 2007, and the related consolidated statements of operations,
shareholders’ equity (net capital deficiency), and cash flows for each of the
three years in the period ended December 31, 2008. These consolidated financial
statements are the responsibility of XOMA Ltd.’s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Since the
date of completion of our audit of the accompanying consolidated financial
statements and initial issuance of our report thereon dated March 10, 2009,
which report contained an explanatory paragraph regarding the Company’s ability
to continue as a going concern, the Company, as discussed in Note 10, has
satisfied all obligations under its Goldman Sachs term loan and raised funds in
equity financings. Therefore, the conditions that raised substantial doubt about
whether the Company will continue as a going concern no longer
exist.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of XOMA Ltd. at December 31,
2008 and 2007, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2008, in conformity with U.S.
generally accepted accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), XOMA Ltd.’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 10, 2009 expressed an
unqualified opinion thereon.
Palo
Alto, California
March 10, 2009,
except for the second to fifth paragraphs of Note 1
and Note 10, as to which the
date is December 22,
2009
XOMA
Ltd.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
9,513 |
|
|
$ |
22,500 |
|
Short-term
investments
|
|
|
1,299 |
|
|
|
16,067 |
|
Restricted
cash
|
|
|
9,545 |
|
|
|
6,019 |
|
Receivables
|
|
|
16,686 |
|
|
|
12,135 |
|
Prepaid
expenses and other current assets
|
|
|
1,296 |
|
|
|
1,113 |
|
Debt
issuance costs
|
|
|
365 |
|
|
|
254 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
38,704 |
|
|
|
58,088 |
|
Property
and equipment, net
|
|
|
26,843 |
|
|
|
25,603 |
|
Debt
issuance costs—long-term
|
|
|
1,224 |
|
|
|
722 |
|
Other
assets
|
|
|
402 |
|
|
|
402 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
67,173 |
|
|
$ |
84,815 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
(NET
CAPITAL DEFICIENCY)
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
9,977 |
|
|
$ |
6,995 |
|
Accrued
liabilities
|
|
|
4,438 |
|
|
|
7,710 |
|
Accrued
interest
|
|
|
1,588 |
|
|
|
878 |
|
Deferred
revenue
|
|
|
9,105 |
|
|
|
8,017 |
|
Other
current liabilities
|
|
|
1,884 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
26,992 |
|
|
|
23,600 |
|
Deferred
revenue—long-term
|
|
|
8,108 |
|
|
|
10,047 |
|
Interest
bearing obligation—long-term
|
|
|
63,274 |
|
|
|
50,850 |
|
Other
long-term liabilities
|
|
|
200 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
98,574 |
|
|
|
84,497 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 5)
|
|
|
|
|
|
|
|
|
Shareholders’
equity (net capital deficiency):
|
|
|
|
|
|
|
|
|
Preference
shares, $0.05 par value, 1,000,000 shares authorized
|
|
|
|
|
|
|
|
|
Series
A, 210,000 designated, no shares issued and outstanding at
December 31, 2008 and 2007
|
|
|
— |
|
|
|
— |
|
Series
B, 8,000 designated, 2,959 shares issued and outstanding at
December 31, 2008 and 2007 (aggregate liquidation preference of $29.6
million)
|
|
|
1 |
|
|
|
1 |
|
Common
shares, $0.0005 par value, 210,000,000 shares authorized, 140,467,529 and
131,957,774 shares outstanding at December 31, 2008 and 2007,
respectively
|
|
|
70 |
|
|
|
66 |
|
Additional
paid-in capital
|
|
|
753,634 |
|
|
|
740,119 |
|
Accumulated
comprehensive loss
|
|
|
(2 |
) |
|
|
(9 |
) |
Accumulated
deficit
|
|
|
(785,104 |
) |
|
|
(739,859 |
) |
Total
shareholders’ equity (net capital deficiency)
|
|
|
(31,401 |
) |
|
|
318 |
|
Total
liabilities and shareholders’ equity (net capital deficiency)
|
|
$ |
67,173 |
|
|
$ |
84,815 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
XOMA
Ltd.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
License
and collaborative fees
|
|
$ |
16,366 |
|
|
$ |
36,460 |
|
|
$ |
2,846 |
|
Contract
and other revenue
|
|
|
30,473 |
|
|
|
31,057 |
|
|
|
16,329 |
|
Royalties
|
|
|
21,148 |
|
|
|
16,735 |
|
|
|
10,323 |
|
Total
revenues
|
|
|
67,987 |
|
|
|
84,252 |
|
|
|
29,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development (including contract related of $20,828, $17,032, and
$10,909, respectively, for the years ended December 31, 2008,
2007, and 2006)
|
|
|
82,576 |
|
|
|
66,215 |
|
|
|
52,094 |
|
General
and administrative
|
|
|
24,145 |
|
|
|
20,581 |
|
|
|
18,088 |
|
Total
operating costs and expenses
|
|
|
106,721 |
|
|
|
86,796 |
|
|
|
70,182 |
|
Loss
from operations
|
|
|
(38,734 |
) |
|
|
(2,544 |
) |
|
|
(40,684 |
) |
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and interest income
|
|
|
859 |
|
|
|
1,866 |
|
|
|
1,675 |
|
Interest
expense
|
|
|
(7,654 |
) |
|
|
(11,585 |
) |
|
|
(12,932 |
) |
Other
income (expense)
|
|
|
(99 |
) |
|
|
(63 |
) |
|
|
100 |
|
Net
loss before taxes
|
|
|
(45,628 |
) |
|
|
(12,326 |
) |
|
|
(51,841 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
383 |
|
|
|
— |
|
|
|
— |
|
Net
loss
|
|
$ |
(45,245 |
) |
|
$ |
(12,326 |
) |
|
$ |
(51,841 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
$ |
(0.34 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.54 |
) |
Shares
used in computing basic and diluted net loss per common share
|
|
|
132,928 |
|
|
|
127,946 |
|
|
|
95,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
XOMA
Ltd.
CONSOLIDATED
STATEMENT OF SHAREHOLDERS’ EQUITY
(NET
CAPITAL DEFICIENCY)
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Shares
|
|
|
Common
Shares
|
|
|
Paid-In
Capital
|
|
|
Accumulated
Comprehensive
Income
(Loss)
|
|
|
Accumulated
Deficit
|
|
|
Total
Shareholders’
Equity
(Net
Capital
Deficiency)
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Balance,
December 31, 2005
|
|
|
3 |
|
|
$ |
1 |
|
|
|
86,313 |
|
|
$ |
43 |
|
|
$ |
655,041 |
|
|
$ |
(66 |
) |
|
$ |
(675,692 |
) |
|
$ |
(20,673 |
) |
Exercise
of share options, contributions to 401(k) and incentive
plans
|
|
|
— |
|
|
|
— |
|
|
|
879 |
|
|
|
1 |
|
|
|
1,489 |
|
|
|
— |
|
|
|
— |
|
|
|
1,490 |
|
Share-based
compensation expense under SFAS 123R
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
978 |
|
|
|
— |
|
|
|
— |
|
|
|
978 |
|
Conversion
of convertible debt
|
|
|
— |
|
|
|
— |
|
|
|
18,262 |
|
|
|
9 |
|
|
|
31,807 |
|
|
|
— |
|
|
|
— |
|
|
|
31,816 |
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized loss on investments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
57 |
|
|
|
— |
|
|
|
57 |
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(51,841 |
) |
|
|
(51,841 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,784 |
) |
Balance,
December 31, 2006
|
|
|
3 |
|
|
|
1 |
|
|
|
105,454 |
|
|
|
53 |
|
|
|
689,315 |
|
|
|
(9 |
) |
|
|
(727,533 |
) |
|
|
(38,173 |
) |
Exercise
of share options, contributions to 401(k) and incentive
plans
|
|
|
— |
|
|
|
— |
|
|
|
864 |
|
|
|
— |
|
|
|
1,976 |
|
|
|
— |
|
|
|
— |
|
|
|
1,976 |
|
Share-based
compensation expense under SFAS 123R
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,858 |
|
|
|
— |
|
|
|
— |
|
|
|
2,858 |
|
Conversion
of convertible debt
|
|
|
— |
|
|
|
— |
|
|
|
25,640 |
|
|
|
13 |
|
|
|
45,970 |
|
|
|
— |
|
|
|
— |
|
|
|
45,983 |
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(12,326 |
) |
|
|
(12,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(12,326 |
) |
Balance,
December 31, 2007
|
|
|
3 |
|
|
|
1 |
|
|
|
131,958 |
|
|
|
66 |
|
|
|
740,119 |
|
|
|
(9 |
) |
|
|
(739,859 |
) |
|
|
318 |
|
Exercise
of share options, contributions to 401(k) and incentive
plans
|
|
|
— |
|
|
|
— |
|
|
|
577 |
|
|
|
— |
|
|
|
1,389 |
|
|
|
— |
|
|
|
— |
|
|
|
1,389 |
|
Share-based
compensation expense under SFAS 123R
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,934 |
|
|
|
— |
|
|
|
— |
|
|
|
4,934 |
|
Sale
of common shares
|
|
|
— |
|
|
|
— |
|
|
|
7,932 |
|
|
|
4 |
|
|
|
7,192 |
|
|
|
— |
|
|
|
— |
|
|
|
7,196 |
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized loss on investments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
7 |
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(45,245 |
) |
|
|
(45,245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(45,238 |
) |
Balance,
December 31, 2008
|
|
|
3 |
|
|
$ |
1 |
|
|
|
140,467 |
|
|
$ |
70 |
|
|
$ |
753,634 |
|
|
$ |
(2 |
) |
|
$ |
(785,104 |
) |
|
$ |
(31,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
XOMA
Ltd.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(45,245 |
) |
|
$ |
(12,326 |
) |
|
$ |
(51,841 |
) |
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
6,721 |
|
|
|
6,155 |
|
|
|
5,117 |
|
Common
shares contribution to 401(k) and management incentive
plans
|
|
|
1,008 |
|
|
|
1,321 |
|
|
|
1,088 |
|
Share-based
compensation expense
|
|
|
4,934 |
|
|
|
2,858 |
|
|
|
978 |
|
Accrued
interest on convertible notes and other interest bearing
obligations
|
|
|
1,921 |
|
|
|
408 |
|
|
|
1,159 |
|
Revaluation
of embedded derivative
|
|
|
— |
|
|
|
6,101 |
|
|
|
6,945 |
|
Interest
paid on conversion of convertible debt
|
|
|
— |
|
|
|
(5,172 |
) |
|
|
— |
|
Amortization
of discount, premium and debt issuance costs of
long-term
and convertible debt
|
|
|
1,378 |
|
|
|
584 |
|
|
|
1,035 |
|
Amortization
of premiums on short-term investments
|
|
|
20 |
|
|
|
(5 |
) |
|
|
18 |
|
Loss
on disposal/retirement of property and equipment
|
|
|
99 |
|
|
|
146 |
|
|
|
11 |
|
Other
non-cash adjustments
|
|
|
(20 |
) |
|
|
(7 |
) |
|
|
(3 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(4,551 |
) |
|
|
(52 |
) |
|
|
(6,706 |
) |
Prepaid
expenses and other current assets
|
|
|
(183 |
) |
|
|
(52 |
) |
|
|
(86 |
) |
Other
assets
|
|
|
— |
|
|
|
55 |
|
|
|
— |
|
Accounts
payable
|
|
|
2,982 |
|
|
|
2,809 |
|
|
|
(1,462 |
) |
Accrued
liabilities
|
|
|
(3,272 |
) |
|
|
624 |
|
|
|
1,369 |
|
Deferred
revenue
|
|
|
(851 |
) |
|
|
1,096 |
|
|
|
9,108 |
|
Other
liabilities
|
|
|
2,084 |
|
|
|
— |
|
|
|
— |
|
Net
cash (used in) provided by operating activities
|
|
|
(32,975 |
) |
|
|
4,543 |
|
|
|
(33,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sales of investments
|
|
|
9,875 |
|
|
|
31,480 |
|
|
|
14,950 |
|
Proceeds
from maturities of investments
|
|
|
8,099 |
|
|
|
3,840 |
|
|
|
17,834 |
|
Purchase
of investments
|
|
|
(3,199 |
) |
|
|
(32,994 |
) |
|
|
(28,391 |
) |
Transfer
of restricted cash
|
|
|
(3,526 |
) |
|
|
(1,689 |
) |
|
|
(4,330 |
) |
Purchase
of property and equipment
|
|
|
(8,060 |
) |
|
|
(9,469 |
) |
|
|
(8,506 |
) |
Net
cash provided by (used in) investing activities
|
|
|
3,189 |
|
|
|
(8,832 |
) |
|
|
(8,443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
|
55,000 |
|
|
|
2,840 |
|
|
|
36,541 |
|
Principal
payments of long-term debt
|
|
|
(45,779 |
) |
|
|
(4,707 |
) |
|
|
— |
|
Proceeds
from issuance of convertible notes
|
|
|
— |
|
|
|
— |
|
|
|
11,969 |
|
Proceeds
from issuance of common shares
|
|
|
7,578 |
|
|
|
654 |
|
|
|
401 |
|
Net
cash provided by (used in) financing activities
|
|
|
16,799 |
|
|
|
(1,213 |
) |
|
|
48,911 |
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(12,987 |
) |
|
|
(5,502 |
) |
|
|
7,198 |
|
Cash
and cash equivalents at the beginning of the period
|
|
|
22,500 |
|
|
|
28,002 |
|
|
|
20,804 |
|
Cash
and cash equivalents at the end of the period
|
|
$ |
9,513 |
|
|
$ |
22,500 |
|
|
$ |
28,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
XOMA
Ltd.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Business
and Summary of Significant Accounting
Policies
|
Business
XOMA Ltd.
