NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Over the Company’s 37 year history, it built an extensive portfolio of fully-funded programs by advancing product candidates into the earlier stages of development and then licensing them to licensees who assumed the responsibilities of later stage development, approval and commercialization. Fully-funded programs are those for which the Company’s partners pay all of the development and commercialization costs. As licensees advance these programs, the Company is eligible for potential milestone and royalty payments.
In March 2017, the Company transformed its strategy to become a royalty aggregator with a focus on expanding its portfolio of fully-funded programs by out-licensing internally developed product candidates and acquiring potential milestone and royalty revenue streams on additional product candidates. The Company combined its royalty-aggregator model with a significantly reduced corporate cost structure to further build value for its shareholders. The Company expects that a significant portion of future revenue will be based on payments it may receive for milestones and royalties related to these programs.
2. Basis of Presentation and Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions among consolidated entities were eliminated upon consolidation.
Liquidity and Financial Condition
With the exception of the year ended December 31, 2017, the Company has typically incurred significant operating losses and negative cash flows from operations since its inception. As of December 31, 2017, the Company had cash and cash equivalents of $43.5 million. The Company has evaluated and concluded there are no conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern for a period of one year following the date that these financial statements are issued.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, management evaluates its estimates including, but not limited to, those related to contingent warrant liabilities, revenue recognition, debt amendments, long-lived assets, restructuring liabilities, legal contingencies, 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, such as the Company’s billing under government contracts and the Company’s accrual for clinical trial expenses. Under the Company’s contracts with the National Institute of Allergy and Infectious Diseases (“NIAID”), a part of the National Institutes of Health (“NIH”), the Company bills using NIH provisional rates and thus is subject to future audits at the discretion of NIAID’s contracting office. These audits can result in an adjustment to revenue previously reported which potentially could be significant. In March 2016, the Company effected the novation of its remaining active contract with NIAID to Ology Bioservices, Inc. (“Ology Bioservices”) (formerly known as Nanotherapeutics, Inc.) (see Note 6). The billings made prior to the effective date of the novation of such contract are still subject to future audits, which may result in significant adjustments to reported revenues.
Revenue Recognition
Revenue is 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 or determinable; and (4) collectability is reasonably assured. The determination of criteria (2) is based on management’s judgments regarding whether a continuing performance obligation exists. The 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 collectability of those fees.
F-8
The Company recognizes revenue from its license
arrangements, and royalties.
In prior years, the Company had also recognized revenues for reimbursements of research and development costs under collaboration agreements as the services were performed.
Revenue arrangements with multiple elements are divide
d into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the
partner
and whether there is objective and reliable evidence of the fair value of the undelivered items. Each deliverable
in the arrangement is evaluated to determine whether it meets the criteria to be accounted for as a separate unit of accounting or whether it should be combined with other deliverables. In order to account for the multiple-element arrangements, the Company
identifies the deliverables included within the arrangement and evaluates which deliverables represent separate units of accounting. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable may be an obligation
to deliver services, a right or license to use an asset, or another performance obligation. The consideration received is allocated among the separate units of accounting based on their respective fair values and the applicable revenue recognition criteri
a are applied to each of the separate units. Advance payments received in excess of amounts earned are classified as deferred revenue until earned.
License Fees
Revenue from non-refundable license, technology access or other payments under license agreements are recognized over the estimated period when the transfer of related materials, process and know-how should be delivered to the licensee. After the delivery of the materials, process and know-how to the licensee, the Company has no continuing obligation to perform under the license agreements.
License agreements with certain third parties also provide for contingent payments to be paid to the Company based solely upon the performance of the partner. For such contingent payments revenue is recognized upon completion of the milestone event, once confirmation is received from the third party, provided that collection is reasonably assured and the other revenue recognition criteria have been satisfied.
Contract and Other Revenues
Contract revenue for research and development involved the Company providing research and development services to collaborative parties or others. Cost reimbursement revenue under collaborative agreements was recorded as contract and other revenues and was recognized as the related research and development costs were incurred, as provided for under the terms of these agreements. Revenue for certain contracts was accounted for by a proportional performance, or output-based, method where performance was based on estimated progress toward elements defined in the contract. The amount of contract revenue and related costs recognized in each accounting period were based on management’s estimates of the proportional performance during the period. Adjustments to estimates based on actual performance were recognized on a prospective basis and did not result in reversal of revenue should the estimate to complete had been extended.
Up-front fees associated with contract revenue were recorded as license fees and were recognized in the same manner as the final deliverable, which was generally ratably over the period of the continuing performance obligation. Given the uncertainties of research and development collaborations, significant judgment was required to determine the duration of the arrangement.
Royalty revenue and royalty receivables are recorded in the periods these royalty amounts are earned, if estimable and collectability is reasonably assured. The royalty revenue and receivables recorded in these instances are based upon communication with the Company’s licensees, historical information and forecasted sales trends.
Sale of Future Revenue Streams
The Company has sold its rights to receive certain milestones and royalties on product sales. In the circumstance where the Company has sold its rights to future milestones and royalties under a license agreement and also maintains limited continuing involvement in the arrangement (but not significant continuing involvement in the generation of the cash flows that are due to the purchaser), the Company defers recognition of the proceeds it receives for the milestone or royalty stream and recognizes such deferred revenue as contract and other revenue over the life of the underlying license agreement. The Company recognizes this revenue under the "units-of-revenue" method. Under this method, amortization for a reporting period is calculated by computing a ratio of the proceeds received from the purchaser to the total payments expected to be made to the purchaser over the term of the agreement, and then applying that ratio to the period’s cash payment.
F-9
Estimating the total payments expected to be received by the purchaser over the term of such arrangemen
ts requires management to use subjective estimates and assumptions. Changes to the Company’s estimate of the payments expected to be made to the purchaser over the term of such arrangements could have a material effect on the amount of revenues recognized
in any particular period.
Research and Development Expenses
The Company expenses research and development costs as incurred. Research and development expenses consist of direct costs such as salaries and related personnel costs, material and supply costs, and research-related allocated overhead costs, such as facilities costs. In addition, research and development expenses have included costs related to clinical trials. Such amounts are expensed as incurred.
Stock-Based Compensation
The Company recognizes compensation expense for all stock-based payment awards made to the Company’s employees, consultants and directors that are expected to vest based on estimated fair values. The valuation of stock option awards is determined at the date of grant using the Black-Scholes Option Pricing Model (the “Black-Scholes Model”). The Black-Scholes Model requires inputs such as the expected term of the option, expected volatility and risk-free interest rate. To establish an estimate of expected term, the Company considers the vesting period and contractual period of the award and its historical experience of stock option exercises, post-vesting cancellations and volatility. The estimate of expected volatility is based on the Company’s historical volatility. The risk-free rate is based on the yield available on United States Treasury zero-coupon issues corresponding to the expected term of the award.
The Company records compensation expense for service-based awards over the vesting period of the award on a straight-line basis. For awards with performance-based conditions, the Company records the expense over the remaining service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of a performance-based condition is probable based on the expected satisfaction of the performance conditions as of the reporting date. The amount of stock-based compensation expense recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest.
The valuation of restricted stock units (“RSUs”) is determined at the date of grant using the Company’s closing stock price.
In January 2017, the Company adopted Accounting Standards Update (“ASU”) No. 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, (“ASU 2016-09”). ASU 2016-09 is aimed at the simplification of several aspects of the accounting for employee share-based payment transactions, including accounting for forfeitures, income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Pursuant to the adoption of ASU 2016-09, the Company has made an election to record forfeitures when they occur. Previously, stock-based compensation was based on the number of awards expected to vest after considering estimated forfeitures. The change in accounting principle with regards to forfeitures was adopted using a modified retrospective approach. The adoption of ASU 2016-09 did not have a material impact on the Company’s consolidated financial statements
.
Restructuring and Impairment Charges
Restructuring costs are primarily comprised of severance costs related to workforce reductions, contract termination costs and asset impairments. The Company recognizes restructuring charges when the liability has been incurred, except for employee termination benefits that are incurred over time. Generally, employee termination benefits (i.e., severance costs) are accrued at the date management has committed to a plan of termination and employees have been notified of their termination dates and expected severance payments. Key assumptions in determining the restructuring costs include the terms and payments that may be negotiated to terminate certain contractual obligations and the timing of employees leaving the Company. Other costs, including contract termination costs, are recorded when the arrangement is terminated. Asset impairment charges have been, and will be, recognized when management has concluded that the assets have been impaired.
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 and that can be liquidated without prior notice or penalty to be cash equivalents.
F-10
Property and Equipment
Property and equipment is stated at cost less depreciation. Equipment depreciation is calculated using the straight-line method over the estimated useful lives of the assets (three years). Leasehold improvements were depreciated using the straight-line method over the shorter of the lease terms or the useful lives. Amortization expense for assets acquired through capital leases was included in depreciation expense in the consolidated statements of comprehensive income (loss). Upon the sale, retirement or disposal of assets, the cost and related accumulated depreciation and amortization are removed from the consolidated balance sheets, and the resulting gain or loss, if any, is reflected in other income (expense), net in the consolidated statements of comprehensive income (loss). Repairs and maintenance costs are charged to expense as incurred.
The carrying value of the property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. During the years ended December 31, 2017 and 2016, the Company recognized impairment charges of $0.2 million and $0.2 million, respectively.
Warrants
The Company had issued warrants to purchase shares of its common stock in connection with financing activities. The Company accounted for some of these warrants as a liability at fair value and others as equity at fair value. The fair value of the outstanding warrants was estimated using the Black-Scholes Model. The Black-Scholes Model required inputs such as the expected term of the warrants, expected volatility and risk-free interest rate. These inputs were subjective and required significant analysis and judgment to develop. For the estimate of the expected term, the Company used the full remaining contractual term of the warrant. The Company determined the expected volatility assumption in the Black-Scholes Model based on historical stock price volatility observed on the Company’s underlying stock. The assumptions associated with contingent warrant liabilities were reviewed each reporting period and changes in the estimated fair value of these contingent warrant liabilities were recognized in revaluation of contingent warrant liabilities within the consolidated statements of comprehensive income (loss).
Income Taxes
The Company accounts for income taxes using the liability method under which deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount which is more likely than not to be realizable.
The recognition, derecognition and measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at each reporting date. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. To date, there have been no interest or penalties charged in relation to the unrecognized tax benefits.
Net Income (Loss) per Share
Available to Common Stockholders
Basic net income (loss) per share available to common stockholders is based on the weighted average number of shares of common stock outstanding during the period. During periods of income, the Company allocates participating securities a proportional share of net income, after deduction of a deemed dividend on preferred stock, determined by dividing total weighted average participating securities by the sum of the total weighted average number of common stock and participating securities (the “two-class method”). The Company’s convertible preferred stock participates in any dividends declared by the Company on its common stock and are therefore considered to be participating securities. For the year ended December 31, 2017, the convertible preferred stock had a deemed dividend which represented the accretion of a beneficial conversion feature. As such, the net income for the year ended December 31, 2017 was adjusted for the convertible preferred stock deemed dividend related to the beneficial conversion feature on these shares at issuance. During periods of loss, the Company allocates no loss to participating securities because they have no contractual obligation to share in the losses of the Company. Diluted net income (loss) per share available to common stockholders is based on the weighted average number of shares outstanding during the period, adjusted to include the assumed conversion of preferred stock, and the exercise of certain stock options, RSUs, and warrants for common stock. The calculation of diluted income (loss) per share available to common stockholders requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of any outstanding options, RSUs or warrants and the presumed exercise of such securities are dilutive to earnings (loss) per share available to common stockholders for the period, adjustments to net income (loss) used in the calculation are required to remove the change in fair value of the warrants for the period. Likewise, adjustments to the denominator are required to reflect the related dilutive shares. (See Note 11).
