10-Q 1 xbit20220630_10q.htm FORM 10-Q xbit20220630_10q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2022

 

or

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number 001-37437

XBIOTECH INC.

(Exact name of registrant as specified in charter)

 

British Columbia, Canada

 

__

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

5217 Winnebago Ln, Austin, TX 78744

(Address of principal executive offices)(Zip Code)

 

Telephone Number (512) 386-2900

(Registrants telephone number, including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par valueXBITNASDAQ Global Select Market

 

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 ☒      No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

   

Emerging growth company•

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☒

 

As of August 9, 2022, there were 30,439,275 shares of the Registrant's common stock issued and outstanding.

 

 

 

 

XBIOTECH INC.

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2022

INDEX

 

 

PART IFINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

 
 

Condensed Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021

6

 

Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2022 (unaudited) and 2021 (unaudited)

7

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months and Six Months Ended June 30, 2022 (unaudited) and 2021 (unaudited)

8

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months and Six Months Ended June 30, 2022(unaudited) and 2021 (unaudited)

9

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 (unaudited) and 2021 (unaudited)

11

 

Notes to Condensed Consolidated Financial Statements (unaudited)

12

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

PART IIOTHER INFORMATION

Item 1.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 3.

Defaults Upon Senior Securities

28

Item 4.

Mine Safety Disclosures

28

Item 5.

Other Information

28

Item 6.

Exhibits

29

 

SIGNATURES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. You can identify forward-looking statements by terminology such as “may,” “will,” “should,” “would,” “could,” “expects,” “plans,” “contemplate,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “intend” or “continue” or the negative of such terms or other comparable terminology, although not all forward-looking statements contain these identifying words. Forward-looking statements are subject to inherent risks and uncertainties in predicting future results and conditions that could cause the actual results to differ materially from those projected in these forward-looking statements. These forward-looking statements include, but are not limited to statements about:

 

 

our ability to obtain regulatory approval to market and sell our product candidates in the United States, Europe and elsewhere;

 

 

the initiation, timing, cost, progress and success of our research and development programs, preclinical studies and clinical trials for our product candidates;

 

 

our ability to advance product candidates into, and successfully complete, clinical trials;

 

 

our ability to successfully commercialize the sale of our product candidates in the United States, Europe and elsewhere;

 

 

our ability to recruit sufficient numbers of patients for our future clinical trials for our pharmaceutical products;

 

 

our ability to achieve profitability;

 

 

the implementation of our business model and strategic plans;

 

 

our ability to develop and commercialize product candidates for orphan and niche indications independently;

 

 

our commercialization, marketing and manufacturing capabilities and strategy;

 

 

our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

 

 

our expectations regarding federal, state and foreign regulatory requirements;

 

 

the therapeutic benefits, effectiveness and safety of our product candidates;

 

 

the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our products and product candidates;

 

 

the rate and degree of market acceptance and clinical utility of our future products, if any;

 

 

4

 

 

our expectations regarding market risk, including interest rate changes, foreign currency fluctuations and regional or global economic impacts caused by public health threats, such as the outbreak of coronavirus or other infectious diseases;

 

 

our ability to engage and retain the employees required to grow our business;

 

 

our future financial performance and projected expenditures;

 

 

developments relating to our competitors and our industry, including the success of competing therapies that are or become available; and

 

 

estimates of our expenses, future revenue, capital requirements and our needs for additional financing.

 

All forward looking statements in this Quarterly Report on Form 10-Q involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those under the heading “Risk Factors” included in our annual report for the year ended December 31, 2021 filed with the SEC on March 15, 2022, and under the heading “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Quarterly Report on Form 10-Q.  Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain medical conditions, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

 

 

 

5

 

XBiotech Inc.