(“XOMA” or the “Company”), a Bermuda company, is a biopharmaceutical company
that discovers, develops and manufactures therapeutic antibodies and other
agents designed to treat inflammatory, autoimmune, infectious and oncological
diseases. The Company’s products are presently in various stages of development
and most are subject to regulatory approval before they can be commercially
launched. The Company receives royalties from Genentech, Inc. (“Genentech”) on
two approved products, RAPTIVA®, for
the treatment of moderate-to-severe plaque psoriasis, and LUCENTIS®, for
the treatment of neovascular (wet) age-related macular degeneration. XOMA also
receives royalties from UCB Celltech, a branch of UCB S.A. (“UCB”) on sales of
CIMZIA® in
the United States and Switzerland for the treatment of Crohn’s disease. XOMA’s
pipeline includes both proprietary products and collaborative programs at
various stages of preclinical and clinical development.
Basis
of Presentation
The
consolidated financial statements as of December 31, 2008 were prepared
assuming that the Company would continue as a going concern, which was
contingent upon, among other things, the Company's ability to repay or
restructure the terms of its term loan facility with Goldman Sachs Specialty
Lending Holdings, Inc. ("Goldman Sachs"). The Company was not in
compliance with the requirements of the relevant provisions of this loan
facility in 2009 prior to the repayment of the debt, due to the cessation of
royalties from sales of RAPTIVA® related to its
market withdrawal in the first half of 2009.
In
September of 2009, the Company fully repaid its term loan facility with Goldman
Sachs as described in Note 10:
Subsequent Events- Debt Repayment and Financings in 2009. The
Company estimates that, based on cash and cash equivalents on hand at
September 30, 2009 of $27.7 million and anticipated spending levels, revenues,
collaborator funding, government funding and other sources of funding the
Company believes to be available, it has sufficient cash resources to meet its
anticipated net cash needs into 2011. If adequate funds are not available in the
first quarter of 2010, the Company has developed contingency plans that may
require the Company to further delay, reduce the scope of, or eliminate one or
more of its development programs. In addition, the Company may be required to
further reduce personnel-related costs and other discretionary expenditures that
are within the Company’s control.
Liquidity
and Financial Condition
The
Company has incurred significant operating losses and negative cash flows from
operations since its inception. As of December 31, 2008, the Company had cash,
cash equivalents and short-term investments of $10.8 million, restricted cash of
$9.5 million and working capital of $11.7 million.
The
Company may be required to raise additional funds through public or private
financings, strategic relationships, or other arrangements. The Company cannot
assure that the funding, if needed, will be available on terms attractive to it,
or at all. Furthermore, any additional equity financings may be dilutive to
shareholders and debt financing, if available, may involve restrictive
covenants. The Company’s failure to raise capital as and when needed could have
a negative impact on its financial condition and its ability to pursue business
strategies.
Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation.
Use
of Estimates and Reclassifications
The
preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures. On an
on-going basis, management evaluates its estimates, including those related to
revenue recognition, research and development expense, long-lived assets and
stock-based compensation. The Company bases its estimates on historical
experience and on various other market specific and other relevant assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ significantly from these estimates.
In the
third quarter of 2008, the National Institutes of Health (“NIH”) completed an
audit of the Company’s 2007 actual data and developed billing rates for the
period from January of 2007 to June of 2009 to be used for all of the Company’s
contracts with the National Institute of Allergy and Infectious Diseases
(“NIAID”), a part of the NIH, including Contract No.
HHSN26620060008C/N01-A1-60008l (“NIAID 2”). While the audited NIH rates are
considered final for 2007 billings, these NIH rates are considered provisional
for the period from January of 2008 to June of 2009 and thus are subject to
future audits at the discretion of NIAID’s contracting office. In September of
2008, XOMA retroactively applied these NIH rates to the invoices from 2007
through the third quarter of 2008 resulting in an adjustment to decrease revenue
by $2.7 million. The adjustment increased the Company’s loss from operations and
net loss for the year ended December 31, 2008 by $2.7 million. The
adjustment also increased basic and diluted net loss per common share by $0.02
for the year ended December 31, 2008.
Prior to
the NIH’s audit, the Company’s billings were based on provisional fringe,
overhead and general and administrative rates supported by XOMA’s 2005 actual
data. As the NIH audit only covered 2007 actual data, which differs
significantly from 2006 actual data primarily due to a 22% increase in headcount
from 2006 to 2007, management has determined that the original provisional rates
are more reflective of 2006 actual data than 2007 actual data. Based on this
understanding, the parties agreed to not adjust the 2006 billings with the
provision that those billings are subject to future NIH audit at the discretion
of the NIAID contracting office.
Certain
reclassifications of prior period amounts have been made to our consolidated
statements of cash flows to conform to the current period
presentation.
Concentration
of Risk
Cash
equivalents, short-term investments, restricted cash and receivables are
financial instruments, which potentially subject the Company to concentrations
of credit risk. The Company maintains money market funds and short-term
investments that were previously thought to bear a minimal risk. Recent
volatility in the financial markets has created liquidity problems in these
types of investments, and money market fund investors, including the Company,
have recently been unable to retrieve the full amount of funds, even in
highly-rated liquid money market accounts, upon maturity. As of
December 31, 2008, the full amount of matured money market fund investments
had been received by the Company.
The
Company has not experienced any significant credit losses and does not generally
require collateral on receivables. In 2008, three customers represented 31%, 30%
and 20% of total revenues and as of December 31, 2008, there were billed
receivables of $14.7 million outstanding from these three customers and one
additional customer representing 33%, 28%, 16% and 15% of the accounts
receivable balance. In 2007, four customers represented 36%, 20%, 16% and 13% of
total revenues and as of December 31, 2007, there were billed and unbilled
receivables of $10.9 million outstanding from three of these customers
representing 42%, 31% and 26% of the accounts receivable balance. In 2006, two
customers represented 40% and 35% of total revenues and as of December 31,
2006, there were billed and unbilled receivables of $11.2 million outstanding
from these customers and one additional customer representing 45%, 26% and 13%
of the accounts receivable balance.
Significant
Accounting Policies
The
following policies are critical to an understanding of the Company’s financial
condition and results of operations because they require it to make estimates,
assumptions and judgments about matters that are inherently
uncertain.
Revenue
Recognition
Revenue
is generally recognized when the four basic criteria of revenue recognition are
met: (1) persuasive evidence of an arrangement exists; (2) delivery
has occurred or services have been rendered; (3) the fee is fixed and
determinable; and (4) collectibility is reasonably assured. Determination
of criteria (3) and (4) are based on management’s judgments regarding
the nature of the fee charged for products or services delivered and the
collectibility of those fees. Allowances are established for estimated
uncollectible amounts, if any.
The
Company recognizes revenue from its license and collaboration arrangements,
contract services, product sales and royalties. Revenue arrangements with
multiple elements are divided into separate units of accounting if certain
criteria are met, including whether the delivered element has stand-alone value
to the customer and whether there is objective and reliable evidence of the fair
value of the undelivered items. The consideration received is allocated among
the separate units based on their respective fair values and the applicable
revenue recognition criteria are applied to each of the separate units. Advance
payments received in excess of amounts earned are classified as deferred revenue
until earned.
License
and Collaborative Fees
Revenue
from non-refundable license, technology access or other payments under license
and collaborative agreements where the Company has a continuing obligation to
perform is recognized as revenue over the expected period of the continuing
performance obligation. The Company estimates the performance period at the
inception of the arrangement and reevaluates it each reporting period. This
reevaluation may shorten or lengthen the period over which the remaining revenue
is recognized. Changes to these estimates are recorded on a prospective
basis.
Milestone
payments under collaborative arrangements are recognized as revenue upon
completion of the milestone events, once confirmation is received from the third
party and collectibility is reasonably assured. This represents the culmination
of the earnings process because the Company has no future performance
obligations related to the payment. Milestone payments that require a continuing
performance obligation on the part of the Company are recognized over the
expected period of the continuing performance obligation. Amounts received in
advance are recorded as deferred revenue until the related milestone is
completed.
Contract
Revenue
Contract
revenue for research and development involves the Company providing research and
development for manufacturing processes for collaborative partners, biodefense
contracts or others. Revenue for these contracts is accounted for by a
proportional performance, or output based, method where performance is based on
estimated progress toward elements defined in the contract. The amount of
contract revenue and related costs recognized in each accounting period are
based on management’s estimates of the proportional performance during the
period toward elements defined in the contract. Adjustments to estimates based
on actual performance are recognized on a prospective basis and do not result in
reversal of revenues should the estimate to complete be extended.
Up-front
fees are recognized ratably over the expected benefit period under the
arrangement. Given the uncertainties of research and development collaborations,
significant judgment is required to determine the duration of the
arrangement.
Royalty
Revenue
Royalty
revenue and royalty receivables are generally recorded in the periods these
royalties are earned, in advance of collection. The royalty revenue and
receivables in these instances is based upon communication with collaborative
partners, historical information and forecasted sales trends. Under some of
XOMA’s agreements with licensees that include receipt of royalty revenue, the
Company does not have sufficient historical information to estimate royalty
revenues or receivables in the period that these royalties are earned. For these
contracts, the Company records royalty revenue upon receipt of a royalty
statement or cash.
Research
and Development
The
Company expenses research and development costs as incurred. Research and
development expenses consist of direct and research-related allocated overhead
costs such as facilities costs, salaries and related personnel costs and
material and supply costs. In addition, research and development expenses
include costs related to clinical trials to validate the Company’s testing
processes and procedures and related overhead expenses. Expenses resulting from
clinical trials are recorded when incurred based in part on estimates as to the
status of the various trials. From time to time, research and development
expenses may include up-front fees and milestones paid to collaborative partners
for the purchase of rights to in-process research and development. Such amounts
are expensed as incurred.
Long-Lived
Assets
In
accordance with Financial Accounting Standards Board (“FASB”) Statement of
Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” the Company records impairment
losses on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets.
Share-Based
Compensation
The
Company grants qualified and non-qualified share options, shares and other share
related awards under various plans to directors, officers, employees and other
individuals. To date, share-based compensation issued under these plans consists
of qualified and non-qualified incentive share options and shares. Share options
are granted at exercise prices of not less than the fair market value of the
Company’s common shares on the date of grant. Generally, share options granted
to employees fully vest four years from the grant date and expire ten years from
the date of the grant or three months from the date of termination of employment
(longer in case of death or certain retirements). Certain options granted to
directors fully vest on the date of grant and certain options may fully vest
upon a change of control of the Company. Additionally, the Company has an
Employee Share Purchase Plan (“ESPP”) that allows employees to purchase Company
shares at a purchase price equal to 95% of the closing price on the exercise
date.
On
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”), which requires the measurement and
recognition of compensation expense for all share-based payment awards made to
the Company’s employees and directors, including employee share options and
employee share purchases related to the ESPP, on estimated fair values. The
Company is using the modified prospective transition method. Under this method,
compensation cost recognized during the years ended December 31, 2008, 2007
and 2006, includes compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123 amortized
on a graded vesting basis over the options’ vesting period, and compensation
cost for all share-based payments granted subsequent to January 1, 2006,
based on the grant date fair value estimated in accordance with the provisions
of SFAS 123R amortized on a straight-line basis over the options’ vesting
period. As permitted by SFAS 123R under the modified prospective transition
method, the Company has not restated its financial results for prior periods to
reflect expensing of share-based compensation and therefore the results for the
years ended December 31, 2008, 2007 and 2006 are not comparable to earlier
years.