F-11
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of two components: net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to gains and losses that under U.S. GAAP are recorded as an element of stockholders’ equity, but are excluded from net income (loss). The Company did not record any transactions within other comprehensive income (loss) in the periods presented and, therefore, the net income (loss) and comprehensive income (loss) were the same for all periods presented.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance codified in Accounting Standards Codification (“ASC”) 606,
Revenue Recognition — Revenue from Contracts with Customers
, which amends the guidance in ASC 605,
Revenue Recognition
. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued an accounting update to defer the effective date by one year for public entities such that it is now applicable for annual and interim periods beginning after December 15, 2017. Early adoption is permitted for periods beginning after December 15, 2016. ASC 606 also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company is required to adopt the standard on January 1, 2018. To date, the Company has primarily derived its revenues from various license and collaboration arrangements and sale of future royalties. The consideration the Company is eligible to receive under these agreements includes upfront payments, milestone payments and royalties. Each of the Company’s agreements has unique terms that will need to be evaluated separately under ASC 606. The Company has completed its assessment of its active license and collaboration agreements and sale of future royalty arrangements, the impact of the new guidance on its consolidated financial statements, as well as the evaluation of the disclosure requirements under the new standard. The Company will adopt the new standard using the modified retrospective method. The Company has evaluated the accounting, transition and disclosure requirements of the new standard and does not expect it to have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, (“ASU 2016-02”). Under ASU 2016-02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. ASU 2016-02 will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. ASU 2016-02 is effective for the Company for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is in the process of assessing the impact of ASU No. 2016-02 on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)
, (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing and contingent consideration payments made after a business combination. ASU 2016-15 is effective for all interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated statements of cash flows.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
, (“ASU 2017-04”). ASU 2017-09 streamlines the application of modification accounting by stating that when making a change to the terms or conditions of a share-based payment award, a company should apply modification accounting to the award, unless each of the following conditions is met: 1. The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification, and 2. The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and 3. The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. ASU 2017-09 is effective for all interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-09 to have a material impact on its consolidated financial statements.
F-12
3. Consolidated Financial Statement Detail
Cash and Cash Equivalents
At December 31, 2017, cash and cash equivalents consisted of demand deposits of $34.9 million and money market funds of $8.6 million with maturities of less than 90 days at the date of purchase. At December 31, 2016, cash and cash equivalents consisted of demand deposits of $21.5 million and money market funds of $4.2 million with maturities of less than 90 days at the date of purchase.
Property and Equipment, net
Property and equipment, net consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Equipment and furniture
|
|
$
|
124
|
|
|
$
|
14,023
|
|
Leasehold improvements
|
|
|
—
|
|
|
|
554
|
|
|
|
|
124
|
|
|
|
14,577
|
|
Less: Accumulated depreciation and amortization
|
|
|
(41
|
)
|
|
|
(13,541
|
)
|
Property and equipment, net
|
|
$
|
83
|
|
|
$
|
1,036
|
|
As of December 31, 2016, property and equipment held under capital leases, included under equipment and furniture above, amounted to $0.3 million, with accumulated amortization of $0.1 million. The Company terminated these capital lease equipment agreements in March 2017. Depreciation and amortization expense was $0.3 million, $0.8 million, and $1.5 million for the years ended December 31, 2017, 2016, and 2015, respectively.
During the year ended December 31, 2017, the Company completed the sale of equipment and disposal of other certain equipment located in one of its leased facilities for total proceeds of $1.6 million. The total carrying value of the equipment sold and disposed of was $0.4 million. Accordingly, the Company recorded a gain of $1.2 million on the sale and disposal of equipment on the other income (expense), net line of the Company’s consolidated statement of comprehensive income (loss).
In connection with the restructuring activities implemented in December 2016, the Company determined that the leasehold improvements located in one of its leased facilities are no longer expected to be used by the Company. The Company determined that an impairment charge equal to the net book value of the leasehold improvements of $0.2 million should be recorded as the future economic value, if any, that may be realized from the leasehold improvements would be negligible in a sublease transaction. The impairment charge is reflected within the restructuring charge in the consolidated statement of comprehensive income (loss) for the year ended December 31, 2016. During the year ended December 31, 2017, the Company recognized an impairment charge of $0.2 million related to one of its leased facilities. There were no significant impairment charges recognized during the year ended December 31, 2015.
Accrued and Other Liabilities
Accrued and other liabilities consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accrued payroll and other benefits
|
|
$
|
141
|
|
|
$
|
1,582
|
|
Accrued clinical trial costs
|
|
|
—
|
|
|
|
458
|
|
Accrued incentive compensation
|
|
|
229
|
|
|
|
—
|
|
Accrued legal and accounting fees
|
|
|
431
|
|
|
|
385
|
|
Deferred rent
|
|
|
765
|
|
|
|
707
|
|
Liability related to sublease
|
|
|
800
|
|
|
|
—
|
|
Other
|
|
|
179
|
|
|
|
1,083
|
|
Total
|
|
$
|
2,545
|
|
|
$
|
4,215
|
|
F-13
4. Collaborative, Licensing and Other Arrangements
Collaborative and Other Agreements
Novartis – Gevokizumab and IL-1 Beta
On August 24, 2017, the Company and Novartis Pharma AG (“Novartis”) entered into a license agreement (the “XOMA-052 License Agreement”) under which the Company granted to Novartis an exclusive, worldwide, royalty-bearing license to gevokizumab, a novel anti-Interleukin-1 (“IL-1”) beta allosteric monoclonal antibody (the “Antibody”) and related know-how and patents (altogether, the “XOMA IP”). Under the terms of the XOMA-052 License Agreement, Novartis will be solely responsible for the development and commercialization of the Antibody and products containing the Antibody. The Company completed the transfer of the required proprietary know-how, process, materials and inventory relating to the XOMA IP to Novartis as of December 31, 2017.
On August 24, 2017, pursuant to a separate agreement (the “IL-1 Target License Agreement”), the Company granted to Novartis non-exclusive licenses to its intellectual property covering the use of IL-1 beta targeting antibodies in the treatment and prevention of cardiovascular disease and other diseases and conditions, and an option to obtain an exclusive license (the “Exclusivity Option”) to such intellectual property for the treatment and prevention of cardiovascular disease. The Company also granted Novartis the right of first negotiation with respect to certain transactions relating to the licensed intellectual property.
Under the XOMA-052 License Agreement, the Company received total consideration of $30.0 million for the license and rights granted to Novartis. Of the total consideration, $15.7 million was paid in cash and $14.3 million (equal to €12.0 million) was paid by Novartis Institutes for BioMedical Research, Inc. (“NIBR”), on behalf of the Company, to settle the Company’s
outstanding debt with Les Laboratories Servier (the
“Servier Loan”). In addition, NIBR extended the maturity date on the Company’s debt to Novartis (see Note 8). The Company also received $5.0 million cash related to the sale of 539,131 shares of the Company’s common stock, at a purchase price of $9.2742 per share. The fair market value of the common stock issued to Novartis was $4.8 million, based on the closing stock price of $8.93 per share on August 24, 2017, resulting in a $0.2 million premium paid to the Company (see Note 12). Based on the achievement of pre-specified criteria, the Company is eligible to receive up to $438.0 million in development, regulatory and commercial milestones. The Company is also eligible to receive royalties on sales of licensed products, which are tiered based on sales levels and range from the high single digits to mid-teens. Under the IL-1 Target License Agreement, the Company received an upfront cash payment of $10.0 million and is eligible to receive low single-digit royalties on canakinumab sales in cardiovascular indications. Should Novartis exercise the Exclusivity Option, the royalties on canakinumab sales will increase to the mid-single digits.
The XOMA-052 License Agreement and IL-1 Target License Agreement were accounted for as one arrangement because they were entered into at the same time in contemplation of each other. The Company concluded that there are multiple deliverables under the combined arrangement which consisted of (i) the licenses to IL-1 beta targeting antibodies, (ii) the license to gevokizumab antibody and (iii) the transfer of know-how, process, materials and inventory related the gevokizumab antibody. The Company concluded that the license to the gevokizumab antibody and the related transfer of know-how process, materials and inventory each do not have stand-alone value. Accordingly, the Company combined these two deliverables into a single unit of accounting. The Company determined that the Exclusivity Option is a substantive option and not priced at a significant and incremental discount. Therefore, the Company concluded that the Exclusivity Option is not a deliverable. The agreements were evaluated pursuant to the provisions of the multiple-element arrangement guidance in determining how to recognize the revenue associated with each unit of account. The total arrangement consideration received from Novartis is $40.2 million and consists of the $25.7 million upfront cash payments, the $14.3 million Servier Loan payoff and the $0.2 million premium on the sale of the common stock. The total arrangement consideration was allocated to each unit of account based on their relative selling prices. Revenue was recognized as the revenue recognition criteria were met for each identified unit of account. During the year ended December 31, 2017, the Company recognized revenue of $31.9 million related to the licenses to IL-1 beta targeting antibodies and the consideration allocated to the gevokizumab antibody of $8.3 million upon completing the transfer of certain proprietary know-how, process, materials and inventory relating to the XOMA IP.
The Company determined that future contingent payments that may be received related to development, regulatory and sales milestones under the XOMA-052 License Agreement are based on the performance of Novartis and do not meet the definition of substantive milestones under the accounting guidance. Accordingly, revenue for the achievement of these milestones will be recognized in the period when the milestone is achieved. As of December 31, 2017, the Company has not recognized any milestone payments under the XOMA-052 License Agreement. The Company expects to recognize royalty revenue in the period of sale of the related products, based on the underlying contract terms. No such amounts were recognized during the year ended December 31, 2017.
F-14
Novartis – Anti-TGFβ Antibody
On September 30, 2015, the Company and Novartis International Pharmaceutical Ltd. (“Novartis International”) entered into a license agreement (the “License Agreement”) under which the Company granted Novartis International an exclusive, world-wide, royalty-bearing license to the Company’s anti-transforming growth factor beta (TGFβ) antibody program (the “anti-TGFβ Program”). Under the terms of the License Agreement, Novartis International has worldwide rights to the anti-TGFβ Program and is responsible for the development and commercialization of antibodies and products containing antibodies arising from the anti-TGFβ Program.
Under the License Agreement, the Company received a $37.0 million upfront fee. The Company is also eligible to receive up to a total of $480.0 million in development, regulatory and commercial milestones. Any such payments will be treated as contingent consideration and recognized as revenue when they are achieved, as the Company has no performance obligations under the License Agreement beyond the initial 90-day period. The Company is also eligible to receive royalties on sales of licensed products, which are tiered based on sales levels and range from a mid-single digit percentage rate to up to a low double-digit percentage rate. Novartis International’s obligation to pay royalties with respect to a particular product and country will continue for the longer of the date of expiration of the last valid patent claim covering the product in that country, or ten years from the date of the first commercial sale of the product in that country.
The License Agreement contains customary termination rights relating to material breach by either party. Novartis International also has a unilateral right to terminate the License Agreement on an antibody-by-antibody and country-by-country basis or in its entirety on one hundred eighty days’ notice.
The Company identified the following performance deliverables under the License Agreement: (i) the license, (ii) regulatory services to be delivered within 90 days from the Effective Date and (iii) transfer of materials, process and know-how, also to be delivered within 90 days from the Effective Date. The Company considered the provisions of the multiple-element arrangement guidance in determining how to recognize the revenue associated with these deliverables. The Company determined that none of the deliverables have standalone value and therefore has accounted for them as a single unit of account. The Company recognized the entire upfront payment as revenue in the consolidated statement of comprehensive income (loss) in 2015 as it had completed its performance obligations as of December 31, 2015. During the year ended December 31, 2017, Novartis International achieved a clinical development milestone pursuant to the License Agreement and, as a result, the Company earned a $10.0 million milestone payment which was recognized as license and collaborative fees in the consolidated statement of comprehensive income (loss). As of December 31, 2017, the Company is eligible to receive up to a total of $470.0 million in development, regulatory and commercial milestones.
In connection with the execution of the License Agreement, XOMA and Novartis Vaccines Diagnostics, Inc. (“NVDI”) executed an amendment to their Amended and Restated Research, Development and Commercialization Agreement dated July 1, 2008, as amended, relating to anti-CD40 antibodies (the “Collaboration Agreement Amendment”). Pursuant to the Collaboration Agreement Amendment, the parties agreed to reduce the royalty rates and period that XOMA is eligible to receive on sales of NVDI’s clinical stage anti-CD40 antibodies. These royalties are tiered based on sales levels and now range from a mid-single digit percentage rate to up to a low double-digit percentage rate and royalties are payable until the later of any licensed patent covering each product or ten years from the launch of each product. All other terms of the Amended and Restated Research, Development and Commercialization Agreement remained unchanged (see Note 8).
Rezolute
On December 6, 2017, the Company entered into a license agreement with Rezolute, Inc. (formerly AntriaBio, Inc.) (“Rezolute”) pursuant to which the Company granted an exclusive global license to Rezolute to develop and commercialize X358 (now “RZ358”) for all indications. The Company and Rezolute also entered into a common stock purchase agreement.