 

Condensed Consolidated Balance Sheets

(in thousands, except share data)

  

June 30, 2022

(Unaudited)

  

December 31, 2021

 

 
         

Assets

        

Current assets:

        

Cash and cash equivalents

 $225,793  $236,983 

Income tax receivable

  12,426   8,953 

Prepaid expenses and other current assets

  545   934 

Total current assets

  238,764   246,870 

Property and equipment, net

  27,276   28,307 
Deferred tax assets  422   - 

Total assets

 $266,462  $275,177 
         

Liabilities and shareholders equity

        

Current liabilities:

        

Accounts payable

 $2,454  $2,069 

Accrued expenses

  5,588   1,374 

Income tax payable

  193   10 

Total current liabilities

  8,235   3,453 

Long-term liabilities:

        

Income tax payable

  1,559   1,466 

Deferred tax liability

  873   873 

Total liabilities

  10,667   5,792 
         

Shareholders equity:

        

Preferred stock, no par value, unlimited shares authorized, no shares outstanding

  -   - 

Common stock and additional paid in capital, no par value, unlimited shares authorized, 30,439,275 shares outstanding at June 30, 2022 and December 31, 2021, respectively

  265,159   262,263 

Accumulated other comprehensive income

  2,524   1,971 

Accumulated (deficit) equity

  (11,888)  5,151 

Total shareholders’ equity

  255,795   269,385 
         

Total liabilities and shareholders equity

 $266,462  $275,177 

 

See accompanying note to unaudited condensed consolidated financials statements

 

6

 

 

XBiotech Inc.

 

Condensed Consolidated Statements of Operations (unaudited)

(in thousands, except share and per share data)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 
   

(unaudited)

   

(unaudited)

   

(unaudited)

   

(unaudited)

 

Revenue

                               

Manufacturing revenue

  $ 1,530     $ 4,500     $ 2,030     $ 9,000  

Clinical trial service revenue

    -       25       -       375  

Total revenue

    1,530       4,525       2,030       9,375  

Cost of goods sold

                               

Manufacturing cost

    207       1,341       420       3,376  

Clinical trial cost

    -       19       -       288  

Total cost of goods sold

    207       1,360       420       3,664  

Gross margin

    1,323       3,165       1,610       5,711  
                                 

Operating expenses:

                               

Research and development

    10,394       9,254       17,214       13,888  

General and administrative

    3,023       4,516       4,337       5,981  

Total operating expenses

    13,417       13,770       21,551       19,869  

Loss from operations

    (12,094 )     (10,605 )     (19,941 )     (14,158 )
                                 

Other income (loss):

                               

Interest income

    241       123       343       232  

Other expense

    (119 )     (2 )     (119 )     (11 )

Foreign exchange (loss) gain

    (2,280 )     793       (990 )     1,202  

Total other (loss) income

    (2,158 )     914       (766 )     1,423  

Loss before income taxes

    (14,252 )     (9,691 )     (20,707 )     (12,735 )

Benefit for income taxes

    2,608       4,573       3,668       5,049  

Net loss

  $ (11,644 )   $ (5,118 )   $ (17,039 )   $ (7,686 )

Net loss per share—basic and diluted

  $ (0.38 )   $ (0.17 )   $ (0.56 )   $ (0.26 )

Shares used to compute basic and diluted net loss per share

    30,439,277       29,987,917       30,439,277       29,707,352  

 

See accompanying note to unaudited condensed consolidated financials statements.

 

7

 

 

XBiotech Inc.

 

Condensed Consolidated Statements of Comprehensive Loss (unaudited)

(in thousands)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 
   

(unaudited)

   

(unaudited)

   

(unaudited)

   

(unaudited)

 
                                 

Net loss

  $ (11,644 )   $ (5,118 )   $ (17,039 )   $ (7,686 )

Foreign currency translation adjustment

    431       318       553       637  

Comprehensive loss

  $ (11,213 )   $ (4,800 )   $ (16,486 )   $ (7,049 )

 

See accompanying note to unaudited condensed consolidated financials statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

XBiotech Inc.