In
addition, the Company elected the “short-cut” method to establish its APIC pool
required under SFAS 123(R) for the year ended December 31, 2006, as
permitted by FASB Staff Position SFAS 123(R)-3, “Transition Election Related to
Accounting for the Tax Effects of Share Base Payment Awards.” In subsequent
periods, the APIC pool will be increased by tax benefits from share-based
compensation and decreased by tax deficiencies caused when the recorded
share-based compensation for book purposes exceeds the allowable tax deduction.
As of December 31, 2008, the Company had not recorded any adjustments to
the APIC pool due to its loss position and the balance has remained
zero.
The
following table shows total share-based compensation expense included in the
consolidated statements of operations for the years ended December 31,
2008, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$ |
2,307 |
|
|
$ |
1,005 |
|
|
$ |
468 |
|
General
and administrative
|
|
|
2,627 |
|
|
|
1,853 |
|
|
|
510 |
|
Total
share-based compensation expense
|
|
$ |
4,934 |
|
|
$ |
2,858 |
|
|
$ |
978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To
estimate the value of an award, the Company uses the Black-Scholes option
pricing model. This model requires inputs such as expected life, expected
volatility and risk-free interest rate. The forfeiture rate also impacts the
amount of aggregate compensation. These inputs are subjective and generally
require significant analysis and judgment to develop. While estimates of
expected life, volatility and forfeiture rate are derived primarily from the
Company’s historical data, the risk-free rate is based on the yield available on
U.S. Treasury zero-coupon issues.
The fair
value of share-based awards was estimated using the Black-Scholes model with the
following weighted average assumptions for the years ended December 31,
2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected
volatility
|
|
|
65 |
% |
|
|
67 |
% |
|
|
79 |
% |
Risk-free
interest rate
|
|
|
2.84 |
% |
|
|
4.22 |
% |
|
|
4.65 |
% |
Expected
life
|
|
5.4 years
|
|
|
5.3 years
|
|
|
5.3 years
|
|
Unvested
share activity for the year ended December 31, 2008 is summarized
below:
|
|
|
|
|
|
|
|
|
Unvested
Number
of
Shares
|
|
|
Weighted-
Average Grant-
Date Fair Value
|
|
Unvested
balance at December 31, 2007
|
|
|
5,846,721 |
|
|
$ |
2.75 |
|
Granted
|
|
|
11,475,750 |
|
|
|
1.98 |
|
Vested
|
|
|
(3,893,834 |
) |
|
|
2.39 |
|
Forfeited
|
|
|
(2,194,257 |
) |
|
|
2.33 |
|
Unvested
balance at December 31, 2008
|
|
|
11,234,380 |
|
|
|
2.17 |
|
|
|
|
|
|
|
|
|
|
At
December 31, 2008, there was $11.1 million of unrecognized share-based
compensation expense related to unvested share options with a weighted average
remaining recognition period of 2.9 years. The estimated fair value of options
vested during 2008, 2007 and 2006 was $3.6 million, $0.4 million and $0.5
million, respectively. Total intrinsic value of the options exercised was
$50,000 in 2008, $0.4 million during 2007 and $1,400 during 2006. Total cash
received from share option exercises during 2008 was $0.1
million.
Income
Taxes
The
Company accounts for uncertain tax positions in accordance with FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN
48”), an interpretation of SFAS No. 109, “Accounting for Income Taxes”
(“SFAS 109”). The application of income tax law and regulations is inherently
complex. Interpretations and guidance surrounding income tax laws and
regulations change over time. As such, changes in the Company’s subjective
assumptions and judgments can materially affect amounts recognized in the
consolidated financial statements.
SFAS 109
provides for the recognition of deferred tax assets if realization of such
assets is more likely than not. Based upon the weight of available evidence,
which includes the Company’s historical operating performance and carryback
potential, the Company has determined that total deferred tax assets should be
fully offset by a valuation allowance.
Net
Loss per Common Share
Basic and
diluted net loss per common share is based on the weighted average number of
common shares outstanding during the period. Diluted net loss per common share
is based on the weighted average number of common shares and other dilutive
securities outstanding during the period, provided that including these dilutive
securities does not increase the net loss per share.
Potentially
dilutive securities are excluded from the calculation of earnings per share if
their inclusion is antidilutive. The following table shows the total outstanding
securities considered antidilutive and therefore excluded from the computation
of diluted net loss per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Options
for common shares
|
|
|
19,810 |
|
|
|
11,108 |
|
|
|
6,230 |
|
Convertible
preference shares
|
|
|
3,818 |
|
|
|
3,818 |
|
|
|
29,459 |
|
Warrants
for common shares (1)
|
|
|
— |
|
|
|
125 |
|
|
|
125 |
|
(1)
|
Expired
in July of 2008
|
Cash
and Cash Equivalents
The
Company considers all highly liquid debt instruments with maturities of three
months or less at the time the Company acquires them to be cash equivalents. At
December 31, 2008 and 2007, cash and cash equivalents consisted of
overnight deposits, money market funds, commercial paper, repurchase agreements
and debt securities with maturities of less than 90 days and are reported at
fair value. Cash and cash equivalent balances were as follows as of
December 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
|
|
Cost
Basis
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Estimated Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
553 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
553 |
|
Cash
equivalents
|
|
|
8,960 |
|
|
|
— |
|
|
|
— |
|
|
|
8,960 |
|
Total
cash and cash equivalents
|
|
$ |
9,513 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
9,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
|
Cost
Basis
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Estimated Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
5,011 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,011 |
|
Cash
equivalents
|
|
|
17,493 |
|
|
|
1 |
|
|
|
(5 |
) |
|
|
17,489 |
|
Total
cash and cash equivalents
|
|
$ |
22,504 |
|
|
$ |
1 |
|
|
$ |
(5 |
) |
|
$ |
22,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
Investments
Short-term
investments include debt securities classified as available-for-sale.
Available-for-sale securities are stated at fair value, with unrealized gains
and losses, net of tax, if any, reported in other comprehensive income (loss).
The estimate of fair value is based on publicly available market information.
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are also included in
investment and other income. The cost of investments sold is based on the
specific identification method. Interest and dividends on securities classified
as available-for-sale are included in investment and other
income.
Due to
the recent adverse developments in the credit markets, XOMA
may experience reduced liquidity with respect to some of its
investments. These investments are generally held to maturity, which is
typically less than one year. However, if the need arose to liquidate such
securities before maturity, the Company may experience losses on
liquidation.
At
December 31, 2008, all short-term investments had maturities of less than
one year. The Company has recorded these investments as current as these
investments are available for current operations and management’s intent is to
realize these investments as required to fund current operations.
Short-term
investments by security type at December 31, 2008 and 2007 were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
|
|
Cost
Basis
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Estimated Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
notes and bonds
|
|
$ |
1,301 |
|
|
$ |
— |
|
|
$ |
(2 |
) |
|
$ |
1,299 |
|
Total
Short-Term Investments
|
|
$ |
1,301 |
|
|
$ |
— |
|
|
$ |
(2 |
) |
|
$ |
1,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
|
Cost
Basis
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Estimated Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
notes and bonds
|
|
$ |
7,447 |
|
|
$ |
— |
|
|
$ |
(5 |
) |
|
$ |
7,442 |
|
State
and municipal debt securities
|
|
|
8,625 |
|
|
|
— |
|
|
|
— |
|
|
|
8,625 |
|
Total
Short-Term Investments
|
|
$ |
16,072 |
|
|
$ |
— |
|
|
$ |
(5 |
) |
|
$ |
16,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and
municipal debt securities as of December 31, 2007 included $8.6 million in
auction rate securities with average ratings by Standard &
Poors/Moody’s of Aaa. During 2008, the Company sold all of its remaining auction
rate securities. All sales were at par value, which was equal to recorded fair
value, and no loss was incurred by the Company.
The
Company reviews its instruments for other-than-temporary impairment whenever the
value of the instrument is less than the amortized cost. All such investments
have been or were in an unrealized loss position for less than twelve months.
The Company has not sold similar investments at a loss and currently has the
financial ability to hold short-term investments with an unrealized loss until
maturity or recovery and not incur any recognized losses. As a result, the
Company does not believe any unrealized losses represent other-than-temporary
impairment. During the years ended December 31, 2008, 2007 and 2006, there
were $4,000, zero and zero in realized gains on short-term investments. During
the years ended December 31, 2008, 2007 and 2006, there were no realized
losses on short-term investments.
Restricted
Cash
Under the
terms of its loan agreement with Goldman Sachs, the Company maintains a
custodial account for the deposit of RAPTIVA®,
LUCENTIS® and
CIMZIA®
royalty revenues in addition to a standing reserve of the next semi-annual
interest payment due on the loan. This cash account and the interest earned
thereon can be used solely for the payment of the semi-annual interest amounts
due on April 1 and October 1 of each year and, at that time, amounts
in excess of the interest reserve requirement may be used to pay down principal
or be distributed back to the Company, at the discretion of the Goldman Sachs.
At December 31, 2008, the restricted cash balance of $8.6 million was
invested in money market funds. See Note 3: Long-Term Debt and Other
Arrangements for additional discussion of the Goldman Sachs term
loan.
In April
of 2008, XOMA entered into an irrevocable letter of credit (“LOC”) arrangement
in favor of an insurance company agent that is certified to draw funds on the
LOC not to exceed $942,000. The LOC is intended to cover any potential
liability, loss, or costs incurred by the agent under any bonds or undertakings
for the purpose of clearing manufacturing materials through U.S. Customs and
Border Protection. The LOC will expire, if not renewed, in one year, and
requires XOMA to record the LOC balance as restricted short-term cash on the
consolidated balance sheet. The restricted cash balance of $0.9 million was
invested in a certificate of deposit as of December 31,
2008.
Fair
Value of Financial Instruments
Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements
(“SFAS 157”). In February of 2008, the FASB issued FASB Staff Position
No. FAS 157-2, Effective
Date of FASB Statement No. 157, which provides a one year deferral
of the effective date of SFAS 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. Therefore, the Company has adopted
the provisions of SFAS 157 with respect to its financial assets and liabilities
only. SFAS 157 defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles and enhances disclosures
about fair value measurements. Fair value is defined under SFAS 157 as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value under SFAS 157
must maximize the use of observable inputs and minimize the use of unobservable
inputs. The standard describes a fair value hierarchy based on three levels of
inputs, of which the first two are considered observable and the last
unobservable, that may be used to measure fair value which are the
following:
|
•
|
Level
1—Quoted prices in active markets for identical assets or
liabilities.
|
|
•
|
Level
2—Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
•
|
Level
3—Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
|
The
adoption of SFAS 157 did not have a material effect on the Company’s financial
position, results of operations, or cash flows.
In
accordance with SFAS 157, the following table represents the Company’s fair
value hierarchy for its financial assets (cash equivalents and investments)
measured at fair value on a recurring basis as of December 31, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurements at Reporting Date Using
|
|
|
|
Total
|
|
|
Quoted Prices
in
Active
Markets
for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
Repurchase
agreements
|
|
$ |
8,950 |
|
|
$ |
8,950 |
|
|
$ |
— |
|
|
$ |
— |
|
Certificates
of deposit-restricted
|
|
|
952 |
|
|
|
952 |
|
|
|
— |
|
|
|
— |
|
Money
market funds
|
|
|
10 |
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
Money
market funds-restricted
|
|
|
8,593 |
|
|
|
8,593 |
|
|
|
— |
|
|
|
— |
|
Corporate
notes and bonds
|
|
|
1,299 |
|
|
|
— |
|
|
|
1,299 |
|
|
|
— |
|
Total
|
|
$ |
19,804 |
|
|
$ |
18,505 |
|
|
$ |
1,299 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
assets held during 2008 consisted of auction rate securities. During 2008, the
Company sold all of its auction rate securities investments at par value, which
equaled the recorded fair value, and has recognized no loss on the sale of such
investments. The following table provides a summary of changes in fair value of
the Company’s Level 3 financial assets as of December 31, 2008 (in
thousands):
|
|
|
|
|
|
Auction Rate
Securities
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$ |
8,625 |
|
Unrealized
gains/losses included in other comprehensive income
|
|
|
— |
|
Sales
|
|
|
(8,625 |
) |
Balance
at December 31, 2008
|
|
$ |
— |
|
|
|
|
|
|
Receivables
Receivables
consisted of the following at December 31, 2008 and 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
$ |
16,274 |
|
|
$ |
11,655 |
|
Other
receivables
|
|
|
412 |
|
|
|
480 |
|
Total
|
|
$ |
16,686 |
|
|
$ |
12,135 |
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
Property
and equipment is stated at cost. Equipment depreciation is calculated using the
straight-line method over the estimated useful lives of the assets (three to
seven years). Leasehold improvements, buildings and building improvements are
amortized and depreciated using the straight-line method over the shorter of the
lease terms or the useful lives (one to fifteen years).
