1. Description of Business

XOMA Corporation (referred to as “XOMA” or the “Company”), a Delaware corporation, has a long history of discovering and developing innovative therapeutics derived from its unique platform of antibody technologies. The Company has typically sought to license these therapeutic assets to licensees who take on the responsibilities of later stage development, approval and commercialization. In addition, XOMA has licensed antibody technologies on a non-exclusive basis to other companies who desire to access this platform for their own discovery efforts. In 2016, XOMA dedicated its research and development efforts to advancing its portfolio of product candidates that have the potential to treat a variety of endocrine diseases, including advancing the development of X358 for the treatment of congenital hyperinsulinism and hypoglycemia in hyperinsulinemic patients following bariatric surgery. XOMA’s strategy has evolved and its current focus is on developing or acquiring revenue generating assets and coupling them with a lean corporate infrastructure. As XOMA’s business model is based on the objective of out-licensing assets to other pharmaceutical companies for them to commercialize and market any resultant products, the Company expects that a significant portion of any future revenue will be based on payments it may receive from its licensees.

Going Concern

The Company has incurred operating losses since its inception resulting in an accumulated deficit of $1.2 billion and has working capital of $1.7 million and $27.9 million in total outstanding debt at June 30, 2017. Management expects to incur operating losses and negative cash flows for the foreseeable future and, as a result, the Company will require additional capital to fund its operations and execute its business plan. As of June 30, 2017, the Company had $12.5 million in cash and cash equivalents, which is available to fund future operations. In the second quarter of 2017, Novartis International Pharmaceutical Ltd. (“Novartis”) achieved a clinical development milestone pursuant to a license agreement and, as a result, the Company earned a $10.0 million milestone payment which was reported as a trade receivable in the condensed consolidated balance sheet as of June 30, 2017 (see Note 4). Taking into account the receipt of this $10.0 million milestone payment, and consummation of the agreement in principle with Les Laboratories Servier (“Servier”) (see Note 13), without the receipt of additional funds from license agreements or additional equity or debt financing, the Company will only be able to fund its operations and make scheduled loan payments into August 2018. Therefore, the Company determined there is substantial doubt about its ability to continue as a going concern.

The Company may not be able to obtain sufficient additional funding through monetizing certain of its existing assets, entering into new license agreements, issuing additional equity or debt instruments or any other means, and if it is able to do so, they may not be on satisfactory terms. The Company’s ability to raise additional capital in the equity and debt markets, should the Company choose to do so, is dependent on a number of factors, including, but not limited to, the market demand for the Company’s common stock, which itself is subject to a number of pharmaceutical development and business risks and uncertainties, as well as the uncertainty that the Company would be able to raise such additional capital at a price or on terms that are favorable to the Company. Consistent with the actions the Company has taken in the past, including the restructuring in December 2016 and February 2017, it will take steps intended to enable the continued operation of the business which may include out-licensing of assets and reducing other expenditures that are within the Company’s control. These reductions in expenditures may have a material adverse impact on the Company’s ability to achieve certain of its planned objectives. Even if the Company is able to source additional funding, it may be forced to further reduce its operations if its business prospects do not improve. If the Company is unable to source additional funding, it may be forced to shut down operations altogether. These condensed consolidated financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary in the event the Company can no longer continue as a going concern.