UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended June 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Transition Period from __________ to __________
Commission File No. 0-14710
XOMA Ltd.
(Exact Name of Registrant as specified in its charter)
Bermuda 52-2154066
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2910 Seventh Street, Berkeley, CA 94710
(Address of principal executive offices) (Zip Code)
(510) 644-1170
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common shares US$.0005 par value 51,719,674
- -------------------------------------- ----------------------------
Class Outstanding at June 30, 1999
XOMA Ltd.
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of June
30, 1999 and December 31, 1998......................................1
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1999
and
1998................................................................2
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999 and
1998................................................................3
Notes to Condensed Consolidated Financial
Statements .........................................................4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ..............................7
PART II OTHER INFORMATION
Items 1 through 5 are either inapplicable or nonexistent
and therefore are omitted from this report
Item 6 Exhibits and Reports on Form 8-K.................................11
Signatures .............................................................13
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XOMA Ltd.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31, 1998
1999 (Audited)
(Unaudited)
Assets:
Cash and cash equivalents $ 1,388 $ 11,857
Short-term investments 19,371 16,430
Related party receivables 246 246
Other receivables 62 144
Prepaid expenses and other 236 159
--------- ---------
Total current assets 21,303 28,836
--------- ---------
Property and equipment, net 3,905 3,895
Assets held for sale 4,442 4,442
Deposits and other 131 131
--------- ---------
$ 29,781 $ 37,304
========= =========
Liabilities and Shareholders' Equity:
Accounts payable $ 3,096 $ 3,515
Accrued liabilities 9,000 6,740
Capital lease obligations due within one year 74 286
--------- ---------
Total current liabilities 12,170 10,541
Convertible subordinated notes 31,314 26,513
--------- ---------
Total liabilities 43,484 37,054
--------- ---------
Redeemable convertible preference shares 0 6,440
--------- ---------
Shareholders' equity (net capital deficiency) (13,703) (6,190)
--------- ---------
$29,781 $37,304
========= =========
The accompanying notes are an integral part of these financial statements.
-2-
XOMA Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------- ------------- ------------ -------------
Revenues:
License Fees $ 525 $ 36 $ 528 $ 61
Product Sales and Royalties 22 1 39 21
-------- -------- -------- ------
547 37 567 82
-------- -------- -------- ------
Expenses:
Research and Development 11,136 10,666 23,409 19,838
General and Administrative 1,631 1,308 3,011 2,750
Non-recurring Licensing Fee 0 2,400 0 2,400
-------- -------- -------- ------
12,767 14,374 26,420 24,988
-------- -------- -------- ------
Loss from Operations (12,220) (14,337) (25,853) (24,906)
Other Income (Expense):
Investment Income 260 574 629 1,267
Interest Expense and Other (403) (400) (797) (831)
-------- -------- -------- ------
Net Loss (12,363) (14,163) (26,021) (24,470)
Preference share dividends 0 0 (55) 0
-------- -------- -------- ------
Net loss available to common shareholders $(12,363) $(14,163) $(23,076) $(24,470)
======== ======== ======== ========
Basic and Diluted Net Loss per Share $(0.24) $(0.34) $(0.52) $(0.61)
Weighted Average Common
Shares Outstanding 50,835 41,812 50,009 41,179
See accompanying notes to financial statements.
-3-
XOMA Ltd.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months Ended
June 30,
1999 1998
---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
$ (22,358) $ (18,693)
------------- -------------
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
20,660 102,398
Proceeds from sale of Short-term Investments
Payments for purchase of Short-term Investments (23,601) (107,217)
Capital expenditures (578) (624)
------------- -------------
Net cash provided by (used in) investing activities (3,519) (5,443)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Shares, net 11,620 71
Proceeds from issuance of Preference Shares, net 0 12,094
Proceeds from issuance of Convertible Notes 4,000 0
Capital Lease principal payments (212) (244)
------------- -------------
Net cash provided by (used in) financing activities 15,408 11,921
------------- -------------
Net increase (decrease) in Cash and Cash Equivalents (10,469) (12,215)
Cash and Cash Equivalents at beginning of period 11,857 37,225
------------- -------------
Cash and Cash Equivalents at end of period $ 1,388 $ 25,010
============= =============
See accompanying notes to financial statements.
-4-
XOMA Ltd.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The interim information contained in this report is unaudited but, in
management's opinion, includes all normal recurring adjustments which are
necessary for a fair presentation of results for the periods presented. Interim
results do not necessarily indicate of results to be expected for the full year.
The financial statements should be read in conjunction with the Company's
audited financial statements for the year ended December 31, 1998.
2. Supplemental Cash Flow Information
In the second quarter of 1999, the Company contributed $0.2 million to the
Company's deferred savings and management incentive compensation programs by
issuing 63,464 common shares.
3. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
June 30, December 31,
1999 1998
------------ -------------
Accrued dividends $ 589 $ 754
Accrued payroll costs 2,107 2,217
Costs related to change in domicile 454 1,457
Clinical trial costs 5,243 1,746
Other 607 566
------------ -------------
$ 9,000 $ 6,740
============ =============
Activities through June 30, 1999 affecting the provision for change in
legal domicile established in 1998 are as follows (in millions):
Original amount $2.5
Charges against the accrual 2.0
Adjustment to the accrual --
-5-
4. Private Placement
In January 1999, the Company issued 2,051,254 common shares to two
institutional investors for net proceeds of $11.4 million. The price represented
approximately a 60% premium over the current market price for XOMA shares. Under
certain circumstances the number of shares may be adjusted in the future. The
common shares will be held in an escrow account until sold by the investors (up
to a maximum of three years). Beginning August 31, 1999, the number of shares
remaining in the escrow account may be adjusted at 90-day intervals based on an
11% discount from a prevailing market price at that time. The investors also
received five-year warrants to purchase up to 240,000 common shares for $5.85
per share. The Company also issued five-year warrants to purchase up to 64,000
common shares for $5.85 per share to a placement agent in connection with this
transaction.
5. Net Loss Per Common Share
Basic and diluted net loss per common share is based on the weighted
average number of common shares outstanding during the period in accordance with
Financial Accounting Standard No. 128. Common share equivalents have not been
included because they are anti-dilutive.
6. Collaborative Transactions
In April 1999, the Company and Genentech, Inc. agreed to collaborative
development of the hu1124 (anti-CD11a) monoclonal antibody product through Phase
III, intended for the treatment of moderate to severe plaque psoriasis. Under
terms of the agreement, XOMA and Genentech will continue to collaborate on the
remaining clinical development and regulatory filings for the product in
psoriasis. XOMA will share future development costs, as well as future U.S.
profits, with Genentech on a 25%/75% basis. XOMA will receive a royalty on sales
outside the United States. Genentech will fund XOMA's share of development costs
via long-term convertible loans.
In June 1999, the Company concluded a licensing agreement with Allergan,
Inc. under which Allergan will have exclusive worldwide rights to use XOMA's
rBPI in combination with other anti-infectives in products to treat ophthalmic
infections. Under the agreement, Allergan will pay the Company up to $11.0
million in upfront and milestone payments, as well as a royalty on future sales
of the combination products. Allergan will also pay all future development costs
for products covered by the agreement.
-6-
7. Subsequent Events
In July 1999, the Company entered into a financing transaction involving
the issuance of 3,024,086 common shares to 33 investors for net proceeds of
$16.4 million. The Company also issued five-year warrants to purchase up to
75,000 common shares for $5.75 per share to each of two placement agents in that
transaction.
After concluding patient accrual in its Phase III clinical trial testing
the NEUPREX(R) product in pediatric patients suffering from severe
meningococcemia in May, the Company is in the process of analyzing data from
this pivotal trial. Because this is a rare and life-threatening systemic
infection that primarily affects children, the trial was conducted under Subpart
E designation and the indication has received "orphan drug" status. Based on its
preliminary analysis, XOMA believes the data show a clinical benefit in
mortality and morbidities, but is scheduling a meeting with the FDA to determine
adequacy for filing a biologics license application. The Company is completing
the full data analysis in preparation for that meeting and cannot predict the
outcome of the FDA's review.
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Second quarter and year-to-date revenues of $0.5 million in 1999 consisted
of primarily licensing income. Revenues in the comparable 1998 periods were
negligible.
Research and development costs in the second quarter of 1999 were $11.1
million, an increase of 4.4% compared to $10.7 million in the second quarter of
1998. For the six months ended June 30, 1999, research and development costs
were $23.4 million, an 18.0% increase over the $19.8 million for the same period
in 1998. These increases were due primarily to spending on clinical trials and
preparation of regulatory filings for the NEUPREX(R) and hu1124 products.
Spending in the second quarter of 1999 was somewhat lower than in the first
quarter primarily due to the completion in May of the Phase III trial testing
NEUPREX(R) in pediatric patients suffering from severe meningococcemia and the
initiation of a development cost sharing arrangement between XOMA and Genentech,
Inc. related to hu1124.
General and administrative expenses were $1.6 million and $3.0 million for
the three and six months ended June 30, 1999 compared with $1.3 million and $2.8
million for the comparable periods of 1998. The increase in the second quarter
of 1999 reflected costs associated with collaborative arrangements.
Expenses for the second quarter of 1998 included a non-recurring charge of
$2.4 million related to an exclusive license with Incyte Pharmaceuticals, Inc.
for all of Incyte's patents and patent applications related to BPI.