Property
and equipment consisted of the following at December 31, 2008 and 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Furniture
and equipment
|
|
$ |
36,592 |
|
|
$ |
34,618 |
|
Buildings,
leasehold and building improvements
|
|
|
22,355 |
|
|
|
19,969 |
|
Construction-in-progress
|
|
|
1,108 |
|
|
|
1,845 |
|
Land
|
|
|
310 |
|
|
|
310 |
|
|
|
|
60,365 |
|
|
|
56,742 |
|
Less:
Accumulated depreciation and amortization
|
|
|
(33,522 |
) |
|
|
(31,139 |
) |
Property
and equipment, net
|
|
$ |
26,843 |
|
|
$ |
25,603 |
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense was $6.7 million, $6.2 million and $5.1 million for the
years ended December 31, 2008, 2007 and 2006, respectively.
Accrued
Liabilities
Accrued
liabilities consisted of the following at December 31, 2008 and 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Accrued
management incentive compensation
|
|
$ |
— |
|
|
$ |
4,135 |
|
Accrued
payroll costs
|
|
|
2,776 |
|
|
|
2,635 |
|
Accrued
professional fees
|
|
|
514 |
|
|
|
617 |
|
Other
|
|
|
1,148 |
|
|
|
323 |
|
Total
|
|
$ |
4,438 |
|
|
$ |
7,710 |
|
|
|
|
|
|
|
|
|
|
Deferred
Revenue
The
Company defers revenue until all requirements under its revenue recognition
policy are met. In 2008, the Company deferred $17.5 million of revenue from five
contracts including Schering-Plough Research Institute (“SPRI”), Takeda
Pharmaceutical Company Limited (“Takeda”) and Novartis AG (“Novartis”) and
recognized $18.4 million of revenue from the five contracts.
In 2007,
the Company deferred $23.3 million of revenue from five contracts including SPRI
and Takeda and recognized $22.2 million of revenue from the five contracts,
including the amortization of the remaining $4.3 million of the $10.0 million in
up-front payments received from Novartis, formerly known as Chiron Corporation,
related to the oncology collaboration contract entered into in February of 2004,
due to the ending of the parties’ mutual exclusivity
obligation.
The
following table shows the activity in deferred revenue for the years ended
December 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Beginning
deferred revenue
|
|
$ |
18,064 |
|
|
$ |
16,968 |
|
Revenue
deferred
|
|
|
17,515 |
|
|
|
23,254 |
|
Revenue
recognized
|
|
|
(18,366 |
) |
|
|
(22,158 |
) |
Ending
deferred revenue
|
|
$ |
17,213 |
|
|
$ |
18,064 |
|
|
|
|
|
|
|
|
|
|
Of the
$17.2 million balance in deferred revenue at December 31, 2008, $9.1
million is expected to be earned over the next year and the remaining $8.1
million is expected to be earned over the next five years.
Other
Current Liabilities
Other
current liabilities consisted of the following at December 31, 2008 and
2007 (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Due
to government agency
|
|
$ |
1,551 |
|
|
$ |
— |
|
Other
|
|
|
333 |
|
|
|
— |
|
Total
|
|
$ |
1,884 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
The
amount due to government agency at December 31, 2008 relates to payments
received from the NIAID 2 contract. In 2008, the NIH completed an audit of
XOMA’s 2007 actual data and developed billing rates for the period from January
of 2007 to June of 2009 to be used for all of the Company’s government
contracts. As a result, XOMA retroactively applied these NIH rates to the
invoices from 2007 through the third quarter of 2008 resulting in an adjustment
to decrease revenue by $2.7 million. Refer to the Use of Estimates and
Reclassification section above for more detail.
Of the
$2.7 million liability recorded in the third quarter of 2008, $0.9 million was
earned in the fourth quarter of 2008. Of the remaining balance at
December 31, 2008, $1.6 million is expected to be earned over the next year
and the remaining $0.2 million is expected to be earned by the completion of the
contract in 2010 and is included in other long-term liabilities in the
consolidated balance sheet as of December 31, 2008.
Supplemental
Cash Flow Information
The
following table shows the supplemental cash flow information for the years ended
December 31, 2008, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
4,354 |
|
|
$ |
3,077 |
|
|
$ |
3,793 |
|
Income
taxes
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
reduction on Novartis note
|
|
$ |
7,500 |
|
|
$ |
— |
|
|
$ |
— |
|
Conversion
of convertible debt to equity
|
|
$ |
— |
|
|
$ |
44,521 |
|
|
$ |
27,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
added to principal balance on Novartis note
|
|
$ |
1,183 |
|
|
$ |
1,323 |
|
|
$ |
1,018 |
|
Payment
of additional interest feature on convertible debt in shares
|
|
|
— |
|
|
|
1,889 |
|
|
|
3,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions from financing activities for the year ended December 31, 2008
consisted of $7.5 million received in the form of debt reduction on XOMA’s
existing loan facility with Novartis, as part of the restructuring of the
Company’s product development collaboration with Novartis entered into in 2004
for the development and commercialization of antibody products for the treatment
of cancer. In addition, interest of $1.2 million, $1.3 million and $1.0 million
on the Novartis secured loan was added to the principal balance of the loan for
the years ended December 31, 2008, 2007 and 2006,
respectively.
Non-cash
transactions from financing activities for the years ended December 31,
2007 and 2006 consisted of the conversion of $44.5 million and $27.5 million,
respectively, in convertible notes to equity and the payment of 1.9 million
shares and 3.6 million
shares,
respectively, related to the additional interest feature. See Note 3: Long-Term Debt and
Other Arrangements to the Consolidated Financial Statements for
additional discussion of the convertible debt and Novartis loan.
Segment
Information
The
Company has determined that, in accordance with SFAS No. 131, “Disclosures
about Segments of an Enterprise and Related Information”, it operates in one
segment as it only reports operating results on an aggregate basis to the chief
operating decision maker of the Company. The Company’s property and equipment is
held entirely in the United States.
Foreign
Operations Information
Revenues
earned by the Company’s foreign operations are attributed to the following
countries for each of the years ended December 31, 2008, 2007 and 2006 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
56,467 |
|
|
$ |
46,029 |
|
|
$ |
26,642 |
|
Ireland
|
|
|
2,603 |
|
|
|
32,088 |
|
|
|
645 |
|
Bermuda
|
|
|
8,917 |
|
|
|
6,135 |
|
|
|
2,211 |
|
Total
|
|
$ |
67,987 |
|
|
$ |
84,252 |
|
|
$ |
29,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
Fair
Value Measurements
In
October of 2008, the FASB issued FSP 157-3 Determining Fair Value of a
Financial Asset in a Market That Is Not Active (FSP 157-3). FSP 157-3
clarified the application of SFAS No. 157 in an inactive market. It
demonstrated how the fair value of a financial asset is determined when the
market for that financial asset is inactive. FSP 157-3 was effective upon
issuance, including prior periods for which financial statements had not been
issued. The implementation of this standard did not have a material impact on
the Company’s consolidated results of operations and financial
condition.
Accounting
for Advance Payments for Goods or Services to Be Used in Future Research and
Development
In June
of 2007, the Emerging Issues Task Force issued EITF Issue 07-03, “Accounting for
Advance Payments for Goods or Services to Be Used in Future Research and
Development” (“EITF 07-03”). EITF 07-03 addresses the diversity which exists
with respect to the accounting for the non-refundable portion of a payment made
by a research and development entity for future research and development
activities. Under EITF 07-03, an entity would defer and capitalize
non-refundable advance payments made for research and development activities
until the related goods are delivered or the related services are performed.
EITF 07-03 was effective for fiscal years beginning after December 15, 2007
and interim periods within those years. The adoption of EITF 07-03 did not have
a material impact on the Company’s financial statements.
Accounting
for Collaborative Agreements
In
December of 2007, the EITF reached a consensus on EITF Issue 07-01,
“Accounting for Collaborative Agreements” (“EITF 07-01”). EITF 07-01 defines
collaborative arrangements and establishes reporting requirements for
transactions between participants and third parties in a collaborative
arrangement. EITF 07-01 prohibits companies from applying the equity method of
accounting to activities performed outside a separate legal entity by a virtual
joint venture. Instead, revenues and costs incurred with third parties in
connection with the collaborative arrangement should be presented gross or net
by the collaborators based on the criteria in EITF Issue 99-19, “Reporting
Revenue Gross as a Principal versus Net as an Agent”, and other applicable
accounting literature. The consensus should be applied to collaborative
arrangements in existence at the date of adoption using a modified retrospective
method that requires reclassification in all periods presented for those
arrangements still in effect at the transition date, unless that application is
impracticable. The consensus is effective for fiscal years beginning after
December 15, 2008. The adoption of EITF 07-01 is not expected to have a
material impact on the Company’s financial statements.
2.
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Licensing
and Collaborative Agreements
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Licensing
Agreements
XOMA has
granted over 50 licenses to biotechnology and pharmaceutical companies for use
of patented and proprietary technologies relating to bacterial expression of
recombinant pharmaceutical products. XOMA, in exchange, receives license and
other fees as well as access to these companies’ antibody display libraries,
intellectual property and/or services that complement XOMA’s existing
development capabilities and support the Company’s own antibody product
development pipeline.
These
agreements also generally provide releases of the licensee companies and their
collaborators from claims under the XOMA patents arising from past activities
using the companies’ respective technologies to the extent they also used XOMA’s
antibody expression technology. Licensees are generally also allowed to use
XOMA’s technology in combination with their own technology in future
collaborations.
Collaborative
Agreements
Total
research and development expenses incurred related to the Company’s
collaborative agreements were approximately $24.1 million, $20.4 million and
$20.1 million in 2008, 2007 and 2006, respectively.
Genentech
In April
of 1996, the Company entered into a collaboration agreement with Genentech for
the development of RAPTIVA®. In
March of 2003, it entered into amended agreements which called for XOMA to share
in the development costs and to receive a 25% share of future U.S. operating
profits and losses and a royalty on sales outside the United States. The amended
agreements also called for Genentech to finance the Company’s share of
development costs up until first FDA marketing approval via a convertible
subordinated loan, and its share of pre-launch marketing and sales costs via an
additional commercial loan facility. Under the loan agreement, upon FDA approval
of the product, which occurred in October of 2003, the Company elected to pay
$29.6 million of the development loan in convertible preference shares, which
are convertible into approximately 3.8 million common shares at a price of
$7.75 per common share. The commercial loan was repaid in cash in two
installments in 2004.
In
January of 2005, the Company announced a restructuring of its arrangement with
Genentech on RAPTIVA®.
Under the restructured arrangement, the Company is entitled to receive
mid-single digit royalties on worldwide sales of RAPTIVA® in
all indications. The previous cost and profit sharing arrangement for
RAPTIVA® in
the U.S. was discontinued and Genentech is responsible for all operating and
development costs associated with the product. In addition, the Company’s
remaining obligation under the development loan was extinguished.
In
December of 1998, the Company licensed its bacterial cell expression technology
to Genentech, which was utilized to develop LUCENTIS® for
the treatment of neovascular (wet) age-related macular degeneration. The Company
is entitled to receive a low single-digit royalty on worldwide sales of
LUCENTIS®.
The
Company recognizes RAPTIVA® and
LUCENTIS®
royalty revenue when the underlying sales occur. Total royalties recognized for
the years ended December 31, 2008, 2007 and 2006 were $21.0 million,
$16.7 million and $10.3 million, respectively.