F-15
Under the terms of the license agreement, Rezolute is responsible for all development, regula
tory, manufacturing and commercialization activities associated with
RZ358
and is required to make certain clinical, regulatory and
commercial
milestone payments to the Company of up to $2
3
2
.0
million in the aggregate based on the achievement of pre-specified criteria. Under the license agreement, the Company is also eligible to receive royalties ranging from the high single digits to the mid-teens based upon annual net sales of
any commercial
product incorporating
RZ358
. Rezolute is obligated to take customary steps to advance
RZ358
, including using diligent efforts to commence the next clinical study for
RZ358
by a certain deadline and to meet certain spending requirements on an annual basis f
or the program until a marketing approval application for
RZ358
is accepted by the FDA.
Rezolute’s obligation to pay royalties with respect to a particular
RZ358
product and country will continue for the longer of the date of expiration of the last valid p
atent claim covering the product in that country, or twelve years from the date of the first commercial sale of the product in that country.
Rezolute has an option through June 1, 2019 to obtain an exclusive license for their choice of one of the Company’s
preclinical monoclonal antibody fragments, including X129, in exchange for a
$1.0 million
upfront option fee and additional clinical, regulatory and commercial milestone payments to the Company of up to $237.0 million in the aggregate based on the achieve
ment of pre-specified criteria as well as royalties ranging from the high single digits to the mid-teens based on annual net sales.
Pursuant to the license agreement and common stock purchase agreement, the Company is eligible to receive $6.0 million in cash and $12.0 million worth of Rezolute’s common stock contingent on the completion of its financing activities. Further, in the event that Rezolute does not complete a financing that raises at least $20.0 million in aggregate gross proceeds (“Qualified Financing”) by March 31, 2019, the Company will receive an additional number of shares of Rezolute’s common stock equal to $7.0 million divided by the weighted average of the closing bid and ask prices or the average closing prices of Rezolute’s common stock on the ten-day trading period prior to March 31, 2019. Finally, in the event that Rezolute is unable to complete a Qualified Financing by March 31, 2020, the Company is eligible to receive $15.0 million in cash in order to maintain the license. Under the common stock purchase agreement, Rezolute granted the Company the right and option to sell the greater of (i) 5,000,000 shares of common stock or (ii) one third of the aggregate shares held by the Company upon failure by Rezolute to list its shares of its common stock on the Nasdaq Stock Market or a similar national exchange on or prior to December 31, 2018.
In addition, under the terms of the license agreement, the Company is eligible to receive a low single digit royalty on sales of Rezolute’s other products from its current programs. Rezolute’s obligation to pay royalties with respect to a particular Rezolute product and country will continue for the longer of twelve years from the date of the first commercial sale of the product in that country or for so long as Rezolute or its licensee is selling such product in such country, provided that such royalty will terminate upon the termination of the licensee’s obligation to make payments to Rezolute based on sales of such product in such country.
The license agreement contains customary termination rights relating to material breach by either party. Rezolute also has a unilateral right to terminate the license agreement in its entirety on ninety days’ notice at any time. The Company has the right to terminate the license agreement if Rezolute challenges the licensed patents.
The Company concluded that there are multiple deliverables under the license agreement which consist of (i) the license to RZ358, (ii) the transfer of RZ358 materials and product data/filing, and (iii) the transfer of process and know-how related to RZ358. The Company concluded that the license to RZ358 and the related transfer of materials, product data/filing, process and know-how each do not have stand-alone value. Accordingly, the Company combined these three deliverables into a single unit of accounting. The Company determined that the option
to obtain an exclusive license for one of the Company’s preclinical monoclonal antibody fragments, including X129,
is a substantive option and not priced at a significant and incremental discount. Therefore, the Company concluded that the option is not a deliverable. Under the agreements, no consideration was exchanged upon execution of the arrangement. Rezolute agreed to issue shares of its common stock and pay cash to the Company upon the occurrence of Rezolute’s financing activities and related timing of those activities. At December 31, 2017, Rezolute has not completed any of its financing activities and therefore, the Company has not recognized any revenue under the arrangement.
Servier
In December 2010, the Company entered into a license and collaboration agreement (“Collaboration Agreement”) with Servier, to jointly develop and commercialize gevokizumab in multiple indications, which provided for a non-refundable upfront payment of $15.0 million that was received by the Company in January 2011. In addition, the Company received a loan of €15.0 million, which was fully funded in January 2011, with the proceeds converting to $19.5 million at the date of funding (see Note 8). Under the terms of the Collaboration Agreement, Servier had worldwide rights to cardiovascular disease and diabetes indications and had rights outside the United States and Japan to all other indications, including non-infectious intermediate, posterior or pan-uveitis, Behçet’s disease uveitis, pyoderma gangrenosum, and other inflammatory and oncology indications. XOMA retained development and commercialization rights in the United States and Japan for all indications other than cardiovascular disease and diabetes.
F-16
On September 28, 2015, Servier notified XOMA of its intention to terminate
the Collaboration Agreement, as amended, and return the gevokizumab rights to XOMA. The termination, which became effective on March 25, 2016, did not result in a change to the maturity date of the Company’s loan with Servier (see Note 8). As the Company
is no longer required to provide services to Servier under the Collaboration Agreement, the Company recognized all remaining deferred revenue of $0.6 million from the date of notification to March 25, 2016. The Company and Servier completed the final recon
ciliation of cost sharing under the collaboration and all related adjustments are reflected in the consolidated statement of comprehensive
income (
loss
)
for the year ended December 31, 2016.
For the years ended December 31, 2016 and 2015, the Company recor
ded revenue of $0.6 million and $1.2 million, respectively, from this Collaboration Agreement.
NIAID
In September 2008, the Company announced that it had been awarded a $64.8 million multiple-year contract funded with federal funds from NIAID (Contract No. HHSN272200800028C), to continue the development of anti-botulinum antibody product candidates. The contract work was being performed on a cost plus fixed fee basis over a three-year period. The Company recognizes revenue under the arrangement as the services are performed on a proportional performance basis. Consistent with the Company’s other contracts with the U.S. government, invoices are provisional until finalized. The Company operated under provisional rates from 2010 through 2014, subject to adjustment based on actual rates upon agreement with the government. In 2014, upon completion of a NIAID review of hours and external expenses, XOMA agreed to exclude certain hours and external expenses resulting in a $1.8 million adjustment to decrease previously invoiced balances. The adjustment was offset by a $1.9 million deferred revenue balance that was recorded in 2012 as a result of a rate adjustment for the period 2007 to 2009. This adjustment reduced accounts receivable and deferred revenue by $1.8 million to reflect the final settlement of the 2008 to 2013 hours and external review. NIAID has deferred payment of the remaining $0.4 million in accounts receivable pending the final agreement on the ongoing 2010 to 2013 final rate submission. The remaining $0.1 million in deferred revenue in connection with the 2011 NIH rate audit would be recognized upon completion of negotiations with and approval by the NIH. The Company recognized revenue of $0.1 million and $0.2 million under this contract, for the years ended December 31, 2017 and 2015. There was no revenue recognized during the year ended December 31, 2016. As of December 31, 2017, the Company wrote off the $0.4 million receivable from NIAID as the likelihood of collection is remote.
In October 2011, the Company announced that NIAID had awarded the Company a new contract under Contract No. HHSN272201100031C (“NIAID 4”) for up to $28.0 million over five years to develop broad-spectrum antitoxins for the treatment of human botulism poisoning. The contract work was being performed on a cost plus fixed fee basis over the life of the contract and the Company recognized revenue under the arrangement as the services were performed on a proportional performance basis. The Company recognized revenue of $1.1 million and $4.9 million under this contract, for the years ended December 31, 2016 and 2015, respectively. There was no revenue recognized during the year ended December 31, 2017. In March 2016, the Company effected a novation of the NIAID 4 to Ology Bioservices. The novation was effected upon obtaining government approval to transfer the contract to Ology Bioservices pursuant to the asset purchase agreement executed in November 2015 (see Note 6).
Pfizer
In August 2007, the Company entered into a license agreement (the “2007 Agreement”) with Pfizer Inc. (“Pfizer”) for non-exclusive, worldwide rights for XOMA’s patented bacterial cell expression technology for research, development and manufacturing of antibody products. From 2011 through 2015, the Company received milestone payments aggregating $4.2 million.
On December 3, 2015, the Company and Pfizer entered into a settlement and amended license agreement pursuant to which XOMA granted Pfizer a fully-paid, royalty-free, worldwide, irrevocable, non-exclusive license right to XOMA’s patented bacterial cell expression technology for phage display and other research, development and manufacturing of antibody products. Under the amended license agreement, the Company received a cash payment of $3.8 million in full satisfaction of all obligations to XOMA under the 2007 Agreement, including but not limited to potential milestone, royalty and other fees under the 2007 Agreement. The Company recognized the entire payment from Pfizer as revenue upon delivery of the license in 2015.
F-17
In August 2005, the Company entered into a license agreement with Wyeth (subsequently acquired by Pfizer) for non-exclusive, worldwide rights for certain
of XOMA’s patented bacterial cell expression technology for vaccine manufacturing. Under the terms of this agreement, the Company received a milestone payment in November 2012 relating to TRUMENBA®, a meningococcal group B vaccine marketed by Pfizer. The
Company’s right to royalties expires on a country-by-country basis upon the expiration of the last-to-expire licensed patent. The Company recognized
zero
and
$0.4 million of royalties earned from the sales of TRUMENBA during the year
s
ended December 31,
2017 and
2016. The royalties on sales of TRUMENBA for the years ended December 31, 2015 were not material. As discussed below under Sale of Future Revenue Streams, the Company sold its right to receive
all future
milestones and royalties on future sales of
products to HCRP in connection with the Royalty Interest Acquisition Agreement entered into in December 2016.
Novo Nordisk
On December 1, 2015, the Company and Novo Nordisk A/S (“Novo Nordisk”) entered into a license agreement under which XOMA granted to Novo Nordisk an exclusive, world-wide, royalty-bearing license to XOMA’s XMetA program of allosteric monoclonal antibodies that positively modulate the insulin receptor (the “XMetA Program”), subject to XOMA’s retained commercialization rights for rare disease indications. Novo Nordisk had an option to add these retained rights to its license upon payment of an option fee.
Novo Nordisk obtained worldwide rights to the XMetA Program and was solely responsible at its expense for the development and commercialization of antibodies and products containing antibodies arising from the XMetA Program, subject to the Company’s retained rights described above. The Company had transferred certain proprietary know-how and materials relating to the XMetA Program to Novo Nordisk. Under the agreement, the Company received a $5.0 million, non-creditable, non-refundable, upfront payment. Based on the achievement of pre-specified criteria, the Company was eligible to receive up to $290.0 million in development, regulatory and commercial milestones. The Company was also eligible to receive royalties on sales of licensed products, which would be tiered based on sales levels and range from a mid-single digit percentage rate to up to a high single digit percentage rate. Novo Nordisk’s obligation to pay development and commercialization milestones would continue for so long as Novo Nordisk was developing or selling products under the agreement, subject to the maximum milestone payment amounts set forth above. Novo Nordisk’s obligation to pay royalties with respect to a particular product and country would continue for the longer of the date of expiration of the last valid patent claim covering the product in that country, or ten years from the date of the first commercial sale of the product in that country.
The Company identified the following performance deliverables under the agreement: (i) the license, and (ii) the transfer of technology and know-how to be delivered within 60 days from December 1, 2015. The Company delivered the majority of the technology and know-how to Novo Nordisk as of December 31, 2015 and determined that any remaining items are perfunctory to the arrangement. Accordingly, the Company recognized the entire $5.0 million upfront fee as revenue in 2015.
On April 20, 2017, the Company received notice from Novo Nordisk regarding the termination of the license agreement due to strategic and business reasons. The termination of the license agreement became effective on July 20, 2017.
Sale of Future Revenue Streams
On December 21, 2016, the Company entered into two Royalty Interest Acquisition Agreements (together, the “Acquisition Agreements”) with HCRP. Under the first Acquisition Agreement, the Company sold its right to receive milestone payments and royalties on future sales of products subject to a License Agreement, dated August 18, 2005, between XOMA and Wyeth Pharmaceuticals (now Pfizer, Inc.) for an upfront cash payment of $6.5 million, plus potential additional payments totaling $4.0 million in the event three specified net sales milestones are met in 2017, 2018 and 2019. Based on estimated sales for 2017, the 2017 sales milestone was not achieved. The Company remains eligible to receive up to $3.0 million if specified net sales milestones are achieved in 2018 and 2019. Under the second Acquisition Agreement, the Company sold all rights to royalties under an Amended and Restated License Agreement dated October 27, 2006 between XOMA and Dyax Corp. for a cash payment of $11.5 million.