Investment income was lower for both the three and six months ended June
30, 1999 compared with the same periods in 1998 due to a lower average
investment balance.
Liquidity and Capital Resources:
The Company's cash, cash equivalents and short-term investments totaled
$20.8 million as of June 30, 1999, compared with $28.3 million at December 31,
1998. Net cash used in operations was $22.4 million for the six months ended
June 30, 1998, compared with $18.7 million in the comparable 1998 period. This
increase was primarily due to payments for clinical trials and preparations for
regulatory filings. In July 1999, the Company completed a private equity
financing raising net proceeds of $16.4 million from the issuance of 3.0 million
common shares. The Company's cash, cash equivalents and short-term investments
are expected to continue to decrease while the Company pursues U.S. Food and
Drug Administration licensure except to the extent the Company secures
additional funding.
-8-
The Company has been able to control its operating cash consumption by
carefully monitoring its costs. As a result, its cash position and resulting
investment income are sufficient to finance the Company's currently anticipated
levels of spending through at least the end of the first quarter of 2000. The
Company continues to evaluate a variety of arrangements which would further
strengthen its competitive position and provide additional funding, but cannot
predict when or whether any such arrangement or additional funding will be
secured. Without additional funding, the Company would have to decrease or
eliminate the development of some of its products.
Year 2000 Exposure:
Year 2000 ("Y2K") exposure is the result of computer programs using two
instead of four digits to represent the year. These computer programs may
erroneously interpret dates beyond the year 1999, which could cause system
failures or other computer errors, leading to disruptions in operations.
The Company has developed a three-phase program to limit or eliminate Y2K
exposures. Phase I is to identify those systems, applications and third-party
relationships from which the Company has exposure to Y2K disruptions in
operations. Phase II is to develop and implement action plans to achieve Y2K
compliance in all areas before the end of 1999. Also included in Phase II is the
development of contingency plans to be implemented should Y2K compliance not be
achieved when required to avoid disruptions in operations. Phase III is the
final testing or equivalent certification of each major area of exposure to
ensure compliance.
The Company has identified three major areas as critical for successful Y2K
compliance: Area 1, which includes company-wide information systems applications
that rely on computer software; Area 2, which includes manufacturing, quality,
and research applications that rely on computer programs embedded in
microprocessors; and Area 3, which includes third-party relationships which may
be affected by Area 1, 2 or 3 exposures that exist in other companies.
The Company, in accordance with Phase I of the program, has conducted an
internal review and contacted all software suppliers to determine major areas of
Y2K exposure in Area 1. In manufacturing, quality and research (Area 2), the
Company engaged a consultant to help identify its exposures. With respect to
Area 3, the Company has evaluated its reliance on third parties for its
operations, and has contacted material third parties in writing with respect to
their state of Y2K readiness. In those cases where Y2K readiness could not be
confirmed, we have developed contingency plans involving increased levels of
inventory stocking and/or alternate suppliers.
-9-
The Company has completed Phases I and II of its Y2K program with respect
to all three of the major areas and expects to substantially complete Phase III
by the end of the third quarter of 1999.
As of June 30, 1999, the Company has identified costs of approximately $0.6
million to replace or remediate and test its Area 1 computer information systems
and its Area 2 manufacturing, quality and research applications, of which $0.4
million has been expended. The Company does not anticipate any material
additional costs. The funds for these costs are part of the Company's cash flow
from operations and capital expenditures.
Assuming that the Company's efforts to mitigate its Y2K exposure in any of
the three areas referred to above are unsuccessful, the most reasonably likely
worst case scenario is an interruption of ongoing clinical trials, including
delays in gathering and evaluating clinical data, and a disruption of the
Company's manufacturing and research operations. The duration and costs of any
such delays are expected to be minimal. The contingency plans to handle this
reasonably likely worst case scenario involve appropriate build-up of key raw
material and supply inventories, provision for temporary power generation and
scheduling of critical work over the year-end period.
Quantitative and Qualitative Disclosures About Market Risk:
Interest Rate Risk. The Company's exposure to market rate risk for changes
in interest rates relates primarily to the Company's investment portfolio. The
Company does not use derivative financial instruments in its investment
portfolio. By policy, the Company places its investments with high quality debt
security issuers, limits the amount of credit exposure to any one issuer, limits
duration by restricting the term, and holds investments to maturity except under
rare circumstances. The Company classifies its cash equivalents or short-term
investments as fixed rate if the rate of return on an instrument remains fixed
over its term. As of June 30, 1999, all the Company's cash equivalents and
short-term investments are classified as fixed rate.
The Company also has a long-term convertible note due to Genentech in 2005.