UCB
In
December of 1998, the Company licensed its bacterial cell expression technology
to Celltech Therapeutics Ltd., now UCB, which utilized it in the development of
CIMZIA® for
the treatment of moderate-to-severe Crohn’s disease in adults who have not
responded to conventional therapies. UCB announced in April of 2008 that
CIMZIA®
received FDA approval for the treatment of Crohn’s disease. CIMZIA® was
approved in Switzerland for the treatment of Crohn’s disease in September of
2007. The Company is entitled to receive a low single-digit royalty on sales of
CIMZIA® in
the U.S. and Switzerland. The Company recognizes CIMZIA®
royalty revenue upon receipt of a royalty statement, until such time that
sufficient historical information is available to estimate royalty revenues or
receivables in the period. During 2008, royalties received from sales of
CIMZIA® were
not material.
Novartis
In
November of 2008, the Company restructured its product development collaboration
with Novartis entered into in 2004 for the development and commercialization of
antibody products for the treatment of cancer. Under the restructured agreement,
the Company received $6.2 million in cash and $7.5 million in the form of debt
reduction on its existing loan facility with Novartis. In addition, the Company
may, in the future, receive milestones and double-digit royalty rates for
certain product programs and options to develop or receive royalties on
additional programs. In exchange, Novartis received control over certain
programs under the original product development collaboration. The Company
recognized revenue on the $13.7 million consideration received in November of
2008, as XOMA had completed the transfer of the full rights to and materials of
the collaboration targets now controlled by Novartis. The Company will recognize
revenue relating to the milestones when they are achieved and on the royalties
when the underlying sales occur.
Under the
original product development collaboration, XOMA received initial payments of
$10.0 million in 2004, which was being recognized ratably over five years, the
expected term of the agreement, as license and collaborative fees. In February
of 2007, the Company announced the parties’ mutual exclusivity obligation to
conduct antibody discovery, development and commercialization work in oncology
had ended. The expiration of this mutual obligation had no impact on the
existing collaboration projects which had reached the development stage and the
parties continued to collaborate on a non-exclusive basis. The entire remaining
unamortized balance of $4.3 million, at December 31, 2006, associated with
the up-front collaboration fee of $10.0 million was recognized in 2007 due to
the change in estimate from five years to three years.
A loan
facility of up to $50.0 million was available to the Company to fund up to 75%
of its share of development expenses incurred beginning in 2005. See Note 3: Long-Term Debt and Other
Arrangements for additional discussion of the financing arrangement
between XOMA and Novartis.
In
December of 2008, the Company entered into a Manufacturing and Technology
Transfer Agreement with Novartis, effective July 1, 2008. Under this
agreement, XOMA has been engaged by Novartis to perform research and
development, process development, manufacturing and technology transfer
activities with respect to certain product programs under the original product
development collaboration. The work performed under this agreement is fully
funded by Novartis. The Company will recognize revenue on the research and
development and other services as they are performed on a time and materials
basis.
NIAID
In
September of 2008, the Company announced that it had been awarded a $65 million
multiple-year contract funded with federal funds from NIAID, a part of the NIH
(Contract No. HHSN272200800028C), to continue development of drug candidates
toward clinical trials in the treatment of botulism poisoning, a potentially
deadly muscle paralyzing disease. The contract work is being performed on a cost
plus fixed fee basis over a three-year period. The Company is recognizing
revenue under the arrangement as the services are being performed on a
proportional performance basis.
In July
of 2006, the Company was awarded a $16.3 million contract, NIAID 2, to produce
monoclonal antibodies for the treatment of botulism to protect United States
citizens against the harmful effects of botulinum neurotoxins used in
bioterrorism. The contract work is being performed on a cost plus fixed fee
basis. The original contract was for a three-year period, however the contract
has been extended into 2010. The Company is recognizing revenue as the services
are being performed on a proportional performance basis. In 2008, the NIH
completed an audit of XOMA’s 2007 actual data and developed billing rates for
the period from January of 2007 to June of 2009 to be used for all of the
Company’s government contracts. As a result, XOMA retroactively applied these
NIH rates to the invoices from 2007 through the third quarter of 2008 resulting
in an adjustment to decrease revenue by $2.7 million. The Company will apply the
$2.7 million to future billing to the NIH for the services performed. Refer to
the Use of Estimates and
Reclassification section above for more detail. As of December 31,
2008, $1.8 million of the $2.7 million credit remains to be applied to future
services.
In March
of 2005, the Company was awarded a $15.0 million contract from NIAID to develop
three anti-botulinum neurotoxin monoclonal antibody therapeutics. The contract
work was performed over an 18-month period and was 100% funded with federal
funds from NIAID under Contract No. HHSN266200500004C. The Company recognized
revenue over the life of the contract as the services were performed on a
proportional performance basis, and, as per the terms of the contract, a 10%
retention on all revenue was deferred and classified as a receivable until final
acceptance of the contract which was achieved in October of 2006.
Schering-Plough
In May of
2006, the Company entered into a collaboration agreement with the SPRI division
of Schering-Plough Corporation for therapeutic monoclonal antibody discovery and
development. Under the agreement, SPRI will make up-front, annual maintenance
and milestone payments to the Company, fund the Company’s research and
development and manufacturing activities related to the agreement and pay the
Company royalties on sales of products resulting from the collaboration. During
the collaboration, the Company will discover therapeutic antibodies against one
or more targets selected by SPRI, use the Company’s proprietary Human
Engineering™
technology to humanize antibody candidates generated by hybridoma techniques,
perform preclinical studies to support regulatory filings, develop cell lines
and production processes and produce antibodies for initial clinical trials. The
Company will recognize revenue on the up-front payments on a straight-line basis
over the expected term of each target antibody discovery, on the research and
development and manufacturing services as they are performed on a time and
materials basis, on the maintenance fees when they are due, on the milestones
when they are achieved and on the royalties when the underlying sales
occur.
Schering-Plough/AVEO
In April
of 2006, XOMA entered into an agreement with AVEO Pharmaceuticals, Inc (“AVEO”)
to utilize XOMA’s Human Engineering™ technology to humanize
AV-299 under which AVEO paid XOMA an up-front license fee and development
milestones. Under this agreement XOMA created four Human Engineering™
versions of the original AV-299, all of which met design goals and from which
AVEO selected one as its lead development candidate.
In
September of 2006, as a result of the successful humanization of AV-299, XOMA
entered into a second agreement with AVEO to manufacture and supply AV-299 in
support of early clinical trials. Under the agreement, XOMA created AV-299
production cell lines, conducted process and assay development and performed
Good Manufacturing Practices (“cGMP”) manufacturing activities. AVEO retains all
development and commercialization rights to AV-299 and is responsible to pay the
Company annual maintenance fees, additional development milestones and royalties
if certain targets are met in the future. The Company will recognize revenue on
the research and development and manufacturing services as they are performed on
a time and materials basis, on the maintenance fees when they are due, on the
milestones when they are achieved and on the royalties when the underlying sales
occur.
In April
of 2007, Schering-Plough Corporation, acting through its SPRI division, entered
into a research, development and license agreement with AVEO concerning AV-299
and other anti-HGF molecules. In connection with the aforementioned license
agreement, AVEO has assigned its entire right, title and interest in, to and
under its manufacturing agreement with XOMA to SPRI.
Takeda
In
November of 2006, the Company entered into a collaboration agreement with Takeda
for therapeutic monoclonal antibody discovery and development. Under the
agreement, Takeda will make up-front, annual maintenance and milestone payments
to the Company, fund its research and development and manufacturing activities
for preclinical and early clinical supplies and pay royalties on sales of
products resulting from the collaboration. Takeda will be responsible for
clinical trials and commercialization of drugs after an Investigational New Drug
Application (“IND”) submission and is granted the right to manufacture once the
product enters into Phase 2 clinical trials. During the collaboration, the
Company will discover therapeutic antibodies against multiple targets selected
by Takeda. The Company will recognize revenue on the up-front payments on a
straight-line basis over the expected term of each target antibody discovery, on
the research and development and manufacturing services as they are performed on
a time and materials basis, on the maintenance fees when they are due, on the
milestones when they are achieved and on the royalties when the underlying sales
occur.
Pfizer
In August
of 2007, XOMA entered into a license agreement with Pfizer Inc. (“Pfizer”) for
non-exclusive, worldwide rights for XOMA’s patented bacterial cell expression
technology for research (including phage display), development and manufacturing
of antibody products. Under the terms of the agreement, XOMA received a license
fee payment of $30.0 million in 2007 and milestone payments of $0.7 million,
including $0.5 million for the initiation of a Phase 3 clinical trial in 2008.
We may receive milestones (licensee achievement based), royalty and other fees
on future sales of all products subject to this license, including products
currently in late-stage clinical development. The Company has no further
obligations under the license agreement and accordingly, the $30.0 million was
recorded as license fee revenue in the accompanying statement of operations for
the year ended December 31, 2007.
Other
In July
of 2007, the Company reached an agreement with a major collaborator to resolve
its liability for material cost charges incurred pursuant to the collaboration
arrangement. As a result, the Company reduced its research and development costs
by $2.8 million included in the statement of operations for the year ended
December 31, 2007. Additionally, as of September 30, 2007, the
Company eliminated an approximate $1.8 million liability carried on the balance
sheet since December 31, 2006 and established a collaboration receivable
balance of $1.0 million for the remaining balance related to the material cost
charges liability resolution, which was collected prior to December 31,
2007.
3.
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Long-Term
Debt and Other Arrangements
|
As of
December 31, 2008, the Company had long-term debt of $63.3 million,
including $50.4 million outstanding under the new Goldman Sachs term loan and
$12.9 million outstanding under the Novartis note. In 2008, XOMA incurred
interest expense of $7.7 million, including $5.1 million related to borrowings
under the Goldman Sachs term loan and $1.2 million related to borrowings under
the Novartis note, and amortization of debt issuance costs of $1.4 million
related to the Goldman Sachs term loan.
As of
December 31, 2007, the Company had long-term debt of $50.9 million,
including $30.3 million outstanding from the original Goldman Sachs term loan
and $20.6 million outstanding from the Novartis note. In 2007, XOMA incurred
interest expense of $11.6 million, including $3.8 million related to the Goldman
Sachs term loan, $1.3 million related the Novartis note and $6.5 million related
to the convertible debt. In 2007, XOMA also recognized amortization of debt
issuance costs of $0.3 million related to the Goldman Sachs term
loan.
Goldman
Sachs Term Loan
In
November of 2006, the Company entered into a five-year, $35.0 million term loan
facility (“the original facility”) with Goldman Sachs and borrowed the full
amount thereunder. Indebtedness under the original facility incurred interest at
an annual rate equal to six-month LIBOR plus 5.25%, and was secured by all
rights to receive payments due to the Company relating to RAPTIVA®,
LUCENTIS® and
CIMZIA®.
In May of
2008, the Company entered into a five-year, $55.0 million amended and restated
term loan facility with Goldman Sachs (the “new facility”) refinancing the
original facility and borrowed the full amount thereunder. Indebtedness under
the new facility bears interest at an annual rate equal to the greater of
(x) six-month LIBOR or (y) 3.0%, plus 8.5% and is subject to reset on
April 1 and October 1 of each year. As of December 31, 2008, the
interest rate was 12.3%. The debt is secured by all rights to receive payments
due to the Company relating to RAPTIVA®,
LUCENTIS® and
CIMZIA®.
Payments received by the Company in respect of these payment rights, in addition
to a standing reserve equal to the next semi-annual interest payment, are held
in a custodial account which is classified as restricted cash. This cash account
and the interest earned thereon can be used solely for the payment of the
semi-annual interest amounts due on April 1 and October 1 of each year
and, at that time, amounts in excess of the interest reserve requirement may be
used to pay down principal or be distributed back to the Company, at the
discretion of Goldman Sachs. The Company may prepay indebtedness under the
facility at any time, subject to certain prepayment premiums if prepaid during
the first four years.
The
Company is required to comply with certain covenants including a ratio of
royalties collected to interest payable and a requirement that quarterly U.S.
and outside-the-U.S. sales of RAPTIVA® and
LUCENTIS®
exceed certain specified minimum levels and XOMA was in compliance with these
covenants as of December 31, 2008. The Company’s ability to comply with
these covenants is dependent on continued sales by Genentech, UCB and their
partners of these products at adequate levels, and any significant reduction in
such sales could cause the Company to violate or be in default under these
provisions, which could result in acceleration of the Company’s obligation to
repay this debt, as discussed in Note 1 to the consolidated
financial statements.