F-18
The Company classified the proceeds received from HCRP as deferred revenue, to be recognized as contract and other revenue over the life of the license agreements because of the Company's limited continuing involvement in the Acquisi
tion Agreements. Such limited continuing involvement is related to the Company’s undertaking to cooperate with HCRP in the event of a litigation or dispute related to the license agreements. Because the transaction was structured as a non-cancellable sale,
the Company does not have significant continuing involvement in the generation of the cash flows due to HCRP and there are no guaranteed rates of return to HCRP, the Company recorded the total proceeds of $18.0 million as deferred revenue. The deferred re
venue
is being
recognized as contract and other revenue over the life of the underlying license agreements under the "units-of-revenue" method. Under this method, amortization for a reporting period is calculated by computing a ratio of the proceeds receiv
ed from HCRP to the payments expected to be made to HCRP over the term of the Acquisition Agreements, and then applying that ratio to the period’s cash payment.
The Company recognized
$0.
3
million as contract and other revenue under these arrangements duri
ng the year ended December 31, 2017. As of December 31, 2017, the current and non-current portion of the remaining deferred revenue was $
0.6
million and
$17.
1
million, respectively. As of December 31, 2016, the Company classified the $18.0
million as non-current deferred revenue.
As of December 31, 2017, the net sales milestone related to 2017 was not met and therefore, the Company did not recognize any
revenue for
milestones under the first Acquisition Agreement.
5. Fair Value Measurements
The Company records its financial assets and liabilities at fair value. The carrying amounts of certain of the Company’s financial instruments, including cash equivalents, trade receivable and accounts payable, approximate their fair value due to their short maturities. Fair value is defined as the exchange price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The accounting guidance for fair value establishes a framework for measuring fair value and a fair value hierarchy that prioritizes the inputs used in valuation techniques. The accounting 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 – Observable inputs, such as quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs, either directly or indirectly, other than quoted prices in active markets for similar assets or liabilities, that are not active or other inputs that are not 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; therefore, requiring an entity to develop its own valuation techniques and assumptions.
The following tables set forth the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as follows (in thousands):
|
|
Fair Value Measurements at December 31, 2017 Using
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
|
Significant Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
(1)
|
|
$
|
34,907
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34,907
|
|
|
|
Fair Value Measurements at December 31, 2016 Using
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
(1)
|
|
$
|
4,161
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,161
|
|
(1) Included in cash and cash equivalents
During the years ended December 31, 2017 and 2016, there were no transfers between Level 1, Level 2, or Level 3 and the valuation techniques used did not change compared to the Company’s established practice.
F-19
The estimated fair value of the contingent warrant liabilities was determined using
the Black-Scholes Model, which
required
inputs such as the expected term of the warrants, volatility and risk-free interest rate. These inputs
were
subjective and generally require
d
significant analysis and judgment to develop. The Company’s common stock price
represented
a significant input that
affect
ed
the valuation of the warrants. The change in the fair value
was
recorded as a gain or loss in the revaluation of contingent warran
t liabilities line of the consolidated statements of comprehensive
income
(
loss
)
.
As of December 31, 2017, all the warrants accounted for as liability expired.
The estimated fair value of the contingent warrant liabilities was estimated using the following range of assumptions at December 31, 2016:
|
|
December 31,
|
|
|
|
2016
|
|
Expected volatility
|
|
64%
|
|
Risk-free interest rate
|
|
0.51%
|
|
Expected term (in years)
|
|
0.19
|
|
The following table provides a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the year ended December 31, 2016 (in thousands):
Balance at December 31, 2015
|
|
|
10,464
|
|
Decrease in estimated fair value of contingent warrant liabilities
upon revaluation
|
|
|
(10,464
|
)
|
Balance at December 31, 2016
|
|
$
|
—
|
|
The fair value of the Company’s outstanding interest-bearing obligations is estimated using the net present value of the payments, discounted at an interest rate that is consistent with market interest rates, which is a Level 2 input. The carrying amount and the estimated fair value of the Company’s outstanding interest-bearing obligations at December 31, 2017 and 2016 are as follows (in thousands):
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
Hercules term loan
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,850
|
|
|
$
|
16,453
|
|
Servier loan
|
|
|
—
|
|
|
|
—
|
|
|
|
12,231
|
|
|
|
12,242
|
|
Novartis note
|
|
|
14,572
|
|
|
|
14,178
|
|
|
|
14,086
|
|
|
|
13,836
|
|
Total interest bearing obligations
|
|
$
|
14,572
|
|
|
$
|
14,178
|
|
|
$
|
43,167
|
|
|
$
|
42,531
|
|
6. Dispositions
Biodefense Assets
On November 4, 2015, the Company and Ology Bioservices entered into an asset purchase agreement under which Ology Bioservices agreed to acquire XOMA’s biodefense business and related assets (including, subject to government approval, certain contracts with the U.S. government), and to assume certain liabilities of XOMA. As part of that transaction, the parties entered into an intellectual property license agreement (the “Ology Bioservices License Agreement”), under which XOMA agreed to license to Ology Bioservices certain intellectual property rights related to the purchased assets. Under the Ology Bioservices License Agreement, the Company was eligible to receive contingent consideration up to a maximum of $4.5 million in cash and 23,008 shares of common stock of Ology Bioservices, based upon Ology Bioservices achieving certain specified future operational objectives. In addition, the Company is eligible to receive 15% royalties on net sales of any future Ology Bioservices products covered by or involving the related patents or know-how.
F-20
On March 17, 2016, the Company effected a novation of
its
NIAID 4
contract
to
Ology Bioservic
es
. On March 23, 2016, the Company completed the transfer of NIAID 4 and certain related third-party service contracts and materials, and the grant of exclusive and non-exclusive licenses for certain of its patents and general know-how to
Ology Bioservices
. The Company believes that NIAID 4 and certain related third-party service contracts and materials related to the biodefense program transferred to
Ology Bioservices
include a sufficient number of key inputs and processes necessary to generate output from
a market participant’s perspective. Accordingly, the Company has determined that such assets
qualif
ied
as a business. The transaction had no impact on the Company’s consolidated financial statements as of, and for the year ended, December 31, 2016.
In February 2017, the Company executed an Amendment and Restatement to both the asset purchase agreement and Ology Bioservices License Agreement primarily to (i) remove Ology Bioservices’ obligation to issue 23,008 shares to the Company of its common stock under the asset purchase agreement, and (ii) revise the payment schedule related to the timing of the $4.5 million cash payments due to the Company under the Ology Bioservices License Agreement. Of the $4.5 million, $3.0 million was contingent upon Ology Bioservices achieving certain specified future operating objectives, which Ology Bioservices achieved in 2017. Based on the payment terms pursuant to the amended Ology Bioservices License Agreement, the Company is entitled to receive an aggregate of $4.6 million. The Company received $2.2 million during the year ended December 31, 2017, which was recognized as other income in the consolidated statement of comprehensive income (loss). As the amended Ology Bioservices License Agreement involves extended payment terms, the remaining $2.4 million, of which $1.7 million is due in monthly installments through July 2018 and $0.7 million is due in quarterly installments through September 2018, will be recognized as other income as the payments are received.
Manufacturing Facility
On November 5, 2015, the Company and Agenus West, LLC, a wholly-owned subsidiary of Agenus Inc. (“Agenus”), entered into an asset purchase agreement under which Agenus agreed to acquire XOMA’s manufacturing facility in Berkeley, California, together with certain related assets, including certain intellectual property related to the purchased assets under an intellectual property license agreement, and to assume certain liabilities of XOMA, in consideration for the payment to XOMA of up to $5.0 million in cash and the issuance to XOMA of shares of Agenus’ common stock having an aggregate value of up to $1.0 million.
On December 31, 2015, XOMA completed the sale of the manufacturing facility, including certain related equipment and furniture, and the grant of non-exclusive licenses for certain of its patents and general know-how to Agenus for cash consideration of $4.7 million, net of the assumed liabilities of $0.3 million at closing. In addition to the cash consideration, XOMA received 109,211 shares of common stock of Agenus with an aggregate value of $0.5 million, which the Company subsequently sold in August 2016. The remaining $0.5 million of Agenus common stock will only be received upon the Company’s satisfaction of certain organizational matters, which XOMA is unlikely to satisfy. Agenus also paid $0.2 million to the Company as consideration for the employees who would not have otherwise been retained by the Company had the manufacturing facility closed on October 31, 2015. At closing, the carrying value of the assets sold was $2.2 million. The Company believes that the assets related to the manufacturing facility and certain other assets sold to Agenus include all key inputs and processes necessary to generate output from a market participant’s perspective. Accordingly, the Company determined that such assets qualified as a business. The Company recorded the gain on the sale of a business of $3.5 million in the other income (expense), net line of the consolidated statement of comprehensive income (loss) for the year ended December 31, 2015.
7. Restructuring Charges
On December 19, 2016, the Board of Directors approved a restructuring of its business based on its decision to focus the Company’s efforts on clinical development, with an initial focus on the X358 clinical programs. The restructuring included a reduction-in-force in which the Company terminated 57 employees (the “2016 Restructuring”). In addition, effective December 21, 2016, the Company’s Chief Executive Officer retired from his position. In early 2017, the Company further revised its business model to prioritize out-licensing activities, further curtail research and development spending, and terminated five additional employees (the “2017 Restructuring”).
During the year ended December 31, 2017, the Company recorded charges of $3.4 million related to severance, other termination benefits and outplacement services in connection with the workforce reduction resulting from the 2017 Restructuring and 2016 Restructuring activities. During the year ended December 31, 2016, the Company recorded charges of $3.8 million related to severance, other termination benefits and outplacement services in connection with the workforce reduction resulting from the 2016 Restructuring. The Company recognized $0.6 million of non-cash stock-based compensation as a result of the acceleration of a former executive’s options and RSUs under his retention benefit agreement in 2016. In addition, in 2016, the Company recognized an asset impairment charge of $0.2 million related to leasehold improvements.
F-21
On July
22, 2015, the Company announced the Phase 3 EYEGUARD-B study of gevokizumab in patients with Behçet’s disease uveitis, run by Servier, did not meet the primary endpoint of increased time to first acute ocular exacerbation. Due to the results and the Compa
ny’s belief they would be predictive of results in its other EYEGUARD studies, in August 2015, the Company announced its intention to end the EYEGUARD global Phase 3 program. On August 21, 2015, the Company, in connection with its efforts to lower operatin
g expenses and preserve capital while continuing to focus on its endocrine product pipeline, implemented a restructuring plan (the “2015 Restructuring”) that included a workforce reduction resulting in the termination of 52 employees during the second half
of 2015.
During the years ended December 31, 2016 and 2015, the Company recorded a credit of $32,000 and a charge of $2.9 million, respectively, related to severance, other termination benefits and outplacement services in connection with the workforce reduction resulting from the 2015 Restructuring. In addition, the Company recognized additional restructuring charges of $29,000 and $0.8 million in contract termination costs in 2016 and 2015, respectively, which primarily include costs in connection with the discontinuation of the EYEGUARD studies.
The outstanding restructuring liabilities are included in accrued and other liabilities on the consolidated balance sheets. As of December 31, 2017 and 2016, the components of these liabilities are shown below (in thousands):
|
|
Employee
Severance
|
|
|
Contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Other
Benefits
|
|
|
Termination
Costs
|
|
|
Stock-based Compensation
|
|
|
Asset Impairment
|
|
Total
|
|
Balance at December 31, 2015
|
|
$
|
343
|
|
|
$
|
116
|
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
459
|
|
Restructuring charges
|
|
|
3,720
|
|
|
|
29
|
|
|
|
619
|
|
|
|
198
|
|
|
4,566
|
|
Non-cash charges
|
|
|
—
|
|
|
|
—
|
|
|
|
(619
|
)
|
|
|
(198
|
)
|
|
(817
|
)
|
Cash payments
|
|
|
(469
|
)
|
|
|
(145
|
)
|
|
—
|
|
|
—
|
|
|
(614
|
)
|
Balance at December 31, 2016
|
|
|
3,594
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
3,594
|
|
Restructuring charges
|
|
|
3,447
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
3,447
|
|
Cash payments
|
|
|
(6,911
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(6,911
|
)
|
Balance at December 31, 2017
|
|
$
|
130
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
130
|
|
The Company expects to pay the remaining $0.1 million in 2018.