Interest on this note of LIBOR plus 1% is reset at the end of June and December
each year and therefore variable.
The table below presents the amounts and related weighted interest rates of
the Company's cash equivalents, short-term investments and long-term convertible
note at June 30, 1999:
-10-
Fair Value Average
Maturity (in $ millions) Interest Rate
------------------- ------------------ -------------------
Cash equivalents, fixed rate daily 1.4 5.2%
Short-term investments, fixed rate 0 - 1 year 19.4 4.9%
Long-term convertible note, variable rate 2005 31.3 6.0%
Other Market Risk. At June 30, 1999 the Company had a long-term convertible
note outstanding, which is convertible into common shares based on the market
price of the Company's common shares at the time of conversion. A 10% decrease
in the market price of the Company's common shares would increase the number of
shares issuable upon conversion by approximately 11%. An increase in the market
price of Company common shares of 10% would decrease the shares issuable by
approximately 9%.
Forward Looking Statements:
Certain statements contained herein related to the FDA regulatory process,
timing and results of clinical trials, release of data and other aspects of
product development, or that otherwise relate to future periods, are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements are based on assumptions which may not prove accurate. Actual results
could differ materially from those anticipated due to certain risks inherent in
the biotechnology industry and for companies engaged in the development of new
products in a regulated market. These risks, including those related to the
timing or results of pending or future clinical trials, actions by the U.S. Food
and Drug Administration or the U.S. Patent and Trademark Office, changes in the
status of the Company's collaborative relationships, uncertainties regarding the
legal standards applicable to biotechnology patents, the Company's financing
needs and opportunities, scale-up and marketing capabilities, competition and
share price volatility, are discussed herein and in other of the Company's
Securities and Exchange Commission filings. Investors should consider carefully
these risks in evaluating XOMA's prospects.
-11-
PART II - OTHER INFORMATION
Item 1 Legal Proceedings. None.
Item 2 Changes in Securities. None.
Item 3 Defaults Upon Senior Securities. None.
Item 4 Submission of Matters to a Vote of Security Holders. None.
Item 5 Other Information. None.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibit 10.1 License Agreement dated as of June 25, 1999 between
XOMA Ireland Limited and Allergan Sales, Inc. (with
certain confidential information omitted, which
omitted information is the subject of a confidential
treatment request and has been filed separately with
the Securities and Exchange Commission)
(Exhibit 2) (1)
Exhibit 10.2 Supply Agreement dated as of June 25, 1999
between XOMA (US) LLC and Allergan Sales, Inc. (with
certain confidential information omitted, which
omitted information is the subject of a confidential
treatment request and has been filed separately with
the Securities and Exchange Commission) (Exhibit 3)
(1)
Exhibit 10.3 Form of Subscription Agreement dated as of July 21,
1999 by and between XOMA Ltd. and the purchasers of
Common Shares in the July 1999 private placement
(Exhibit 2) (2)
Exhibit 10.4 Form of Registration Rights Agreement dated as of
July 21, 1999 by and between XOMA Ltd. and the
purchasers of Common Shares in the July 1999 private
placement (Exhibit 3) (2)
Exhibit 10.5 Form of Common Share Purchase Warrant (July 1999
Warrants) (Exhibit 4) (2)
Exhibit 10.6 Form of Registration Rights Agreement dated as of
July 21, 1999 by and between XOMA Ltd. and the
placement agents in the July 1999 private placement
(Exhibit 5) (2)
Exhibit 27.1 Financial Data Schedule
-12-
(b) Current Report on Form 8-K dated and filed July 1, 1999, as amended by
Amendment No. 1 thereto on Form 8-K/A dated and filed July 19, 1999
(File No. 0-14710), Items 5 (Other Events) and 7 (Exhibits).
Current Report on Form 8-K dated July 23, 1999 filed July 26, 1999
(File No. 0-14710), Items 5 (Other Events) and 7 (Exhibits).
- ------------------
(1) Incorporated by reference to the referenced exhibit to XOMA's Current
Report on Form 8-K dated and filed July 1, 1999, as amended by Amendment
No. 1 thereto on Form 8-K/A dated and filed July 19, 1999 (File No.
0-14710).
(2) Incorporated by reference to the referenced exhibit to XOMA's Current
Report on Form 8-K dated July 23, 1999 filed July 26, 1999 (File No.
0-14710).
-13-
XOMA Ltd.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
XOMA LTD.
Date: August 16, 1999 By: /s/ JOHN L. CASTELLO
---------------------------------------
John L. Castello
Chairman of the Board, President and
Chief Executive Officer
Date: August 16, 1999 By: /s/ PETER B. DAVIS
---------------------------------------
Peter B. Davis
Vice President, Finance and
Chief Financial Officer