Proceeds
from the new facility were used to pay the outstanding principal and accrued
interest under the original facility, certain fees and expenses in connection
with the new facility and for general corporate purposes. At December 31,
2008, the outstanding principal balance under the new facility totaled $50.4
million and the related balance in restricted cash was $8.6 million. Debt
issuance costs under the new facility of $2.0 million are being amortized on a
straight-line basis over the five-year life of the loan and are disclosed as
current and long-term debt issuance costs on the balance sheet. Unamortized debt
issuance costs under the original facility were expensed upon payment of the
underlying loan facility.
Novartis
Note
In May of
2005, the Company executed a secured note agreement with Novartis. Under the
note agreement, Novartis agreed to make semi-annual loans to the Company to fund
up to 75% of the Company’s research and development and commercialization costs
under the collaboration arrangement, not to exceed $50.0 million in aggregate
principal amount. Any unpaid principal amount together with accrued and unpaid
interest was due and payable in full on June 21, 2015, the tenth
anniversary date of the advance date on which the first loan was made. Interest
on the unpaid balance of the principal amount of each loan accrues at six-month
LIBOR plus 2%, which was equal to 3.85% at December 31, 2008, and is
payable semi-annually in June and December of each year. Additionally, the
interest rate resets in June and December of each year. At the Company’s
election, the semi-annual interest payments can be added to the outstanding
principal amount, in lieu of a cash payment, as long as the aggregate principal
amount does not exceed $50.0 million. The Company has made this election for
each interest payment thus far. Loans under the note agreement are secured by
the Company’s interest in its collaboration with Novartis, including any
payments owed to the Company thereunder.
In
November of 2008, the Company restructured its product development collaboration
with Novartis. Under the restructured agreement (see Note 2: Novartis for further
detail), the Company’s existing debt was reduced by $7.5 million. In addition,
the Company made an additional principal repayment on its Novartis note of $1.4
million in November of 2008. Pursuant to this restructuring, no additional
borrowings will be made by XOMA on the Novartis note.
At
December 31, 2008, the outstanding principal balance under this note
agreement totaled $12.9 million.
Convertible
Senior Notes
In
February of 2006, the Company completed an exchange offer with holders of its
6.5% convertible senior notes due 2012 in which the Company exchanged $60.0
million aggregate principal amount of its new 6.5% Convertible SNAPsSM due 2012
(the “New
Notes”)
for all $60.0 million aggregate principal amount of its then outstanding
convertible senior notes due 2012. The Company also issued an additional $12.0
million of New Notes to the public for cash at a public offering price of 104%
of principal, or $12.5 million. The New Notes were initially convertible into
approximately 38.4 million common shares at a conversion rate of 533.4756
of common shares per $1,000 principal amount of New Notes, which is equivalent
to a conversion price of approximately $1.87 per common share.
The
Company separately accounted for the additional interest payment feature of the
New Notes as an embedded derivative instrument, which was measured at fair value
and classified on the balance sheet with the convertible debt. Changes in the
fair value of the embedded derivative were recognized in earnings as a component
of other income (expense). The initial fair value of the derivative was
subtracted from the carrying value of the debt, reflected as a debt discount,
which was amortized as interest expense using the effective interest method
through the date the notes were scheduled to mature, and separately reported as
a derivative liability.
The
additional New Notes were issued to the initial purchasers for net proceeds of
$11.8 million. Debt issuance costs related to the New Notes of approximately
$0.7 million were being amortized on a straight-line basis over the original
72-month life of the notes. Additional debt issuance costs of $2.0 million,
related to the modification of the existing debt, were expensed as incurred with
$1.1 million and $0.9 million expensed during the quarters ended March 31,
2006 and December 31, 2005, respectively.
At the
time of note conversion, unamortized discount, premium and debt issuance costs
related to the converted notes were charged to shareholders’
equity.
During
the first quarter of 2007, $42.0 million of New Notes were voluntarily converted
by holders through March 7, 2007, at which time the Company announced that
it had elected to automatically convert all of the remaining $2.5 million of New
Notes outstanding. As a result, during the first quarter of 2007, 25,640,187 of
common shares were issued to effect the conversion of the principal balances.
Additionally, the Company issued 1,889,317 shares and $5.2 million in cash to
satisfy the remaining additional interest payment feature related to these
converted New Notes. The Company recorded a $6.1 million charge to interest
expense as a result of the revaluation of the embedded derivative related to the
additional interest feature of the convertible notes.
For the
year ended December 31, 2006, $27.5 million of New Notes were converted
into 18,262,264 common shares including 3,602,879 shares related to the
additional interest payment feature of the notes. As of December 31, 2006,
the Company elected to pay all additional interest owed in common shares. The
Company recorded a $6.9 million charge to interest expense during the year ended
December 31, 2006, as a result of an increase in the fair value of the
embedded derivative on its convertible debt including $4.8 million related to
the additional interest feature of the converted notes.
For the
years ended December 31, 2007 and 2006, the Company incurred $0.2 million
and $3.4 million, respectively, in interest expense on its convertible debt.
Interest expense was payable on a semi-annual basis. Additionally, the Company
amortized a net of $0.1 million and $1.0 million in debt issuance costs, premium
and discount for the year ended December 31, 2007 and 2006.
Common
Shares
As of
December 31, 2008, the Company had the authority to issue 210,000,000
common shares with a par value of $0.0005 per share of which 140,467,529 were
outstanding.
Preference
Shares
As of
December 31, 2008, the Company has the authority to issue 1,000,000
preference shares with a par value of $0.05 per share. Of these, 210,000
preference shares have been designated Series A Preference Shares and 8,000
preference shares have been designated Series B Preference Shares.
|
•
|
Series
A: As of December 31, 2008, the Company has authorized 210,000 Series
A Preference Shares of which none were outstanding at December 31,
2008 or 2007. Refer to Shareholder Rights Plan
below.
|
|
•
|
Series
B: As of December 31, 2008, the Company has authorized 8,000 Series B
Preference Shares. In December of 2003, the Company issued 2,959 of the
Series B preference shares to Genentech in repayment of $29.6 million of
the outstanding balance under the convertible subordinated debt agreement.
Pursuant to the rights of the Series B preference shares, the holders of
Series B preference shares will not be entitled to receive any dividends
on the Series B preference shares. The Series B preference shares will
rank senior with respect to rights on liquidation, winding-up and
dissolution of XOMA to all classes of common shares. Upon any voluntary or
involuntary liquidation, dissolution or winding-up of XOMA, holders of
Series B preference shares will be entitled to receive $10,000 per share
of Series B preference shares before any distribution is made on the
common shares. The holder of the Series B preference shares has no voting
rights, except as required under Bermuda
law.
|
The
holder of Series B preference shares has the right to convert Series B
preference shares into common shares at a conversion price equal to $7.75 per
common share, subject to adjustment in certain circumstances. Accordingly, the
2,959 issued Series B preference shares are convertible into 3,818,395 common
shares.
The
Series B preference shares will be automatically converted into common shares at
their then effective conversion rate immediately upon the transfer by the
initial holder to any third party which is not an affiliate of such holder. The
Company will have the right, at any time and from time to time, to redeem any or
all Series B preference shares for cash in an amount equal to the conversion
price multiplied by the number of common shares into which each such share of
Series B preference shares would then be convertible.
Incentive
Compensation Plans
The Board
of Directors established a Management Incentive Compensation Plan (“MICP”)
effective July 1, 1993, in which management employees (other than the Chief
Executive Officer), as well as certain additional discretionary participants
chosen by the Chief Executive Officer, are eligible to participate. The Chief
Executive Officer is covered under a CEO Incentive Compensation Plan (“CICP”)
which was established by the Board of Directors effective January 1, 2004.
Employees that do not qualify under the MICP or CICP are covered under the Bonus
Compensation Plan (“BCP”) effective January 1, 2007.
As of
January 1, 2007, awards earned under the MICP, CICP and BCP are payable in
cash during the first quarter of the following fiscal year so long as the
participant remains an employee of the Company. Awards earned under the MICP
prior to 2004 vested over a three-year period with 50% of each award payable
during the first quarter of the following fiscal year and 25% payable on each of
the next two annual distribution dates, so long as the participant remained an
employee of the Company. The 50% on the first distribution date was payable half
in cash and half in common shares. The balance on the next two annual
distribution dates was payable, at the election of the participant, all in cash,
all in common shares or half in cash and half in common shares or, for elections
not made in a timely manner, all in common shares. The final payout under this
plan occurred in 2006.
In
October of 2007, the Board of Directors approved amendments to the incentive
plans eliminating the requirement for bonus awards to be paid partially in
shares. Beginning with awards related to the year ended December 31, 2007,
the bonus awards are paid entirely in cash. The number of common shares issued
pursuant to awards made for the year ended December 31, 2006 was 177,180,
and these shares were reserved under the Restricted Plan (as defined
below).
The
amounts charged to expense under the incentive plans were zero, $4.0 million and
$1.9 million for the plan years 2008, 2007 and 2006, respectively. In the fourth
quarter of 2008, the Company decided that it would not pay bonuses for 2008. As
of December 31, 2008, no amounts were accrued related to these
plans.
Employee
Share Purchase Plan
In 1998,
the Company’s shareholders approved the 1998 Employee Share Purchase Plan which
provides employees of the Company the opportunity to purchase common shares
through payroll deductions. Up to 1,500,000 common shares are authorized for
issuance under the Share Purchase Plan. An employee may elect to have payroll
deductions made under the Share Purchase Plan for the purchase of common shares
in an amount not to exceed 15% of the employee’s compensation.
Prior to
December 31, 2004, the purchase price per common share was either
(i) an amount equal to 85% of the fair market value of a common share on
the first day of a 24-month offering period or on the last day of such offering
period, whichever was lower, or (ii) such higher price as may be set by the
Compensation Committee of the Board at the beginning of such offering
period.
Effective
January 1, 2005, the plan was amended to reduce future offering periods to
three months and to change the purchase price per common share to 95% of the
closing price of XOMA shares on the exercise date.
In 2008,
2007, and 2006, employees purchased 195,403, 83,338 and 234,535 common shares,
respectively, under the Share Purchase Plan. Net payroll deductions under the
Share Purchase Plan totaled $0.3 million, $0.3 million and $0.4 million for
2008, 2007 and 2006, respectively.
Shareholder
Rights Plan
On
February 26, 2003, the Company’s Board of Directors unanimously adopted a
Shareholder Rights Plan (“Rights Plan”), which is designed to extend the
provisions of a similar rights plan originally adopted in October of 1993. Under
the Rights Plan, Preference Share Purchase Rights (“Rights”) are authorized and
granted at the rate of one Right for each outstanding common share. Each Right
entitles the registered holder of common shares to buy a fraction of a share of
the new series of Preference Shares (“Series A Preference Shares”) at an
exercise price of $30.00, subject to adjustment. The Rights will be exercisable
and will detach from the common share, only if a person or group acquires 20
percent or more of the common shares, announces a tender or exchange offer that
if consummated will result in a person or group beneficially owning 20 percent
or more of the common shares or if the Board of Directors declares a person or
group owning 10 percent or more of the outstanding common shares to be an
Adverse Person (as defined in the Rights Plan). Once exercisable, each Right
will entitle the holder (other than the acquiring person) to purchase units of
Series A Preference Share (or, in certain circumstances, common shares of the
acquiring person) with a value of twice the Rights exercise price. The Company
will generally be entitled to redeem the Rights at $0.001 per Right at any time
until the close of business on the tenth day after the Rights become
exercisable. The Rights will expire at the close of business on
February 26, 2013.
Shares
Reserved for Future Issuance
The
Company has reserved common shares for future issuance as of December 31,
2008, as follows:
|
|
|
|
Share
option plans
|
|
|
24,222,336 |
|
Convertible
preference shares
|
|
|
3,818,395 |
|
Employee
share purchase plan
|
|
|
276,813 |
|
Total
|
|
|
28,317,544 |
|
|
|
|
|
|
Share
Options
At
December 31, 2008, the Company had share-based compensation plans, as
described below. The aggregate number of common shares that may be issued under
these plans is 28,065,000 shares.