8. Long-Term Debt and Other Financings
Novartis Note
In May 2005, the Company executed a secured note agreement (the “Note Agreement”) with Novartis, which was due and payable in full in June 2015. Under the Note Agreement, the Company borrowed semi-annually to fund up to 75% of the Company’s research and development and commercialization costs under its collaboration arrangement with Novartis, not to exceed $50.0 million in aggregate principal amount. Interest on the principal amount of the loan accrues at six-month London Interbank Offered Rate plus 2%, which was equal to 3.81% at December 31, 2017, 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 could 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 made this election for all interest payments. Accrued interest of $0.3 million, $0.4 million and $0.3 million was added to the principal balance of the note for the years ended December 31, 2017, 2016, and 2015, respectively. Loans under the Note Agreement were secured by the Company’s interest in its collaboration with Novartis, including any payments owed to it thereunder.
On September 30, 2015, concurrent with the execution of the License Agreement with Novartis International as discussed in Note 4, XOMA and NIBR, who assumed the rights to the note from NVDI, executed an amendment to the Note Agreement (the “Secured Note Amendment”) under which the parties extended the maturity date of the note from September 30, 2015 to September 30, 2020, and eliminated the mandatory prepayment previously required to be made with certain proceeds of pre-tax profits and royalties. In addition, upon achievement of a specified development and regulatory milestone, the then-outstanding principal amount of the note will be reduced by $7.3 million rather than the Company receiving such amount as a cash payment.
F-22
On
September 22, 2017, in connection with the XOMA-052 License Agreement with Novartis, the Company and NIBR executed an amendment to the Secured Note Amendment under which the parties further extended the maturity date of the Secured Note Amendment from Sept
ember 30, 2020 to September 30, 2022. All other terms of the Secured Note Amendment and original Note Agreement remain unchanged. The Company determined that the amendment resulted in a debt modification. As a result, the Secured Note Amendment will contin
ue to be accounted for using the effective interest method, with a new effective interest rate based on revised cash flows calculated on a prospective basis upon the execution of the amendment.
As of December 31,
2017
and
2016
, the outstanding principal
balance under this Secured Note Amendment was $
14.6
million and $
14.1
million, respectively, and was included in interest bearing obligations –
non-current
in the accompanying consolidated balance sheets.
Servier Loan Agreement
In December 2010, in connection with the Collaboration Agreement entered into with Servier, the Company executed a loan agreement with Servier (the “Servier Loan Agreement”), which provided for an advance of €15.0 million, which converted to approximately $19.5 million at that time. The loan was secured by an interest in the Company’s intellectual property rights to all gevokizumab indications worldwide, excluding certain rights in the U.S. and Japan. Interest was calculated at a floating rate based on a Euro Inter-Bank Offered Rate and subject to a cap. The interest rate was reset semi-annually in January and July of each year.
On January 9, 2015, Servier and the Company entered into Amendment No. 2 (“Loan Amendment”) to the Servier Loan Agreement to extend the maturity date of the loan from January 13, 2016 to three tranches of principal to be repaid as follows: €3.0 million on January 15, 2016, €5.0 million on January 15, 2017, and €7.0 million on January 15, 2018. All other terms of the Servier Loan Agreement remained unchanged. The loan would be immediately due and payable upon certain customary events of default. In January 2016, the Company made payments of €3.0 million in principal and €0.2 million in accrued interest to Servier.
In January 2017, the Company entered into Amendment No. 3 to the Servier Loan Agreement (the “Amendment No. 3”) which extended the maturity date of the portion of the loan equal to €5.0 million due on January 15, 2017 to July 15, 2017. The other terms of the Servier Loan Agreement remained unchanged. The Company determined that Amendment No. 3 resulted in a debt modification. As a result, the Company continued to account for the loan using the effective interest method, with a new effective interest rate based on revised cash flows calculated on a prospective basis upon the execution of the Amendment No. 3.
Upon initial issuance, the loan had a stated interest rate lower than the market rate based on comparable loans held by similar companies, which represented additional value to the Company. The Company recorded this additional value as a discount to the carrying value of the loan amount, at its fair value of $8.9 million.
The loan discount was amortized to interest expense under the effective interest method over the remaining life of the loan. The Company recorded non-cash interest expense resulting from the amortization of the loan discount of $0.4 million, $0.6 million and $0.7 million for the years ended December 31, 2017, 2016, and 2015, respectively. At December 31, 2016, the net carrying value of the loan was $12.2 million. For the years ended December 31, 2016 and 2015, the Company recorded an unrealized foreign exchange gain of $5,000 and an unrealized foreign exchange loss of $0.2 million, respectively, related to the re-measurement of the loan discount.
The outstanding principal balance under this loan was $12.6 million using a euro to US dollar exchange rate of 1.052, as of December 31, 2016. The Company recognized unrealized foreign exchange gains of $0.5 million and $1.9 million for the years ended December 31, 2016, and 2015, related to the re-measurement of the loan.
On August 25, 2017, NIBR settled the Servier Loan in cash by paying directly to Servier $14.3 million, which represented the outstanding balance of the loan based on a euro to dollar exchange rate of 1.1932. The funds that NIBR paid directly to Servier were a portion of the upfront payment due to XOMA under the XOMA-052 License Agreement (see Note 4). As a result of the debt being fully paid, the intellectual property securing the Servier Loan Agreement was released back to the Company. A loss on extinguishment of $0.1 million from the payoff of the loan was recognized in the consolidated statement of comprehensive income (loss) during the year ended December 31, 2017.
F-23
Hercules Term Loan
On February 27, 2015 (“Closing Date”), the Company entered into a loan and security agreement with Hercules Technology Growth Capital, Inc. (the “Hercules Term Loan”). The Hercules Term Loan had a variable interest rate that is the greater of either (i) 9.40% plus the prime rate as reported from time to time in The Wall Street Journal minus 7.25%, or (ii) 9.40%. The payments under the Hercules Term Loan were interest only until June 1, 2016 . The interest-only period was followed by equal monthly payments of principal and interest amortized over a 30-month schedule through the scheduled maturity date of September 1, 2018. As security for its obligations under the Hercules Term Loan, the Company granted a security interest in substantially all of its existing and after-acquired assets, excluding its intellectual property assets.
The Hercules Term Loan included certain affirmative and restrictive covenants, but did not include any financial covenants, and also included standard events of default, including payment defaults. Upon the occurrence of an event of default, a default interest rate of an additional 5% may have been applied to the outstanding loan balances, and Hercules may have declared all outstanding obligations immediately due and payable, and taken such other actions as set forth in the Hercules Term Loan.
The Company incurred debt issuance costs of $0.5 million in connection with the Hercules Term Loan. The Company was required to pay a final payment fee equal to $1.2 million on the maturity date, or such earlier date as the term loan was paid in full. The debt issuance costs and final payment fee were being amortized and accreted, respectively, to interest expense over the term of the term loan using the effective interest method. The Company recorded non-cash interest expense resulting from the amortization of the debt issuance costs and accretion of the final payment of $0.2 million, $0.7 million and $0.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
As of December 31, 2016, the outstanding principal balance of the Hercules Term Loan was $17.5 million, and the net carrying value was $16.9 million. On December 21, 2016, the Company entered into Amendment No. 1 (the “Amendment”) to the Hercules Term Loan. Under the Amendment, Hercules agreed to release its security interest in the assets subject to the Acquisition Agreements described in Note 4 above. In turn, in January 2017, the Company paid $10.0 million of the outstanding principal balance owed to Hercules. This amount was included in current interest-bearing obligations as of December 31, 2016. All other terms of the Hercules Term Loan remained unchanged.
On March 21, 2017, the remaining balance of the Hercules Term Loan was paid in full and the Company was not required to pay the 1% prepayment charge due pursuant to the terms of the loan. A loss on extinguishment of $0.5 million from the payoff of the Hercules Term Loan was recognized in the consolidated statement of comprehensive income (loss) during the year ended December 31, 2017.
In connection with the Hercules Term Loan, the Company issued unregistered warrants that entitle Hercules to purchase up to an aggregate of 9,063 unregistered shares of the Company’s common stock at an exercise price equal to $66.20 per share. These warrants are exercisable immediately and have a five-year term expiring in February 2020. The Company allocated the aggregate proceeds of the Hercules Term Loan between the warrants and the debt obligation. The fair value of the warrants of $0.5 million, which was determined using the Black-Scholes Model, was recorded as a discount to the debt obligation. The debt discount was amortized over the term of the loan using the effective interest method. The warrants are classified in stockholders’ equity (deficit) on the consolidated balance sheets. As of December 31, 2017, all of these warrants were outstanding.
Interest Expense
Amortization of debt issuance costs and discounts are included in interest expense. Interest expense in the consolidated statements of comprehensive income (loss) for the years ended December 31, 2017, 2016, and 2015, relates to the following debt instruments (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Novartis note
|
|
$
|
490
|
|
|
$
|
405
|
|
|
$
|
329
|
|
Servier loan
|
|
|
431
|
|
|
|
892
|
|
|
|
1,083
|
|
Hercules loan
|
|
|
311
|
|
|
|
2,628
|
|
|
|
2,223
|
|
Other
|
|
|
6
|
|
|
|
21
|
|
|
|
130
|
|
Total interest expense
|
|
$
|
1,238
|
|
|
$
|
3,946
|
|
|
$
|
3,765
|
|
F-24
9. Income Taxes
The Company is subject to an ownership change pursuant to IRC Section 382, which occurred in February 2017, which significantly limits its ability to use its net operating loss carryforwards and tax credits against its 2017 taxable income. Due to historical losses, there was no income tax expense for the years ended December 31, 2016, and 2015.
The provision for income taxes (all current) consists of the following (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Federal
|
|
$
|
1,649
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
13
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
1,662
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Reconciliation between the tax provision computed at the federal statutory income tax rate of 34% and the Company’s actual effective income tax rate is as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Federal tax at statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
Warrant valuation
|
|
|
—
|
|
|
|
7
|
%
|
|
|
29
|
%
|
Stock compensation and other permanent differences
|
|
|
6
|
%
|
|
|
—
|
|
|
(1)
|
%
|
Tax credits
|
|
(4)
|
%
|
|
|
2
|
%
|
|
(14)
|
%
|
Impact of 2017 Tax Act on change in deferred
|
|
|
128
|
%
|
|
|
—
|
|
|
|
—
|
|
Section 382 limitations
|
|
|
868
|
%
|
|
|
—
|
|
|
|
—
|
|
Valuation allowance
|
|
(1,022)
|
%
|
|
(43)
|
%
|
|
(48)
|
%
|
Total
|
|
|
10
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The significant components of net deferred tax assets at December 31, 2017 and 2016 were as follows (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Capitalized research and development expenses
|
|
$
|
26,367
|
|
|
$
|
53,557
|
|
Net operating loss carryforwards
|
|
|
4,701
|
|
|
|
123,672
|
|
Research and development and other credit carryforwards
|
|
|
12,225
|
|
|
|
25,297
|
|
Stock compensation
|
|
|
3,680
|
|
|
|
7,099
|
|
Deferred revenue
|
|
|
3,928
|
|
|
|
6,577
|
|
Other
|
|
|
883
|
|
|
|
1,724
|
|
Total deferred tax assets
|
|
|
51,784
|
|
|
|
217,926
|
|
Valuation allowance
|
|
|
(51,784
|
)
|
|
|
(217,926
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The net (decrease) increase in the valuation allowance was $(166.1) million, $8.2 million, and $19.6 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Accounting standards provide 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 four sources of taxable income including historical operating performance and the repeal of net operating loss carryback, the Company has determined that total deferred tax assets should be fully offset by a valuation allowance.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017. The Company has calculated the impact of the Tax Act in its year end income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing. In December 2017, SAB 118 was issued to address the application of U.S. GAAP in situations when a registrant does not have all the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, additional work may be necessary for a more detailed analysis of the Company's deferred tax assets and liabilities. Any subsequent adjustment to the provisional amounts will be recorded in 2018 when the analysis is complete.
F-25
Under ASC 740, Accounting for Income Taxes, the enactment of the Tax Act also requires companies to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the per
iod in which the new legislation is enacted.
Consequently, the Company accounted for
a
provisional estimated reduction of the d
eferred tax assets
from
$72.
7
million to $51.
8
million with a corresponding decrease to the Company’s valuation allowance.
The Co
mpany
expect
s
the new law to significantly reduce
its
tax rate in future periods, and
its
tax footnote reflects the effects of a federal tax rate reduction net of
its
valuation allowance.
As of January 1, 2017, the Company adopted ASU 2016-09 and as a result recognized a stock compensation excess windfall, net of operating loss carryforwards that were converted into deferred tax net operating losses of $1.8 million, with a corresponding increase in valuation allowance of $1.8 million.