 

Condensed Consolidated Statements of Shareholders' Equity (unaudited)

(in thousands)

 

   

 

 Number of Shares    

 

 Common Stock and Additional Paid in Capita       Accumulated Other Comprehensive Income (Loss)        Accumulated (Deficit) Equity       Total  

Balance at March 31, 2022

    30,439     $ 263,711     $ 2,093     $ (244 )   $ 265,560  

Net loss

    -       -       -       (11,644 )     (11,644 )

Foreign currency translation adjustment

    -       -       431       -       431  

Share-based compensation expense

    -       1,448       -       -       1,448  

Balance at June 30, 2022

    30,439     $ 265,159     $ 2,524     $ (11,888 )   $ 255,795  

 

   

 

Number of Shares    

 

Common Stock and Additional Paid in Capital       Accumulated Other Comprehensive Income (Loss)       Accumulated (Deficit) Equity          Total  

Balance at March 31, 2021

    29,983     $ 255,513     $ 1,585     $ 95,000     $ 352,098  

Net loss

    -       -       -       (5,118 )     (5,118 )

Foreign currency translation adjustment

    -       -       318       -       318  

Issuance of common stock under stock option plan

    41       226       -       -       226  

Share-based compensation expense

    -       1,040       -       -       1,040  

Balance at June 30, 2021

    30,024     $ 256,779     $ 1,903     $ 89,882     $ 348,564  

 

 

 

 

 

 

 

 

 

 

 

9

 

 

   

 

Number of Shares    

 

Common Stock and Additional Paid in Capital       Accumulated Other Comprehensive Income (Loss)       Accumulated (Deficit) Equity       Total  

Balance at December 31, 2021

    30,439     $ 262,263     $ 1,971     $ 5,151     $ 269,385  

Net loss

    -       -       -       (17,039 )     (17,039 )

Foreign currency translation adjustment

    -       -       553       -       553  

Issuance of common stock under stock option plan

    -       -       -       -       -  

Share-based compensation expense

    -       2,896       -       -       2,896  

Balance at June 30, 2022

    30,439     $ 265,159     $ 2,524     $ (11,888 )   $ 255,795  

 

   

 

Number of Shares    

 

Common Stock and Additional Paid in Capital       Accumulated Other Comprehensive Income (Loss)       Accumulated (Deficit) Equity         Total   

Balance at December 31, 2020

    29,304     $ 249,805     $ 1,266     $ 97,568     $ 348,639  

Net loss

    -       -       -       (7,686 )     (7,686 )

Foreign currency translation adjustment

    -       -       637       -       637  

Issuance of common stock under stock option plan

    720       4,998       -       -       4,998  

Share-based compensation expense

    -       1,976       -       -       1,976  

Balance at June 30, 2021

    30,024     $ 256,779     $ 1,903     $ 89,882     $ 348,564  

 

See accompanying note to unaudited condensed consolidated financials statements.

 

 

 

 

 

 

 

 

 

10

 

 

XBiotech Inc.

 

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

  

Six Months Ended June 30,

 
  

2022

  

2021

 
  

(unaudited)

  

(unaudited)

 

Operating activities

        

Net loss

 $(17,039) $(7,686)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

        

Depreciation

  1,437   1,259 

Share-based compensation expense

  2,896   1,976 

Changes in operating assets and liabilities:

        

Account receivable

  -   4,088 

Income tax receivable

  (3,473)  (1,535)

Deferred cost of goods sold

  -   1,089 

Escrow receivable

  -   75,063 

Prepaid expenses and other current assets

  390   200 

Deferred tax assets

  (422)  (108)

Accounts payable

  221   (1,026)

Accrued expenses

  4,215   330 

Income tax payable

  276   848 

Deferred tax liability

  (1)  108 

Net cash (used in) provided by operating activities

  (11,500)  74,606 
         

Investing activities

        

Purchase of property and equipment

  (243)  (2,349)

Net cash used in investing activities

  (243)  (2,349)
         

Financing activities

        

Issuance of common stock under stock option plan

  -   4,998 

Net cash provided by financing activities

  -   4,998 

Effect of foreign exchange rate on cash and cash equivalents

  553   637 
         

Net change in cash and cash equivalents

  (11,190)  77,892 

Cash and cash equivalents, beginning of period

  236,983   237,366 

Cash and cash equivalents, end of period

 $225,793  $315,258 
         

Supplemental Information:

        

Accrued purchases of property and equipment

  164   25 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

11

 

XBiotech Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

1.

Organization

 

XBiotech Inc. (XBiotech or the Company) was incorporated in Canada on March 22, 2005. XBiotech USA, Inc., a wholly-owned subsidiary of the Company, was incorporated in Delaware, United States in November 2007. XBiotech Germany GmbH, a wholly-owned subsidiary of the Company, was incorporated in Germany in January 2014. The Company’s headquarters are located in Austin, Texas.