In
October of 2007, the Board of Directors (the “Board”) approved a company-wide
grant of options to purchase common shares. The purpose of the grant was to
improve the level of employee ownership in the business by using existing
share-based option plans to bring the Company in line with competitive industry
levels. Of the total 6,635,000 options granted, 5,185,000 options were made
subject to shareholder approval of a commensurate increase in the number of
shares available for the grant of options under the Company’s existing share
option plans. In addition, all options granted in February of 2008 as part of
the Company’s annual compensation plan were subject to the aforementioned
shareholder approval. As of December 31, 2007, the 5,185,000 shares from
October of 2007 were not included in any of the options outstanding disclosures,
options granted disclosures, or share-based compensation expense as they were
not deemed granted for accounting purposes until shareholder approval was
obtained in May of 2008.
In May of
2008, the shareholders approved the increase in the number of shares available
for issuance under the Company’s existing share option plans. Upon shareholder
approval, the Company recognized share-based compensation expense for the
remaining 5,185,000 share options granted in October of 2007 and the
company-wide grant of 3,521,300 share options from February of
2008.
These
shares vest according to the Company’s standard four-year vesting schedule which
provides for 25% cliff vesting on the first year anniversary of the legal date
of grant and monthly vesting of the remaining 75% of shares over the next three
years. For accounting purposes, the expense related to the cliff vesting feature
will be recognized from May of 2008 through the first corresponding anniversary
of the legal grant date.
Share
Option Plan
Under the
Company’s amended 1981 Share Option Plan (“Option Plan”) the Company grants
qualified and non-qualified share options to employees and other individuals, as
determined by the Board of Directors, at exercise prices of not less than the
fair market value of the Company’s common shares on the date of grant. Options
granted under the Option Plan may be exercised when vested and generally expire
ten years from the date of the grant or three months from the date of
termination of employment (longer in case of death or certain retirements).
Options granted generally vest over four years and certain options may fully
vest upon a change of control of the Company. The Option Plan will terminate on
November 15, 2011.
Up to
25,600,000 shares are authorized for issuance under the Option Plan. As of
December 31, 2008, options covering 18,798,499 common shares were
outstanding under the Option Plan.
Restricted
Share Plan
The
Company also has a Restricted Share Plan (“Restricted Plan”) which provides for
the issuance of options or grants of common shares to certain employees and
other individuals as determined by the Board of Directors at fair market value
of the common shares on the grant date. Prior to 2005, options or shares could
be granted at not less than 85% of fair market value of the common shares on the
grant date. Each option issued under the Restricted Plan will be a non-statutory
share option under federal tax laws and will have a term not in excess of ten
years from the grant date or three months from the date of termination of
employment (longer in the case of death or certain retirements). Options granted
generally vest over four years and certain options may fully vest upon a change
of control of the Company. The Restricted Plan will terminate on
November 15, 2011.
Up to
2,750,000 shares are authorized for issuance under the Restricted Plan, subject
to the condition that not more than 25,600,000 shares are authorized under both
the Option Plan and the Restricted Plan. As of December 31, 2008, options
covering 1,655,566 common shares were outstanding under the Restricted
Plan.
Directors
Share Option Plan and Other Options
In 1992,
the shareholders approved a Directors Share Option Plan (“Directors Plan”) which
provides for the issuance of options to purchase common shares to non-employee
directors of the Company at 100% of the fair market value of the shares on the
date of the grant. Up to 1,350,000 shares are authorized for issuance during the
term of the Directors Plan. Options generally vest on the date of grant and have
a term of up to ten years. As of December 31, 2008, options for 999,500
common shares were outstanding under the Directors Plan.
In
addition, in July of 2002, the Company granted a non-qualified fully-vested
option to a director to purchase 15,000 common shares at 100% of the fair market
value of the shares on the date of grant, which will expire in ten years. This
option was not issued as part of the Directors Plan.
In August
of 2007, the Company granted a non-qualified option to Steven B. Engle, CEO, to
purchase 1,100,000 common shares at 100% of the fair market value of the shares
on the date of grant. The option is subject to the Company’s typical four-year
vesting schedule and will expire 10 years from the date of issuance. The option
was not issued as part of the Company’s Option Plan or the Restricted
Plan.
Share
Option Plans Summary
A summary
of the status of the all of Company’s share option plans as of December 31,
2008, 2007 and 2006, and changes during years ended on those dates is presented
below:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Options:
|
|
|
Shares
|
|
|
Price*
|
|
|
Shares
|
|
|
Price*
|
|
|
Shares
|
|
|
Price*
|
|
Outstanding
at beginning of year
|
|
|
|
11,108,120 |
|
|
$ |
3.66 |
|
|
|
6,229,864 |
|
|
$ |
4.22 |
|
|
|
5,422,096 |
|
|
$ |
4.96 |
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
(2) |
|
|
|
2,784,750 |
|
|
|
1.59 |
|
|
|
5,545,850 |
|
|
|
2.95 |
|
|
|
1,480,300 |
|
|
|
1.70 |
|
|
(3) |
|
|
|
8,691,000 |
|
|
|
3.28 |
|
|
|
500,000 |
|
|
|
5.00 |
|
|
|
— |
|
|
|
— |
|
Exercised
|
|
|
|
(85,740 |
) |
|
|
1.54 |
|
|
|
(252,920 |
) |
|
|
1.60 |
|
|
|
(3,733 |
) |
|
|
1.41 |
|
Forfeited,
expired or cancelled (4)
|
|
|
|
(2,687,947 |
) |
|
|
3.46 |
|
|
|
(914,674 |
) |
|
|
4.50 |
|
|
|
(668,799 |
) |
|
|
4.68 |
|
Outstanding
at end of year
|
|
|
|
19,810,183 |
|
|
|
3.24 |
|
|
|
11,108,120 |
|
|
|
3.66 |
|
|
|
6,229,864 |
|
|
|
4.22 |
|
Exercisable
at end of year
|
|
|
|
8,575,803 |
|
|
|
|
|
|
|
5,261,399 |
|
|
|
|
|
|
|
4,245,736 |
|
|
|
|
|
Weighted
average fair value of options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
(2) |
|
|
|
|
|
|
$ |
0.94 |
|
|
|
|
|
|
$ |
1.80 |
|
|
|
|
|
|
$ |
1.16 |
|
|
(3) |
|
|
|
|
|
|
$ |
0.99 |
|
|
|
|
|
|
$ |
0.89 |
|
|
|
|
|
|
|
— |
|
*
|
Weighted-average
exercise price:
|
(1)
|
Option
price less than market price on date of grant as provided for in the
Restricted Share Plan.
|
(2)
|
Option
price equal to market price on date of
grant.
|
(3)
|
Option
price greater than market price on date of
grant.
|
(4)
|
The
Company adjusts for forfeitures as they
occur.
|
The
following table summarizes information about share options outstanding at
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range
of
Exercise
Prices
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
Number
|
|
|
Life*
|
|
|
Price**
|
|
|
Number
|
|
|
Price**
|
|
|
$0.62 – $1.58 |
|
|
|
2,290,895 |
|
|
|
8.56 |
|
|
$ |
1.14 |
|
|
|
716,459 |
|
|
$ |
1.39 |
|
|
1.64 – 2.11 |
|
|
|
1,793,869 |
|
|
|
7.04 |
|
|
|
1.85 |
|
|
|
1,029,135 |
|
|
|
1.78 |
|
|
2.12 – 2.17 |
|
|
|
2,293,750 |
|
|
|
8.56 |
|
|
|
2.17 |
|
|
|
873,085 |
|
|
|
2.17 |
|
|
2.18 – 2.70 |
|
|
|
161,812 |
|
|
|
7.19 |
|
|
|
2.46 |
|
|
|
41,342 |
|
|
|
2.44 |
|
|
2.71 – 2.71 |
|
|
|
3,437,700 |
|
|
|
8.31 |
|
|
|
2.71 |
|
|
|
419,500 |
|
|
|
2.71 |
|
|
2.79 – 3.56 |
|
|
|
2,106,820 |
|
|
|
5.55 |
|
|
|
3.38 |
|
|
|
1,443,790 |
|
|
|
3.38 |
|
|
3.58 – 3.65 |
|
|
|
56,703 |
|
|
|
0.40 |
|
|
|
3.63 |
|
|
|
53,162 |
|
|
|
3.62 |
|
|
3.67 – 3.67 |
|
|
|
5,250,084 |
|
|
|
8.28 |
|
|
|
3.67 |
|
|
|
1,580,780 |
|
|
|
3.67 |
|
|
3.84 – 9.75 |
|
|
|
2,017,550 |
|
|
|
4.40 |
|
|
|
6.32 |
|
|
|
2,017,550 |
|
|
|
6.32 |
|
|
9.99 – 12.99 |
|
|
|
401,000 |
|
|
|
2.78 |
|
|
|
10.42 |
|
|
|
401,000 |
|
|
|
10.42 |
|
|
$0.62 – $12.99 |
|
|
|
19,810,183 |
|
|
|
7.41 |
|
|
|
3.24 |
|
|
|
8,575,803 |
|
|
|
3.94 |
|
Options
vested and expected to vest
|
|
|
|
17,420,515 |
|
|
|
|
|
|
|
3.31 |
|
|
|
|
|
|
|
|
|
*
|
Weighted-average
remaining contractual life
|
**
|
Weighted-average
exercise price
|
The
weighted average remaining contractual term of outstanding share options at
December 31, 2008, was 7.4 years and the aggregate intrinsic value was
zero. The weighted average remaining contractual term of exercisable share
options at December 31, 2008, was 6.1 years and the aggregate intrinsic
value was zero.
Equity
Line of Credit
On
October 21, 2008, the Company entered into a common share purchase
agreement (the “Purchase Agreement”) with Azimuth Opportunity Ltd. (“Azimuth”),
pursuant to which it obtained a committed equity line of credit facility (the
“Facility”) under which the Company may sell up to $60 million of its registered
common shares to Azimuth over a 24-month period, subject to certain conditions
and limitations. XOMA is not obligated to utilize any of the $60 million
Facility and remains free to enter other financing transactions. Pursuant to the
terms of the Purchase Agreement, the Company determines, in its sole discretion,
the timing, dollar amount and floor price per share of each draw down under the
Facility, subject to certain conditions and limitations. The number and price of
shares sold in each draw down are determined by a contractual formula designed
to approximate fair market value, less a discount which may range from 2.65% to
6.65%. If the daily volume weighted average price of the Company’s common shares
falls below a threshold price of $1.00 on any trading day during a draw down
period, Azimuth will not be required to purchase the pro-rata portion of common
shares allocated to that day. However, at its election, Azimuth may buy the
pro-rata portion of shares allocated to that day at the threshold price less a
negotiated discount. The Purchase Agreement also provides that from time to time
and in its sole discretion, the Company may grant Azimuth the right to exercise
one or more options to purchase additional common shares during each draw down
pricing period for the amount of shares based upon the maximum option dollar
amount and the option threshold price specified by the Company. Shares under the
Facility are sold pursuant to a prospectus which forms a part of a registration
statement declared effective by the Securities and Exchange Commission on
May 29, 2008. From the inception of the Facility through December 31,
2008, the Company sold 7,932,432 common shares under the Facility for aggregate
gross proceeds of $7.5 million, and $52.5 million remains available under the
Facility at year end. This includes the sale of 4.0 million shares under
the Facility in December of 2008 that Azimuth agreed to purchase notwithstanding
that the relevant volume weighted average prices were under the threshold price
of $1.00. Under the terms of the Purchase Agreement, the Company negotiated a
discount rate of 8.86% for this draw down. Prior to the successful conclusion of
negotiations, Azimuth was not obligated to purchase these shares. Offering
expenses incurred through December 31, 2008 related to this Facility were
$0.3 million.
Warrants
In July
of 2008, the remaining 125,000 warrants issued to Incyte Corporation expired.
These warrants, to purchase common shares at $6.00 per share, were issued in
July of 1998 as partial payment of license fees. As of December 31, 2007,
there were 125,000 of these warrants outstanding.
5.
|
Commitments and
Contingencies
|
Collaborative
Agreements, Royalties and Milestone Payments
The
Company is obligated to pay royalties, ranging generally from 1.5% to 5% of the
selling price of the licensed component and up to 40% of any sublicense fees to
various universities and other research institutions based on future sales or
licensing of products that incorporate certain products and technologies
developed by those institutions.
In
addition, the Company has committed to make potential future “milestone”
payments to third parties as part of licensing and development programs.
Payments under these agreements become due and payable only upon the achievement
of certain developmental, regulatory and/or commercial milestones. Because it is
uncertain if and when these milestones will be achieved, such contingencies,
aggregating up to $79.0 million have not been recorded on the consolidated
balance sheet. The Company is unable to determine precisely when and if payment
obligations under the agreements will become due as these obligations are based
on milestone events, the achievement of which is subject to a significant number
of risks and uncertainties.