Based on an analysis under Section 382 of the Internal Revenue Code (which subjects the amount of pre-change NOLs and certain other pre-change tax attributes that can be utilized to annual limitations), the Company experienced an ownership change in February 2017 which substantially limits the future use of its pre-change Net Operating Losses ("NOLs") and certain other pre-change tax attributes per year. The Company has excluded NOLs of $119.8 million and tax credit carryforwards of $15.4 million that will expire as a result of the annual limitations in these deferred tax assets as of December 31, 2017. To the extent that the Company does not utilize its carry-forwards within the applicable statutory carryforward periods, either because of Section 382 limitations or the lack of sufficient taxable income, the carryforwards will expire unused.
As of December 31, 2017, the Company had federal net operating loss carry-forwards of approximately $13.6 million and state net operating loss carry-forwards of approximately $27.3 million to offset future taxable income. The net operating loss carryforwards begin to expire in 2036 for federal and 2028 for state purposes. California net operating losses of $24.3 million, $41.2 million, and $22.4 million, expired in the years 2017, 2016, and 2015, respectively. The Company had federal orphan credit of $1.0 million which if not utilized will expire in 2037. The Company also had $19.8 million of California research and development tax credits which have no expiration date.
The Company files income tax returns in the U.S. federal jurisdiction, California, Maryland and Texas. The Company’s federal income tax returns for tax years 2014 and beyond remain subject to examination by the Internal Revenue Service. The Company’s state income tax returns for tax years 2013 and beyond remain subject to examination by state tax authorities. In addition, all of the net operating losses and research and development credit carry-forwards that may be used in future years are still subject to adjustment.
The following table summarizes the Company's activity related to its unrecognized tax benefits (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Balance at January 1
|
|
$
|
8,625
|
|
|
$
|
9,666
|
|
|
$
|
5,503
|
|
Increase related to current year tax position
|
|
|
581
|
|
|
|
592
|
|
|
|
2,687
|
|
(Decrease) increase related to prior year tax position
|
|
|
(3,705
|
)
|
|
|
(1,633
|
)
|
|
|
1,476
|
|
Balance at December 31
|
|
$
|
5,501
|
|
|
$
|
8,625
|
|
|
$
|
9,666
|
|
As of December 31, 2017, the Company had a total of $4.5 million of net unrecognized tax benefits, none of which would affect the effective tax rate upon realization. The Company currently has a full valuation allowance against its U.S. net deferred tax assets which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future.
The Company does not expect its unrecognized tax benefits to change significantly over the next twelve months. The Company will recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. Through December 31, 2017, the Company has not accrued interest or penalties related to uncertain tax positions.
10. Compensation and Other Benefit Plans
The Company grants qualified and non-qualified stock options, RSUs, common stock and other stock-based awards under various plans to directors, officers, employees and other individuals. Stock options are granted at exercise prices of not less than the fair market value of the Company’s common stock on the date of grant. Additionally, the Company has an Employee Stock Purchase Plan (“ESPP”) that allows employees to purchase Company shares at a purchase price equal to 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last day of the offering period.
F-26
Employee Stock Purchase
Plan
In May 2015, the Company’s stockholders approved the 2015 Employee Stock Purchase Plan (the “2015 ESPP”) which replaced the Company’s legacy 1998 ESPP. Under the 2015 ESPP, the Company reserved 15,000 shares of common stock for issuance as of its effective date of July 1, 2015, subject to adjustment in the event of a stock split, stock dividend, combination or reclassification or similar event. The 2015 ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 10% of their eligible compensation, subject to any plan limitations. The 2015 ESPP provides for six-month offering periods ending on May 31 and November 30 of each year, with the exception of the first offering period, which ran from July 1, 2015 through November 30, 2015, as the Company transitioned from the 1998 ESPP. At the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last day of the offering period.
In February 2017, the Compensation Committee and the Board of Directors adopted, and in May 2017, the Company’s stockholders approved, an amendment to the Company’s 2015 ESPP. The amendment (a) increased by 250,000 the shares of common stock (from 15,000 shares to a total of 265,000 shares) available for issuance under the 2015 ESPP; and (b) increased the maximum number of shares of common stock an employee may purchase in any offering period to 2,500.
During the years ended December 31, 2017, 2016, and 2015, employees purchased 5,314, 7,070, and 6,029 shares of common stock, respectively, under the 2015 ESPP.
Deferred Savings Plan
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 2017, 2016 and 2015 of $18,000 (or $24,000 for employees over 50 years of age). The Company may, at its sole discretion, make contributions each plan year, in cash or in shares of the Company’s common stock, in amounts which match up to 50% of the salary deferred by the participants. The expense related to these contributions was $0.5 million and $0.8 million for the years ended December 31, 2016, and 2015, respectively, and 100% was paid in common stock in each year. The Company applies shares from plan forfeitures of terminated employees toward the Company’s matching contribution. For the year ended December 31, 2017, the forfeitures exceeded the total matching contribution from the Company. Therefore, no expense was recognized by the Company.
Stock Option Plans
In May 2010, the Compensation Committee and the full Board adopted, and in July 2010 the Company’s stockholders approved, a new equity-based compensation plan, the 2010 Long Term Incentive and Share Award Plan, which has since been amended and restated as the Amended and Restated 2010 Long Term Incentive and Stock Award Plan (the “2010 Plan”). The 2010 Plan replaced the Company’s legacy Option Plan, Restricted Plan and 1992 Directors Share Option Plan (the “Directors Plan”) and provided a more current set of terms under which to provide this type of compensation.
In February 2016, the Compensation Committee and the Board of Directors adopted, and in May 2016, the Company’s stock holders approved an amendment to the 2010 Plan to, among other things, allow for an increase in the number of shares of common stock reserved for issuance by 170,000 shares to an aggregate of 1,108,560 shares.
In February 2017, the Compensation Committee and the Board of Directors adopted, and in May 2017, the Company’s stockholders approved, an amendment to the 2010 Plan. The amendment (a) increases the number of shares of common stock issuable over the term of the plan by an additional 1,470,502 to 2,579,062 shares in the aggregate; (b) increases the number of shares of common stock issuable under the plan as incentive stock options by an additional 2,004,087 to 2,579,062 shares; (c) increases the per person award limits for purposes of compliance with Section 162(m) of the Internal Revenue Code to 2,000,000 shares for options and stock appreciation rights and to 2,000,000 shares for other types of stock awards; and (d) for purposes of Section 162(m) (i) confirms existing performance criteria upon which performance goals may be based with respect to performance awards under the 2010 Plan, and (ii) confirms existing means of adjustment when calculating the attainment of performance goals for performance awards granted under the 2010 Plan.
F-27
From t
he 2010 Plan
, the Company
grants stock options, RSUs, and other stock-based awards to eligibl
e employees, consultants and directors. No further grants or awards will be made under the Option Plan, the Restricted Share Plan or the Directors Plan. Shares underlying options previously issued under the Option Plan, the Restricted Share Plan or the Dir
ectors Plan that are currently outstanding will, upon forfeiture, cancellation, surrender or other termination, become available under the 2010 Plan. Stock-based awards granted under the 2010 Plan may be exercised when vested and generally expire ten years
from the date of the grant or three to six months from the date of termination of employment (longer in case of death or certain retirements). Vesting periods vary based on awards granted, however, certain stock-based awards may vest immediately or may ac
celerate based on performance-driven measures.
As of December 31, 2017, the Company had 412,314 shares available for grant under the stock option plan. As of December 31, 2017, options and RSUs covering 1,641,492 shares of common stock were outstanding under the stock option plan.
Stock Options
Stock options generally vest monthly over three to four years for employees and one year for directors. Stock options held by employees who qualify for retirement age (defined as employees that are a minimum of 55 years of age and the sum of their age plus years of full-time employment with the Company exceeds 70 years) vest on the earlier of scheduled vest date or the date of retirement.
Performance-Based Stock Options
In February 2017, the Board of Directors approved a grant of 1,018,000 stock options to members of the Board of Directors, executives, and non-executive employees, subject to approval by the Company’s stockholders of an increase in the available shares under the 2010 Plan at the 2017 Annual Meeting of Stockholders. In May 2017, the shareholders approved the increase in the number of shares available for issuance under the Company’s 2010 Plan and 998,000 stock options were issued upon approval. As such, the stock options approved for grant in February 2017 were not deemed granted for accounting purposes until May 2017. The stock options granted to the non-employee board members and non-executive employees vest monthly over three years from the grant date. The stock options granted to the executives contain a combination of time-based and corporate performance-based vesting conditions.
In December 2017, the Company granted an additional 130,000 stock options to executives with corporate performance-based vesting conditions.
Stock-based compensation expense associated with the corporate performance-based stock options is recognized if the performance condition is considered probable of achievement using management’s best estimates. As of December 31, 2017, certain corporate-based milestones were achieved and therefore the related expense was recognized. During the year ended December 31, 2017, the Company recognized stock-based compensation expense of $1.8 million related to stock options with performance-based vesting criteria.
Stock Option Plans Summary
The following table summarizes the Company’s stock option activity for the year ended December 31, 2017:
|
|
Number of
shares
|
|
|
Weighted
Average
Exercise
Price
Per
Share
|
|
Outstanding at beginning of year
|
|
|
568,292
|
|
|
$
|
77.70
|
|
Granted
|
|
|
1,387,820
|
|
|
|
10.94
|
|
Exercised
|
|
|
(110,400
|
)
|
|
|
5.95
|
|
Forfeited, expired or cancelled
|
|
|
(223,647
|
)
|
|
|
84.40
|
|
Outstanding at end of year
|
|
|
1,622,065
|
|
|
$
|
24.54
|
|
Exercisable at end of year
|
|
|
849,279
|
|
|
$
|
32.79
|
|
Of the stock options outstanding as of December 31, 2017, 542,500 were granted subject to performance objectives tied to the achievement of corporate goals set by the Compensation Committee of the Company’s Board of Directors and will vest in full or part based on achievement of such goals. As of December 31, 2017, 330,000 of the performance-based stock options have vested upon achievement of the Company’s corporate goals for 2017.
The aggregate intrinsic value of stock options exercised in 2017 and 2015 was $2.4 million and $0.4 million, respectively. No stock options were exercised in 2016. The weighted-average grant-date fair value per share of the options granted in 2017, 2016 and 2015 was $10.26, $4.90 and $51.92, respectively.
F-28
As of December 31,
2017
, there were
1,622,065
stock options
outstanding
with a weighted average exercise price per share of $
24.54
, aggregate intrinsic value of
$
34.3
million
, and a weighted average remaining contractual term of
7.91
years. As of December 31,
2017
, there were
849,279
stock options exercisable with an aggregate
intrinsic value of
$
18.5
million
and a weighted average remaining contractual term of
7.65
years.
As of December 31, 2017, $8.6 million of total unrecognized compensation expense related to stock options is expected to be recognized over a weighted average period of 2.2 years.
Restricted Stock Units
RSUs generally vest over three years for employees and one year for directors. RSUs held by employees who qualify for retirement age (defined as employees that are a minimum of 55 years of age and the sum of their age plus years of full-time employment with the Company exceeds 70 years) vest on the earlier of scheduled vest date or the date of retirement.
Unvested RSU activity for the year ended December 31, 2017 is summarized below:
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average Grant-
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
Unvested balance at January 1, 2017
|
|
|
91,228
|
|
|
$
|
39.82
|
|
Granted
|
|
|
11,799
|
|
|
|
4.67
|
|
Vested
|
|
|
(62,405
|
)
|
|
|
37.63
|
|
Forfeited
|
|
|
(22,142
|
)
|
|
|
45.45
|
|
Unvested balance at December 31, 2017
|
|
|
18,480
|
|
|
$
|
18.00
|
|
The total grant-date fair value of RSUs that vested in 2017, 2016, and 2015, was $2.3 million, $5.3 million and $5.5 million, respectively. As of December 31, 2017, $88,000 of total unrecognized compensation expense related to employee RSUs was expected to be recognized over a weighted average period of 0.26 years.