 

Since its inception, XBiotech has focused on advancing technology to rapidly identify and clone antibodies from individuals that have resistance to disease. At the heart of the Company is a proprietary technical knowhow to translate natural human immunity into therapeutic product candidates. The Company has in its pipeline both anti-infective and anti-inflammatory candidate therapeutics derived from this technology.

 

An area of medical focus for XBiotech are therapies that block a potent substance naturally produced by the body, known as interleukin-1 alpha (IL-1a), that mediates tissue breakdown, angiogenesis, the formation of blood clots and inflammation. IL-1a is a protein that is on or in cells of the body and is involved in the body’s response to injury or trauma. In almost all chronic and in some acute injury scenarios (such as stroke or heart attack), IL-1a may mediate harmful disease-related activity.

 

At the end of 2019, XBiotech sold a True Human™ antibody that blocked IL-1a activity for $1.35 billion in cash and potential milestone payments (the “Janssen Transaction”). On February 2, 2022, XBiotech announced an addendum to the 2019 Janssen Manufacturing Agreement. XBiotech will continue to manufacture bermekimab for use by Janssen in its clinical trials through December 2023. As part of the Janssen Transaction, XBiotech maintained the right to develop new antibodies that block IL-1a and develop these therapeutics in all areas of medicine except dermatology. Moreover, all patents acquired by Janssen relating to IL-1a would be asserted for the benefit of XBiotech to protect its future IL-1a related therapies in all non-dermatological indications. Consequently, XBiotech is pursuing the development of other True Human™ antibodies targeting IL-1a for areas of medicine outside of dermatology. Due to the speed and effectiveness of the Company’s True Human™ antibody discovery technology, the Company has identified new IL-1a targeting product candidates and has already brought one such candidate into a clinical study in oncology. While the Company previously was focused on a single True Human™ antibody targeting IL-1a, it now plans to develop more than one product candidate that targets IL-1a to be used in different areas of medicine.

 

The Company continues to be subject to a number of risks common to companies in similar stages of development. Principal among these risks are the uncertainties of technological innovations, dependence on key individuals, development of the same or similar technological innovations by the Company’s competitors and protection of proprietary technology. The Company’s ability to fund its planned clinical operations, including completion of its planned trials, is expected to depend on the amount and timing of cash receipts from future collaboration or product sales and/or financing transactions. The Company believes that its cash and cash equivalents of $225.8 million at June 30, 2022, will enable the Company to achieve several major inflection points, including potential new clinical studies with lead product candidates. The Company expects to have sufficient cash through 12 months from the date of this report.

 

 

2.

Significant Accounting Policies

 

Basis of Presentation

 

The condensed consolidated balance sheet as of June 30, 2022, the condensed consolidated statements of operations and comprehensive loss and shareholders’ equity for the three and six months ended June 30, 2022 and 2021, and the condensed consolidated statement of cash flows for the six months ended June 30, 2022 were prepared by management without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, except as otherwise disclosed, necessary for the fair presentation of the financial position, results of operations, and changes in financial position for such periods, have been made.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted.These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2021. The results of operations for the period ended June 30, 2022 are not necessarily indicative of the operating results that may be expected for a full year. The condensed consolidated balance sheet as of December 31, 2021 contains financial information taken from the audited XBiotech Inc.consolidated financial statements as of that date.

12

 

Basis of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated upon consolidation.

 

Use of Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported values of amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Revenue

 

Revenue from the Janssen Agreements

 

The Company recognizes revenues from its Janssen Agreements as follows.

 

The Company entered into its clinical manufacturing and clinical trial services arrangements in connection with its sale of certain intellectual property on December 30, 2019. These contracts commenced January 1, 2020. The Company executed an addendum related to manufacturing agreement, which is expected to generate revenue through December 2023. While these agreements are not considered contracts with a customer based on the terms thereof, the Company is applying the revenue recognition guidance by analogy.