Purchase
Obligations
In
September of 2007, XOMA entered into a five-year purchase agreement for custom
cell culture medium for use in research and development activities. Under the
terms of the agreement, the Company is obligated to meet certain purchase
commitments of approximately $0.1 million per year over the next five years.
These amounts were met for the years ended December 31, 2008 and 2007 and
are not included in the Consolidated Balance Sheet.
Leases
As of
December 31, 2008, the Company leased administrative, research facilities,
and office equipment under operating leases expiring on various dates through
May of 2014.
Future
minimum lease commitments are as follows (in thousands):
|
|
|
|
|
|
Operating
Leases
|
|
2009
|
|
|
4,041 |
|
2010
|
|
|
4,162 |
|
2011
|
|
|
4,171 |
|
2012
|
|
|
3,946 |
|
2013
|
|
|
2,300 |
|
Thereafter
|
|
|
617 |
|
Minimum
lease payments
|
|
$ |
19,237 |
|
|
|
|
|
|
Total
rental expense was approximately $4.1 million, $3.6 million and $3.1 million for
the years ended December 31, 2008, 2007 and 2006, respectively. Rental
expense based on leases allowing for escalated rent payments are recognized on a
straight-line basis. The Company is required to restore certain of its leased
property to certain conditions in place at the time of lease. The Company
believes these costs would not be material to its operations.
Legal
Proceedings
In
September of 2004, XOMA (US) LLC entered into a collaboration with Aphton for
the treatment of gastrointestinal and other gastrin-sensitive cancers using
anti-gastrin monoclonal antibodies. In May of 2006, Aphton filed for bankruptcy
protection under Chapter 11, Title 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the District of Delaware,
No. 06-10510 (CSS). XOMA (US) LLC filed a proof of claim in the proceeding,
as an unsecured creditor of Aphton, for approximately $594,000. Aphton and the
Official Committee of Unsecured Creditors filed a Proposed Plan of
Reorganization that would result in a liquidation of Aphton. The creditors have
voted in favor of the plan, and the bankruptcy court has confirmed it. It is not
presently known what, if any, distributions will be made to holders of unsecured
claims. There were no developments material to XOMA in the United States
Bankruptcy Court proceedings involving Aphton during the year ended
December 31, 2008.
The
Company recognized $0.4 million in income tax benefit in 2008 relating to
refundable credits. There was no income tax expense for 2007 and
2006.
The
significant components of net deferred tax assets as of December 31, 2008
and 2007 are as follows (in millions):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Capitalized
research and development expenses
|
|
$ |
79.6 |
|
|
$ |
80.3 |
|
Net
operating loss carryforwards
|
|
|
103.5 |
|
|
|
93.6 |
|
Research
and development and other credit carryforwards
|
|
|
20.6 |
|
|
|
21.2 |
|
Other
|
|
|
11.0 |
|
|
|
10.5 |
|
Total
deferred tax assets
|
|
|
214.7 |
|
|
|
205.6 |
|
Valuation
allowance
|
|
|
(214.7 |
) |
|
|
(205.6 |
) |
Net
deferred tax assets
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
The net
increase in the valuation allowance was $9.1 million, $42.3 million and $5.9
million for the years ended December 31, 2008, 2007 and 2006, respectively.
Approximately $13.1 million and $23.1 million in unutilized federal net
operating loss carryforwards expired in 2008 and 2007, respectively. An
additional $10.9 million in California net operating loss carryforwards expired
unutilized in 2008.
SFAS 109
provides for the recognition of deferred tax assets if realization of such
assets is more likely than not. Based upon the weight of available evidence,
which includes the Company’s historical operating performance and carryback
potential, the Company has determined that total deferred tax assets should be
fully offset by a valuation allowance.
XOMA’s
accumulated federal, state, and foreign tax net operating loss carryforwards and
credit carryforwards as of December 31, 2008, are as follows:
|
|
|
|
|
|
|
|
|
Amounts
(in millions)
|
|
|
Expiration
Dates
|
|
Federal
|
|
|
|
|
|
|
NOLs
|
|
$ |
159.5 |
|
|
|
2009 – 2028 |
|
Credits
|
|
|
10.5 |
|
|
|
2009 – 2028 |
|
State
|
|
|
|
|
|
|
|
|
NOLs
|
|
|
132.5 |
|
|
|
2014 – 2029 |
|
Credits
|
|
|
15.0 |
|
|
Do not expire
|
|
Foreign
|
|
|
|
|
|
|
|
|
NOLs
|
|
|
332.0 |
|
|
Do
not expire
|
|
The
Company’s activities in Ireland and the adoption of FIN 48 in 2007 have allowed
it to record previously unrecorded net operating losses related to its Irish
subsidiary. The availability of the Company’s net operating loss and tax credit
carryforwards may be subject to substantial limitation if it should be
determined that there has been a change in ownership of more than 50% of the
value of the Company’s shares over a three-year period.
On
January 1, 2007 the Company adopted FIN 48 which clarifies the accounting
for uncertainty in income taxes recognized in the Company’s financial statements
in accordance with SFAS 109 and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition and measurement of a tax position taken or
expected to be taken in a tax return. The adoption of FIN 48 did not have a
material impact on the Company.
The
Company files income tax returns in the U.S. federal jurisdiction, state of
California and Ireland. The Company’s federal income tax returns for tax years
2005 and beyond remain subject to examination by the Internal Revenue Service.
The Company’s California and Irish income tax returns of the tax years 2004 and
beyond remain subject to examination by the Franchise Tax Board and Irish
Revenue Commissioner. In addition, all of the net operating losses and research
and development credit carryforwards that may be used in future years are still
subject to adjustment.
The
Company did not have unrecognized tax benefits as of December 31, 2008 and
does not expect this to change significantly over the next twelve months. In
connection with the adoption of FIN 48, the Company will recognize interest and
penalties accrued on any unrecognized tax benefits as a component of income tax
expense. As of December 31, 2008, the Company has not accrued interest or
penalties related to uncertain tax positions.
7.
|
Related
Party Transactions
|
Related
party transactions during the years ended December 31, 2008 and 2007
consisted of relocation loans to two employees. The final balance of these loans
was forgiven in November of 2008. The initial loans of $70,000 and $150,000 were
granted in 2001 and 2004, respectively, and were forgiven, along with related
interest, over five and two-thirds and four years, respectively, contingent on
the employees continued employment with the Company. Total related party
balances as of December 31, 2008 and 2007 were zero and $38,000,
respectively.
Under
section 401(k) of the Internal Revenue Code of 1986, the Board of Directors
adopted, effective June 1, 1987, a tax-qualified deferred compensation plan
for employees of the Company. Participants may make contributions which defer up
to 50% of their eligible compensation per payroll period, up to a maximum for
2008 of $15,500 (or $20,500 for employees over 50 years of age). The Company
may, at its sole discretion, make contributions each plan year, in cash or in
the Company’s common shares, in amounts which match up to 50% of the salary
deferred by the participants. The expense related to these contributions was
$1.1 million, $1.0 million and $0.8 million for the years ended
December 31, 2008, 2007 and 2006, respectively, and 100% was paid in common
shares in each year.
Workforce
Reduction
In
January of 2009, the Company announced a workforce reduction of approximately 42
percent, or 144 employees, a majority of which were employed in manufacturing
and related support functions. A charge of approximately $3 million is expected
to be recorded in the first quarter of 2009 for severance and other costs
related to the workforce reduction. As a result, the Company is temporarily
suspending operations in four of its leased buildings. The Company’s leases on
these four buildings expire in the period from 2011 to 2014 and total minimum
lease payments due from January of 2009 until expiration of the leases are $7.2
million. In addition, the net book value of fixed assets relating to these four
buildings is approximately $12.5 million as of December 31, 2008, and will
be subject to impairment review. The Company is currently evaluating its options
as to the future use of these leased spaces.
Expansion
of Collaboration with Takeda
In
February of 2009, XOMA expanded its existing collaboration with Takeda to
provide Takeda with access to multiple antibody technologies, including a suite
of research and development technologies and integrated information and data
management systems. The Company received a $29.0 million expansion fee, of which
$23.2 million was received in cash in February of 2009 and the remainder was
withheld for payment to the Japanese taxing authority. In addition, the Company
expects to pay approximately $1.5 million of additional expenses to Takeda
related to the agreement.
10.
|
Subsequent
Events- Debt Repayment and Financings in
2009
|
Repayment
of Goldman Sachs Term Loan
In
September of 2009, the Company fully repaid its term loan facility with Goldman
Sachs. In 2009 prior to such repayment, the Company was not in compliance with
the requirements of the relevant provisions of this loan facility, due to the
cessation of royalties from sales of RAPTIVA®
related to its market withdrawal in the first half of 2009. Repayment of this
loan facility discharged all of the Company’s obligations to the
lenders.
Sale of LUCENTIS®
Royalty
Stream
In the
third quarter of 2009, the Company sold the LUCENTIS®
royalty stream to Genentech for $25.0 million and will not receive any further
royalties on sales of LUCENTIS®.
Registered
Direct Financings and Other Financings
In the
second quarter of 2009, the Company raised approximately $22.0 million, before
deducting placement agent fees and estimated offering expenses of approximately
$1.6 million, in two separate registered direct offerings. Certain institutional
investors
purchased
22.2 million units, with each unit consisting of one of the Company’s common
shares and a warrant to purchase 0.5 of a common share. The warrants represent
the right to acquire an aggregate of up to 11.1 million common
shares.
In addition, the Company sold approximately 34.3 million common
shares to Azimuth for approximately $26.4 million, before deducting placement
agent fees and estimated offering expenses of approximately $0.4 million.
11.
|
Quarterly
Financial Information (unaudited)
|
The
following is a summary of the quarterly results of operations for the years
ended December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations
|
|
|
|
Quarter
Ended
|
|
|
|
March
31
|
|
|
June
30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In
thousands, except per share amounts)
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues (1)
|
|
$ |
12,057 |
|
|
$ |
11,116 |
|
|
$ |
7,894 |
|
|
$ |
36,920 |
|
Total
operating costs and expenses (2)
|
|
|
25,083 |
|
|
|
29,907 |
|
|
|
26,438 |
|
|
|
25,293 |
|
Other
expense, net
|
|
|
(1,149 |
) |
|
|
(1,899 |
) |
|
|
(1,818 |
) |
|
|
(2,028 |
) |
Net
income (loss)
|
|
|
(14,175 |
) |
|
|
(20,690 |
) |
|
|
(20,362 |
) |
|
|
9,982 |
|
Basic
and diluted net income (loss) per common share
|
|
$ |
(0.11 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.15 |
) |
|
$ |
0.07 |
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues (1)
|
|
$ |
12,252 |
|
|
$ |
14,136 |
|
|
$ |
43,140 |
|
|
$ |
14,724 |
|
Total
operating costs and expenses (2)
|
|
|
20,838 |
|
|
|
21,667 |
|
|
|
20,423 |
|
|
|
23,868 |
|
Other
expense, net (3)
|
|
|
(7,342 |
) |
|
|
(807 |
) |
|
|
(900 |
) |
|
|
(733 |
) |
Net
income (loss)
|
|
|
(15,928 |
) |
|
|
(8,338 |
) |
|
|
21,817 |
|
|
|
(9,877 |
) |
Basic
net income (loss) per common share
|
|
$ |
(0.14 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.17 |
|
|
$ |
(0.07 |
) |
Diluted
net income (loss) per common share
|
|
$ |
(0.14 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.16 |
|
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Revenues
in the quarter ended December 31, 2008 include a non-recurring fee
from Novartis of $13.7 million relating to a restructuring of the
existing collaboration agreement. Revenues in the quarter ended
September 30, 2007 include a $30.0 million non-recurring license fee
from Pfizer.
|
(2)
|
Operating
expenses for the quarter ended December 31, 2008 include a reversal
of the bonus accrual of $3.0 million, as the Company determined it
would not pay 2008 bonuses. Operating expenses for the quarter ended
September 30, 2007 include a non-recurring credit of $2.8 million
related to an agreement reached with a major collaborator regarding
material costs previously recorded under the collaboration
agreement.
|
(3)
|
Other
expense for the quarter ended March 31, 2007 includes $6.1 million
related to the revaluation of the embedded derivative to fair market value
and the payment in common shares, of the additional interest feature, on
the Company’s convertible debt.
|
F-30