Stock-based Compensation Expense
The fair value of stock options granted during the years ended December 31, 2017, 2016, and 2015, was estimated based on the following weighted average assumptions for:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
100
|
%
|
|
|
101
|
%
|
|
|
84
|
%
|
Risk-free interest rate
|
|
|
1.90
|
%
|
|
|
1.84
|
%
|
|
|
1.40
|
%
|
Expected term
|
|
5.6 years
|
|
|
5.6 years
|
|
|
5.6 years
|
|
The following table shows total stock-based compensation expense for stock options, RSUs and ESPP in the consolidated statements of comprehensive income (loss) (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Research and development
|
|
$
|
876
|
|
|
$
|
2,805
|
|
|
$
|
5,022
|
|
General and administrative
|
|
|
6,425
|
|
|
|
4,221
|
|
|
|
4,705
|
|
Restructuring
|
|
|
—
|
|
|
|
619
|
|
|
—
|
|
Total stock-based compensation expense
|
|
$
|
7,301
|
|
|
$
|
7,645
|
|
|
$
|
9,727
|
|
F-29
11. Net
Income (
Loss
)
per Share
Available to Common Stockholders
Potentially dilutive securities are excluded from the calculation of diluted net income (loss) per share available to common stockholders if their inclusion is anti-dilutive.
The following table shows the weighted-average outstanding securities considered anti-dilutive and therefore excluded from the computation of diluted net income (loss) per share
available to common stockholders
(in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Common stock options and RSUs
|
|
|
346
|
|
|
|
548
|
|
|
|
550
|
|
Warrants for common stock
|
|
|
100
|
|
|
|
894
|
|
|
|
960
|
|
Convertible preferred stock
|
|
|
4,372
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
4,818
|
|
|
|
1,442
|
|
|
|
1,510
|
|
The following is a reconciliation of the numerators and denominators used in calculating basic and diluted net income (loss) per share
available to common stockholders
(in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14,596
|
|
|
$
|
(53,530
|
)
|
|
$
|
(20,606
|
)
|
Less: Deemed dividend on convertible preferred stock
|
|
|
(5,603
|
)
|
|
|
—
|
|
|
|
—
|
|
Less: Allocation of undistributed earnings to participating securities
|
|
|
(3,279
|
)
|
|
|
—
|
|
|
|
—
|
|
Net income (loss) available to common stockholders, basic
|
|
|
5,714
|
|
|
|
(53,530
|
)
|
|
|
(20,606
|
)
|
Adjustments to undistributed earnings allocated to participating securities
|
|
|
96
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss) available to common stockholders, diluted
|
|
$
|
5,810
|
|
|
$
|
(53,530
|
)
|
|
$
|
(20,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used for basic net income (loss) per share available to common stockholders
|
|
|
7,619
|
|
|
|
6,021
|
|
|
|
5,890
|
|
Effect of dilutive stock options
|
|
|
360
|
|
|
|
—
|
|
|
|
—
|
|
Effect of dilutive warrants
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average shares outstanding used for diluted net income (loss) per share available to common stockholders
|
|
|
7,980
|
|
|
|
6,021
|
|
|
|
5,890
|
|
Basic net income (loss) per share of common stock
|
|
$
|
0.75
|
|
|
$
|
(8.89
|
)
|
|
$
|
(3.50
|
)
|
Diluted net income (loss) per share of common stock
|
|
$
|
0.73
|
|
|
$
|
(8.89
|
)
|
|
$
|
(3.50
|
)
|
12. Capital Stock
Biotechnology Value Fund Financing
In February 2017, the Company sold 1,200,000 shares of its common stock and 5,003 shares of Series X convertible preferred stock directly to Biotechnology Value Fund, L.P. and certain of its affiliates (“BVF”) in a registered direct offering, for aggregate net cash proceeds of $24.8 million.
BVF purchased the shares of common stock from the Company at a price of $4.03 per share, the closing stock price on the date of purchase. Each share of Series X convertible preferred stock has a stated value of $4,030 per share and is convertible into 1,000 shares of registered common stock based on a conversion price of $4.03 per share of common stock. The total number of shares of common stock issued upon conversion of all issued Series X convertible preferred stock will be 5,003,000 shares. Each share is convertible at the option of the holder at any time, provided that the holder will be prohibited from converting into common stock if, as a result of such conversion, the holder, together with its affiliates, would beneficially own a number of shares above a conversion blocker, which is initially set at 19.99% of the total common stock then issued and outstanding immediately following the conversion of such shares. As of December 31, 2017 if the preferred shares were converted, BVF would own 49.1% of the Company’s total outstanding common shares. As of December 31, 2017, none of the preferred stock has been converted into shares of the Company’s common stock.
F-30
The designations, preferences, rights and limitations of the convertible preferred shares are set forth in a Certificate of Designation of Pref
erences, Rights and Limitations of Series X convertible preferred stock filed with the Delaware Secretary of State. Shares of Series X convertible preferred stock will generally have no voting rights, except as required by law and except that the consent o
f the holders of the outstanding Series X convertible preferred stock will be required to amend the terms of the Series X preferred stock and to approve certain corporate actions. In the event of the Company’s liquidation, dissolution or winding up, holder
s of Series X convertible preferred stock will participate, on a pro-rata basis, with any distribution of proceeds to holders of common stock. Holders of Series X convertible preferred stock are entitled to receive dividends on shares of Series X convertib
le preferred stock equal (on an as if converted to common stock basis) to and in the same form as dividends actually paid on the Company’s common stock or other junior securities.
The Company evaluated the Series X convertible preferred stock for liability or equity classification under the applicable accounting guidance, and determined that equity treatment was appropriate because the Series X convertible preferred stock did not meet the definition of the liability instruments defined thereunder for convertible instruments. Specifically, the Series X convertible preferred shares are not mandatorily redeemable and do not embody an obligation to buy back the shares outside of the Company’s control in a manner that could require the transfer of assets. Additionally, the Company determined that the Series X convertible preferred stock would be recorded as permanent equity, not temporary equity, based on the relevant guidance given that they are not redeemable for cash or other assets (i) on a fixed or determinable date, (ii) at the option of the holder, and (iii) upon the occurrence of an event that is not solely within control of the Company.
The Company has also evaluated the embedded conversion and redemption features within the Series X convertible preferred stock in accordance with the accounting guidance for derivatives. Based on this assessment, the Company determined that the conversion option is clearly and closely related to the equity host, and thus, bifurcation is not required. The contingent redemption feature was determined to not be clearly and closely related to the equity-like host; however, it met the criteria as a scope exception for derivative accounting. Therefore, the contingent redemption feature was also not bifurcated from the Series X convertible preferred stock.
The fair value of the common stock into which the Series X convertible preferred stock is convertible exceeded the allocated purchase price of the Series X convertible preferred stock by $5.6 million on the date of issuance, as such the Company recorded a deemed dividend. The Company recognized the resulting beneficial conversion feature as a deemed dividend equal to the number of shares of Series X convertible preferred stock sold on February 16, 2017 multiplied by the difference between the fair value of the common stock and the Series X convertible preferred stock effective conversion price per share on that date. The dividend was reflected as a one-time, non-cash, deemed dividend to the holders of Series X convertible preferred stock on the date of issuance, which is the date the stock first became convertible.
ATM Agreement
On November 12, 2015, the Company entered into an At The Market Issuance Sales Agreement (the “2015 ATM Agreement”) with Cowen and Company, LLC (“Cowen”), under which the Company may offer and sell from time to time at its sole discretion shares of its common stock through Cowen as its sales agent, in an aggregate amount not to exceed the amount that can be sold under the Company’s registration statement on Form S-3 (File No. 333-201882) filed with the SEC on the same date. The registration statement under the 2015 ATM Agreement will expire in February 2018. Cowen may sell the shares by any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 of the Securities Act, including without limitation sales made directly on The NASDAQ Global Market, on any other existing trading market for the Company’s common stock or to or through a market maker. Cowen also may sell the shares in privately negotiated transactions, subject to the Company’s prior approval. The Company will pay Cowen a commission equal to 3% of the gross proceeds of the sales price of all shares sold through it as sales agent under the 2015 ATM Agreement. Offering costs, consisting of legal, accounting, and filing fees, incurred in connection with the 2015 ATM Agreement are capitalized. The capitalized offering costs will be offset against proceeds from the sale of common stock under this agreement. In the event the offering is terminated, all capitalized offering costs will be expensed. For the year ended December 31, 2017, the Company sold a total of 110,252 shares of common stock under this agreement for aggregate gross proceeds of $0.6 million. Total offering costs of $0.2 million were offset against the proceeds upon sale of common stock. For the year ended December 31, 2016, the Company sold a total of 10,365 shares of common stock under this agreement for aggregate gross proceeds of $56,000. Total offering costs of $56,000 were offset against the proceeds upon sale of common stock. There were no shares of common stock sold under the 2015 ATM Agreement during the year ended December 31, 2015.
F-31
Common Stock Purchase Agreement
In August 2017, in connection with the XOMA-052 License Agreement, the Company and Novartis entered into a Common Stock Purchase Agreement under which Novartis purchased 539,131 shares of the Company’s common stock, at a price per share of $9.2742 for an aggregate purchase price of $5.0 million in cash. The fair market value of the common stock issued to Novartis was $4.8 million, based on the closing stock price of $8.93 per share on the effective date of the Common Stock Purchase Agreement of August 24, 2017. The excess of the purchase price over the fair market value of the common stock represents a premium of $0.2 million which was accounted for as additional consideration to the related license agreements (See Note 4 for further discussion). The shares issued to Novartis are unregistered securities and the Company agreed to use commercially reasonable efforts to make and keep public information available and timely file all reports and other documents with the SEC as required of the Company under the Securities Exchange Act of 1934, as amended. Under the Common Stock Purchase Agreement, upon a request by Novartis, the Company will use commercially reasonable efforts to register the shares for resale under the Securities Act on a registration statement on Form S-3, to be filed within 60 days of the written request, and will use commercially reasonable efforts to keep such registration statement continuously effective under the Securities Act until the date all of the shares of common stock covered by such registration statement have been sold or can be sold publicly without restriction or limitation under Rule 144.
Common Stock Warrants
As of December 31, 2017 and 2016, the following common stock warrants were outstanding:
|
|
|
|
|
|
Exercise Price
|
|
|
Number of Shares at December 31,
|
|
Issuance Date
|
|
Expiration Date
|
|
Balance Sheet Classification
|
|
per Share
|
|
|
2017
|
|
|
2016
|
|
March 2012
|
|
March 2017
|
|
Contingent warrant liabilities
|
|
$
|
35.20
|
|
|
|
—
|
|
|
|
479,277
|
|
September 2012
|
|
September 2017
|
|
Stockholders' equity (deficit)
|
|
$
|
70.80
|
|
|
|
—
|
|
|
|
1,967
|
|
February 2015
|
|
February 2020
|
|
Stockholders' equity (deficit)
|
|
$
|
66.20
|
|
|
|
9,063
|
|
|
|
9,063
|
|
February 2016
|
|
February 2021
|
|
Stockholders' equity (deficit)
|
|
$
|
15.40
|
|
|
|
8,249
|
|
|
|
8,249
|
|
|
|
|
|
|
|
|
|
|
|
|
17,312
|
|
|
|
498,556
|
|
In February 2016, in conjunction with services provided by a third-party consultant, the Company issued a warrant to purchase up to an aggregate of 8,249 unregistered shares of the Company’s common stock at an exercise price equal to $15.40 per share. These warrants were exercisable immediately and have a five-year term expiring in February 2021. The estimated fair value of the warrants of $0.1 million was calculated using the Black-Scholes Model and was classified in stockholders’ equity (deficit) on the consolidated balance sheet. As of December 31, 2017, all of these warrants were outstanding.
In February 2015, the Company issued Hercules five-year warrants in connection with the Hercules Term Loan (see Note 8) that entitle Hercules to purchase up to an aggregate of 9,063 unregistered shares of the Company’s common stock at an exercise price equal to $66.20 per share. The warrants are classified in stockholders’ equity (deficit) on the consolidated balance sheets. As of December 31, 2017, all of these warrants were outstanding.
In December 2014, in connection with a registered direct offering to select institutional investors, the Company issued two-year warrants to purchase up to an aggregate of 404,833 shares of the Company’s common stock at an exercise price of $158.01 per share. These warrants contained provisions that were contingent on the occurrence of a change in control, which could conditionally obligate the Company to repurchase the warrants for cash in an amount equal to their estimated fair value using the Black-Scholes Model on the date of such change in control. Due to these provisions, the Company accounted for the warrants issued in December 2014 as a liability at estimated fair value. In addition, the estimated fair value of the liability related to the warrants was revalued at each reporting period until the earlier of the exercise of the warrants or their expiration. During the year ended December 31, 2016, the Company revalued the warrants using the Black-Scholes Model, and recorded a $3.0 million reduction in the estimated fair value as a gain on the revaluation of contingent warrant liabilities line of the Company’s consolidated statement of comprehensive income (loss). The decrease in the estimated fair value of the warrants was primarily due to the decrease in the market price of the Company’s common stock at December 31, 2016 compared to December 31, 2015. In December 2016, all of these warrants expired unexercised.