 

XBiotech is still in the research and development phase; however, the eventual output of the Company’s intended ordinary activities will be the licensing of intellectual property and/or sale of commercialized compounds for use in pharmaceutical treatment of disease, not the performance of manufacturing of development stage compounds or clinical trials for others. Although Janssen is not a customer, as these services are not the output of XBiotech’s ordinary activities, the Company evaluated the terms of the agreements and has analogized to Accounting Standards Codification, Topic 606, Revenue from Contracts with Customers (“ASC 606”) for clinical manufacturing and clinical trial services revenue recognition.

 

Under ASC 606, an entity recognizes revenue when (or as) its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606 (or for those analogized to it), the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts (including by analogy) when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the counterparty. At contract inception, once the contract is determined to be within the scope of or analogized to ASC 606, the Company assesses the goods or services promised within each contract and determine those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

Manufacturing Revenue

 

The Company has a Clinical Manufacturing Agreement that it accounts for by analogy to ASC 606, under which it agreed to manufacture bermekimab for use by Janssen in clinical trials, in exchange for payments of $4.5 million per quarter, for the year ended 2020 and 2021. In 2022 the Company executed an addendum to the 2019 Janssen Manufacturing Agreement . The agreement is expected to generate as much as $4.7 million in revenue through December 2023.

 

13

 

Research and Development Costs

 

All research and development costs are charged to expense as incurred. Research and development costs include salaries and personnel-related costs, consulting fees, fees paid for contract clinical trial research services, the costs of laboratory consumables, equipment and facilities, license fees and other external costs. Costs incurred to acquire licenses for intellectual property to be used in research and development activities with no alternative future use are expensed as incurred as research and development costs.

 

Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

 

Clinical Trial Accruals

 

Expense accruals related to clinical trials are based on the Company’s estimates of services received and efforts expended pursuant to contracts with third party service providers who conduct and manage clinical trials on the Company’s behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing costs, the Company estimates the period over which services will be performed and the level of effort to be expended in each period based upon patient enrollment, clinical site activations, or information provided to the Company by its vendors on their actual costs incurred. Any estimates of the level of services performed or the costs of these services could differ from actual results.

 

Income Taxes

 

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company measures deferred tax assets and liabilities using the enacted tax rates for the years and jurisdictions in which the temporary differences are expected to be recovered. A change to the tax rates used to measure the Company’s deferred taxes is recognized in income during the period in which the new rate(s) were enacted.

 

The Company recognizes deferred tax assets to the extent the Company’s assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including the future reversals of existing taxable temporary differences, projected future taxable income exclusive of reversing temporary differences and carryforwards, tax-planning strategies, taxable income in prior carryback years if permitted under tax law, and the results from prior years. If the Company determines it is more likely than not, that all or a portion of a deferred tax asset will not be realized a valuation allowance is recorded with a charge to income tax expense. Alternatively, if the Company determines that all or a portion of a deferred tax asset previously not meeting the more likely than not threshold will be realized, the Company reduces its valuation allowance and recognizes a benefit in income tax expense.

 

The Company records uncertain tax positions in accordance with ASC 740, Accounting for Income Taxes (“ASC 740”) based on a two-step process in which (1) the Company determines whether it is more likely than not that the tax position will be sustained based on the technical merits of the position, and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than fifty percent likely to be realized upon ultimate settlement with the related tax authority. The Company's policy is to recognize interest and penalties related to uncertain tax positions, if any, in income tax expense.

 

14

 

Share-Based Compensation

 

The Company accounts for its share-based compensation awards in accordance with ASC Topic 718, Compensation-Stock Compensation (“ASC 718”). ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statements of operations based on their grant date fair values. For stock options granted to employees and to members of the board of directors for their services on the board of directors, the Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. To determine the fair value of its common stock, the Company uses the closing price of the Company’s common stock as reported by NASDAQ. For awards subject to service-based vesting conditions, the Company recognizes share-based compensation expense, equal to the grant date fair value of stock options on a straight-line basis over the requisite service period. The Company accounts for forfeitures as they occur rather than on an estimated basis.

 

Share-based compensation expense recognized for the three months and six months ended June 30, 2022 and 2021 was included in the following line items on the Consolidated Statements of Operations (in thousands).

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Research and development

 $979  $433  $1,969  $796 

General and administrative

  469   534   927   1,046 

Cost of goods sold

  -   73   -   134 

Total share-based compensation expense

 $1,448  $1,040  $2,896  $1,976 

 

The fair value of each option is estimated on the date of grant using the Black-Scholes method with the following assumptions:

 

  

Three Months Ended

 

Six Months Ended

  

June 30,

 

June 30,

  

2022

 

2021

 

2022

 

2021

Dividend yield

  

-

   

-

   

-

   

-

 

Expected volatility

  

83%

  

84%

-

85%

 

82%

-

83%

 

84%

-

86%

Risk-free interest rate

 

2.5%

-

3.5%

 

0.9%

-

1.1%

 

1.5%

-

3.5%

 

0.5%

-

1.1%

Expected life (in years)

 

5.38

-

6.25

 

5.38

-

6.25

 

5.38

-

6.25

 

5.38

-

6.25

Weighted-average grant date fair value per share

  

5.43

   

11.12

   

5.53

   

11.49

 

 

Cash and Cash Equivalents

 

The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consisted primarily of cash on deposit in U.S., German and Canadian banks. Cash and cash equivalents are stated at cost which approximates fair value.

 

15

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents. The Company holds these investments in highly-rated financial institutions, and limits the amounts of credit exposure to any one financial institution. These amounts at times may exceed federally insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to any significant credit risk on these funds. The Company has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements.

 

Fair Value Measurements

 

The consolidated financial statements include financial instruments for which the fair value of such instruments may differ from amounts reflected on a historical cost basis. Financial instruments of the Company consist of cash deposits, accounts and other receivables, accounts payable, and certain accrued liabilities. These financial instruments are held at cost, which generally approximates fair value due to their short-term nature.

 

The Company follows ASC Topic 820, Fair Value Measurements and Disclosures, which establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market date (observable inputs) and the Company’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

 

 

Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities.

 

 

Level 2—Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

 

 

Level 3—Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.

 

At June 30, 2022 and December 31, 2021, the Company did not have any assets or liabilities that are measured at fair value on a recurring basis. The carrying amounts reflected in the balance sheets for cash and cash equivalents, prepaid expenses and other current assets, accounts payable, and accrued expenses approximate their fair values at June 30, 2022 and December 31, 2021, due to their short-term nature.

 

Property and Equipment

 

Property and equipment, which consists of land, construction in process, furniture and fixtures, computers and office equipment, scientific equipment, leasehold improvements, vehicles and building are stated at cost and depreciated over the estimated useful lives of the assets, with the exception of land and construction in process which are not depreciated, using the straight line method. The useful lives are as follows:

 

  

•         Furniture and fixtures

7 years

  

•         Office equipment

5 years

  

•         Leasehold improvements

Shorter of asset’s useful life or remaining lease term

  

•         Scientific equipment

5 years

  

  •      Vehicles

5 years

  

  •      Mobile facility

27.5 years

  

•         Building

39 years

 

16

 

Costs of major additions and betterments are capitalized; maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to expense as incurred. Upon retirement or sale, the cost of the disposed asset and the related accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized.

 

Impairment of Long-Lived Assets

 

The Company periodically evaluates its long-lived assets for potential impairment in accordance with ASC Topic 360, Property, Plant and Equipment. Potential impairment is assessed when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Recoverability of these assets is assessed based on undiscounted expected future cash flows from the assets, considering a number of factors, including past operating results, budgets and economic projections, market trends and product development cycles. If impairments are identified, assets are written down to their estimated fair value. The Company has not recognized any impairment through June 30, 2022.

 

Foreign Currency Transactions

 

Certain transactions are denominated in a currency other than the Company’s functional currency of the U.S. dollar, and the Company generates assets and liabilities that are fixed in terms of the amount of foreign currency that will be received or paid. At each balance sheet date, the Company adjusts the assets and liabilities to reflect the current exchange rate, resulting in a translation gain or loss. Transaction gains and losses are also realized upon a settlement of a foreign currency transaction in determining net loss for the period in which the transaction is settled.

 

Comprehensive Income (Loss)

 

ASC Topic 220, Comprehensive Income, requires that all components of comprehensive income (loss), including net income (loss), be reported in the financial statements in the period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on investments and foreign currency translation adjustments.