In September 2012, the Company issued to GECC five-year warrants in connection with the amendment to the GECC Loan Agreement (see Note 8) that entitle GECC to purchase up to an aggregate of 1,967 unregistered shares of the Company’s common stock at an exercise price equal to $70.80 per share. The warrants are classified in stockholders’ equity (deficit) on the consolidated balance sheets. In September 2017, all of these warrants expired unexercised.
F-32
In March 2012, in connection with an underwritten offering, the Company issued five-year warrants to purchase 741,729 shares of the Company’s common stock at an exercise price of $35.20 per share. These warrants contain provisions that are contingent on th
e occurrence of a change in control, which could conditionally obligate the Company to repurchase the warrants for cash in an amount equal to their estimated fair value using the Black-Scholes Model on the date of such change in control. Due to these provi
sions, the Company accounts for the warrants issued in March 2012 as a liability at estimated fair value. In addition, the estimated fair value of the liability related to the warrants is revalued at each reporting period until the earlier of the exercise
of the warrants, at which time the liability
would
be reclassified to stockholders' equity at its then estimated fair value, or expiration of the warrants. The Company revalued the warrants at December 31, 2016 using the Black-Scholes Model and recorded a
$7.5
million reduction in the estimated fair value as a gain on the revaluation of contingent warrant liabilities line of the Company’s consolidated statement of comprehensive
income (
loss
)
. The decrease in the estimated fair value of the warrants
was
prim
arily due to the decrease in the market price of the Company’s common stock at December 31, 2016 compared to December 31, 2015.
As of December 31, 2016, the estimated fair value of these warrants was zero. In March 2017, all of these warrants expired unexe
rcised
.
13. Commitments and Contingencies
Collaborative Agreements, Royalties and Milestone Payments
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 commercial milestones by the Company’s licensees. Because it is uncertain if and when these milestones will be achieved, such contingencies, aggregating up to $15.5 million (assuming one product per contract meets all milestones events) have not been recorded on the accompanying consolidated balance sheets. 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.
Legal Proceedings
On July 24, 2015, a purported securities class action lawsuit was filed in the United States District Court for the Northern District of California, captioned Markette v. XOMA Corp., et al. (Case No. 3:15-cv-3425) naming as defendants the Company and certain of its officers. The complaint asserted that all defendants violated Section 10(b) of the Exchange Act and SEC Rule 10b-5, by making materially false or misleading statements regarding our EYEGUARD-B study between November 6, 2014 and July 21, 2015. The plaintiff also alleged that Messrs. Varian and Rubin violated Section 20(a) of the Exchange Act. On September 2, 2016, the defendants filed a motion to dismiss. On September 28, 2017, the Court granted defendants’ motion to dismiss with leave to amend. All parties subsequently agreed to dismiss the action and on October 25, 2017, the Court issued an Order of Dismissal, dismissing the action with prejudice with respect to the named Plaintiff’s individual claims and without prejudice with respect to unnamed class members.
On October 1, 2015, a stockholder purporting to act on the behalf of the Company, filed a derivative lawsuit in the Superior Court of California for the County of Alameda, purportedly asserting claims on behalf of the Company against certain of officers and the members of Board of Directors of the Company, captioned Silva v. Scannon, et al. (Case No. RG15787990). The lawsuit asserted claims for breach of fiduciary duty, corporate waste and unjust enrichment based on the dissemination of allegedly false and misleading statements related to the Company’s EYEGUARD-B study. The plaintiff was seeking unspecified monetary damages and other relief, including reforms and improvements to the Company’s corporate governance and internal procedures. On December 6, 2017, the parties filed a joint stipulation, agreeing to dismiss the action. On December 7, 2017, the Court granted the stipulation, issuing an order of dismissal. The order dismissed the action without prejudice.
On November 16 and November 25, 2015, two derivative lawsuits were filed purportedly on the Company’s behalf in the United States District Court for the Northern District of California, captioned Fieser v. Van Ness, et al. (Case No. 4:15-CV-05236-HSG) and Csoka v. Varian, et al. (Case No. 3:15-cv-05429-SI), against certain of the Company’s officers and the members of its Board of Directors. The lawsuits asserted claims for breach of fiduciary duty and other violations of law based on the dissemination of allegedly false and misleading statements related to the Company’s EYEGUARD-B study. The plaintiffs seek unspecified monetary damages and other relief including reforms and improvements to the Company’s corporate governance and internal procedures. On December 4, 2017, the parties in each case filed joint stipulations, agreeing to dismiss the actions. On December 6, 2017, the Court granted the stipulations, issuing an order of dismissal in each of the Fieser and Csoka actions. The order dismissed the actions without prejudice.
F-33
Operating Leases
The Company leases facilities and office equipment under operating leases expiring on various dates through April 2023. These leases require the Company to pay taxes, insurance, maintenance and minimum lease payments. For each facility lease, the Company has two successive renewal options to extend the lease for five years upon the expiration of the initial lease term.
In September 2017, the Company entered into a lease agreement for an office facility in Emeryville, California. The lease has a term of 63 months and commenced on November 14, 2017. Under the lease agreement the Company will make total lease payments of $0.9 million through February 2023.
Total rental expense, including other costs required under the Company’s leases, was approximately $2.4 million, $3.8 million and $3.7 million for the years ended December 31, 2017, 2016, and 2015, respectively. Rental expense based on leases allowing for escalated rent payments are recognized on a straight-line basis. At the expiration of the lease, the Company is required to restore certain of its leased property to certain conditions in place at the time of lease inception. The Company believes these costs will not be material to its operations.
On November 21, 2017, the Company entered into a non-cancellable sublease agreement for a portion of one of its three leased facilities. The term of the sublease agreement commenced on December 26, 2017. Under the term of the sublease agreement, the Company will receive $5.1 million over the term of the sublease, which ends at the same time as the original lease in April 2023. Under the sublease agreement, the Company’s future sublease income will be equal to the amount required to be paid to the Company’s landlord. In addition, the sublease provides for a tenant improvement allowance of $0.8 million that the Company is to provide to the subtenant; therefore, the Company recognized a loss on the sublease equal to the tenant improvement allowance. Under the sublease agreement, the Company and the sub-lessee executed a standby letter of credit amounting to $1.0 million to be held by the Company as security under the sublease in the event of uncured default by the sub-lessee. As of December 31, 2017, the Company has not drawn any funds from the letter of credit as there was no default by the sub-lessee.
The Company estimates future minimum lease amounts (in thousands):
Year Ending December 31,
|
|
Rent Payments
|
|
|
Sublease income
|
|
2018
|
|
$
|
3,848
|
|
|
$
|
897
|
|
2019
|
|
|
3,969
|
|
|
|
924
|
|
2020
|
|
|
4,117
|
|
|
|
952
|
|
2021
|
|
|
3,332
|
|
|
|
980
|
|
2022
|
|
|
2,774
|
|
|
|
1,010
|
|
Thereafter
|
|
|
906
|
|
|
|
340
|
|
Total minimum lease payments
|
|
$
|
18,946
|
|
|
$
|
5,103
|
|
14. Concentration of Risk, Segment and Geographic Information
Concentration of Risk
Cash equivalents and receivables are financial instruments which potentially subject the Company to concentrations of credit risk, as well as liquidity risk for certain cash equivalents such as money market funds. The Company has not encountered such issues during 2017 and 2016. The Company’s policy is to focus on investments with high credit quality and liquidity to limit the amount of credit exposure. The Company currently maintains a portfolio of cash equivalents and have not experienced any losses.
The Company has not experienced any significant credit losses and does not require collateral on receivables. For the year ended December 31, 2017, one partner represented 95% of total revenues, and as of December 31, 2017, one partner represented 100% of the accounts receivable balance.
For the year ended December 31, 2016, three partners represented 27%, 22%, and 19% of total revenues, and as of December 31, 2016, one partner represented 85% of the accounts receivable balance.
For the year ended December 31, 2015, one partner represented 67% of total revenues.
F-34
Segment Information
The Company has determined that it operates in one business segment as it only reports operating results on an aggregate basis to the chief operating decision maker of the Company.
Geographic Information
Revenue attributed to the following geographic regions was as follows (in thousands) based on the location of the licensees:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
1,654
|
|
|
$
|
3,822
|
|
|
$
|
10,685
|
|
Europe
|
|
|
50,936
|
|
|
|
1,642
|
|
|
|
44,662
|
|
Asia Pacific
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
Total
|
|
$
|
52,690
|
|
|
$
|
5,564
|
|
|
$
|
55,447
|
|
The Company’s property and equipment is held in the United States.
15. Subsequent Event
In January 2018, the Company sold 67,658 shares of common stock under the 2015 ATM Agreement for aggregate net cash proceeds of $2.3 million.
F-35
16. Quarterly Financial Information (unaudited)
The following is a summary of the quarterly results of operations for the years ended December 31, 2017 and 2016:
|
|
Consolidated Statements of Operations Data
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands, except per share amounts)
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
(1)
|
|
$
|
260
|
|
|
$
|
10,890
|
|
|
$
|
36,183
|
|
|
$
|
5,357
|
|
Restructuring (charge) credit
|
|
|
(2,020
|
)
|
|
|
(1,460
|
)
|
|
|
29
|
|
|
|
4
|
|
Operating costs and expenses
|
|
|
(9,160
|
)
|
|
|
(8,119
|
)
|
|
|
(7,562
|
)
|
|
|
(7,371
|
)
|
Income (loss) from operations
|
|
|
(10,920
|
)
|
|
|
1,311
|
|
|
|
28,650
|
|
|
|
(2,010
|
)
|
Other income (expense), net
|
|
|
205
|
|
|
|
(1,026
|
)
|
|
|
(600
|
)
|
|
|
648
|
|
Net income (loss) before income tax
|
|
|
(10,715
|
)
|
|
|
285
|
|
|
|
28,050
|
|
|
|
(1,362
|
)
|
Provision for income tax benefit (expense)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,706
|
)
|
|
|
44
|
|
Net income (loss)
|
|
$
|
(10,715
|
)
|
|
$
|
285
|
|
|
$
|
26,344
|
|
|
$
|
(1,318
|
)
|
Basic net income (loss) per share available to common stockholders
|
|
$
|
(2.37
|
)
|
|
$
|
0.02
|
|
|
$
|
2.06
|
|
|
$
|
(0.16
|
)
|
Diluted net income (loss) per share available to common stockholders
(3)
|
|
$
|
(2.37
|
)
|
|
$
|
0.02
|
|
|
$
|
1.98
|
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
3,962
|
|
|
$
|
443
|
|
|
$
|
635
|
|
|
$
|
524
|
|
Restructuring (charge) credit
|
|
|
(36
|
)
|
|
21
|
|
|
|
—
|
|
|
|
(4,551
|
)
|
Operating costs and expenses
|
|
|
(17,915
|
)
|
|
|
(18,482
|
)
|
|
|
(12,727
|
)
|
|
|
(13,432
|
)
|
Loss from operations
|
|
|
(13,989
|
)
|
|
|
(18,018
|
)
|
|
|
(12,092
|
)
|
|
|
(17,459
|
)
|
Other income (expense), net
(2)
|
|
|
5,624
|
|
|
|
2,858
|
|
|
|
(433
|
)
|
|
|
(21
|
)
|
Net loss
|
|
$
|
(8,365
|
)
|
|
$
|
(15,160
|
)
|
|
$
|
(12,525
|
)
|
|
$
|
(17,480
|
)
|
Basic net loss per share of common stock
|
|
$
|
(1.40
|
)
|
|
$
|
(2.52
|
)
|
|
$
|
(2.08
|
)
|
|
$
|
(2.89
|
)
|
Diluted net loss per share of common stock
|
|
$
|
(1.40
|
)
|
|
$
|
(2.52
|
)
|
|
$
|
(2.08
|
)
|
|
$
|
(2.89
|
)
|
|
(1)
|
In the third quarter of 2017, total revenues include upfront and milestone payments relating to various out-licensing arrangements, including $35.4 million of license fee revenue recognized in connection with the license agreements with Novartis, and, in the second quarter of 2017, total revenues include a $10.0 million milestone earned under the license agreement with Novartis International.
|
|
(2)
|
Fluctuations in 2016 primarily relate to (losses) gains on the revaluation of the contingent warrant liabilities.
|
|
(3)
|
For the quarters ended June 30, 2017 and September 30, 2017, the Company’s diluted net income per share of common stock was computed by giving effect to all potentially dilutive common stock equivalents outstanding during each of these periods.
|
F-36