 

Segment and Geographic Information

 

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company and the chief operating decision maker view the Company’s operations and manage its business as one operating segment. Substantially all of the Company’s operations are in the U.S. geographic segment.

 

Net Loss Per Share

 

Net income/loss per share (“EPS”) is computed by dividing net loss by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income/loss by the weighted average number of common shares and common share equivalents outstanding (if dilutive) during each period. The number of common share equivalents, which include stock options, is computed using the treasury stock method.

 

Subsequent Events

 

The Company considered events or transactions occurring after the balance sheet date but prior to the date the consolidated financial statements are available to be issued for potential recognition or disclosure in its consolidated financial statements. We have evaluated subsequent events through the date of filing this Form 10-Q.

 

17

 

Recent Accounting Pronouncements

 

Recently Issued Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires instruments measured at amortized cost to be presented at the net amount expected to be collected. Entities are also required to record allowances for available-for-sale debt securities rather than reduce the carrying amount. On November 15, 2019, the FASB delayed the effective date of the standard for certain small public companies and other private companies. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities. The Company expects that the adoption will not have a material impact on its consolidated financial statements.

 

 

3.

Revenue

 

On February 2, 2022, the Company announced an addendum to the 2019 Janssen Manufacturing Agreement XBiotech will continue to manufacture bermekimab for use by Janssen in its clinical trials through December 2023. For the three months and six months ended June 30, 2022, the Company has recorded $1.5 and $2.0 million, respectively of gross revenue under the February 2022 agreement.

 

 

4.

Property and Equipment

 

Property and equipment consisted of the following as of June 30, 2022 and December 31, 2021 (in thousands):

 

  

June 30, 2022

  

December 31, 2021

 

Manufacturing equipment

 $3,183  $3,796 

Winnebago building

  21,417   21,587 

Other fixed assets

  2,676   2,924 

Total property and equipment

 $27,276  $28,307 

 

 

5.

Common Stock

 

Pursuant to its Articles, the Company has an unlimited number of shares available for issuance with no par value.

 

From January 1, 2021 through December 31, 2021, 1.1 million shares of common stock were issued upon the exercise of stock options at a price of $3.27 to $15.00 per share for total proceeds of $8.0 million.

 

No stock options were exercised from January 1, 2022 through June 30,2022.

 

 

6.

Common Stock Options

 

On November 11, 2005, the Board of Directors of the Company adopted the XBiotech Inc. 2005 Incentive Stock Option Plan (the “2005 Plan”), and on March 24, 2015, the board of directors of the Company adopted the XBiotech Inc. 2015 Equity Incentive Plan (the 2015 Plan”) pursuant to which the Company may grant incentive stock and non-qualified stock options to directors, officers, employees or consultants of the Company or an affiliate or other persons as the Compensation Committee may approve.

 

18

 

All options under both Plans will be non-transferable and may be exercised only by the participant, or in the event of the death of the participant, a legal representative until the earlier of the options’ expiry date or the first anniversary of the participant’s death, or such other date as may be specified by the Compensation Committee.

 

The term of the options is at the discretion of the Compensation Committee, but may not exceed 10 years from the grant date. The options expire on the earlier of the expiration date or the date three months following the day on which the participant ceases to be an officer or employee of or consultant to the Company, or in the event of the termination of the participant with cause, the date of such termination. Options held by non-employee Directors have an exercise period coterminous with the term of the options.

 

The number of common shares reserved for issuance to any one person pursuant to the 2005 Plan shall not, in aggregate, exceed 5% of the total number of outstanding common shares. The exercise price per common share under each option will be the fair market value of such shares at the time of the grant. Upon stock option exercise, the Company issues new shares of common stock.

 

A summary of changes in common stock options issued under the 2005 Plan and under the 2015 Plan is as follows:

 

  

Options

 

Exercise Price

 

Weighted-Average
Exercise Price

Options outstanding at December 31, 2020

  

5,327,425

  

$2.71

-

$21.99

 

$

6.09

 

Granted

  

130,000

  

15.83

-

17.49

  

16.69

 

Exercised

  

(743,279

)

 

2.71

-

21.99

  

6.87

 

Forfeitures

  

(88,374

)

 

4.14

-

19.30

  

9.55

 

Options outstanding at June 30, 2021

  

4,625,772

  

$2.71

-

$21.99

 

$

16.30

 

 

  

Options

 

Exercise Price

 

Weighted-Average
Exercise Price

Options outstanding at December 31, 2021

  

4,656,677

  

$2.71

-

$21.74

 

$

10.68

 

Granted

  

146,600

  

5.62

-

11.50

  

7.16

 

Exercised

  

-

  

-

  

-

 

Forfeitures

  

(97,308

)

 

$4.95

-

$21.74

  

14.06

 

Options outstanding at June 30, 2022

  

4,705,969

  

$2.71

-

$21.74

 

$

10.50

 

 

As of June 30, 2021, there was approximately $5.1 million of unrecognized compensation cost, related to stock options granted under the Plans which will be amortized to stock compensation expense over the next 1.58 years.

 

As of June 30, 2022, there was approximately $5.4 million of unrecognized compensation cost, related to stock options granted under the Plans which will be amortized to stock compensation expense over the next 1.41 years.

 

 

7.

Net Income/Loss Per Share

 

The following summarizes the computation of basic and diluted net income/loss per share for three months and six months ended June 30, 2022 and 2021 (in thousands, except share and per share data):

 

19

 
  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Net loss

 $(11,644) $(5,118) $(17,039) $(7,686)

Weighted-average number of common shares—basic and diluted

  30,439,277   29,987,917   30,439,277   29,707,352 

Net loss per share—basic and diluted

 $(0.38) $(0.17) $(0.56) $(0.26)

 

Potentially dilutive securities outstanding, prior to the use of the treasury stock method or if-converted method, in the amount of 4,705,969 and 4,625,772 have been excluded from the computation of diluted weighted-average common shares outstanding as of June 30, 2022 and June 30, 2021, respectively, because including them would have had an anti-dilutive effect due to the losses reported.

 

 

8.

Income Taxes

 

The Company's effective tax rates for the three months ended June 30, 2022 and June 30, 2021, were 18.3% and 47.2% respectively. The effective tax rate for the three month period ended June 30, 2022 varied from the Canadian statutory rate primarily due to losses in jurisdictions for which a valuation allowance is recorded and no benefit is recognized. The effective tax rate for the three month period ended June 30, 2021 varied from the Canadian statutory rate primarily due to permanent changes to prior tax filings.

 

The Company's effective tax rates for the six months ended June 30, 2022 and June 30, 2021, were 17.7% and 39.6% respectively. The effective tax rate for the six month period ended June 30, 2022 varied from the Canadian statutory rate primarily due to losses in jurisdictions for which a valuation allowance is recorded and no benefit is recognized. The effective tax rate for the six month period ended June 30, 2021 varied from the Canadian statutory rate primarily due to permanent changes to prior tax filings.

 

 

 

 

 

 

 

 

 

20

 
 
 

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

 

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

XBiotech Inc. (“XBiotech” or the “Company) is a pre-market biopharmaceutical company engaged in discovering and developing True Human™ monoclonal antibodies for treating a variety of diseases. True Human™ monoclonal antibodies are those which occur naturally in human beings—as opposed to being derived from animal immunization or otherwise engineered. We believe that naturally occurring monoclonal antibodies have the potential to be safer and more effective than their non-naturally occurring counterparts. XBiotech is focused on developing its True Human™ pipeline and manufacturing system.

 

Following the Janssen Transaction in December 2019, the tender offer in February 2020, and the dividends paid in July 2021, the accumulated deficit as of June 30, 2022 was ($11.8) million. We had net losses before income tax of $14.3 million and $20.7 million for the three months and six months ended June 30, 2022, respectively, compared to $9.7 million and $12.7 million for the three months and six months ended June 30, 2021, respectively. During the next year, we expect the revenues from 2019 Janssen Transaction Addendum will be used in our research and development activities. In addition, we expect to incur significant and increasing operating losses for the foreseeable future as we advance our drug candidates from discovery through preclinical testing and clinical trials and seek regulatory approval and eventual commercialization. We will need to generate significant revenues to achieve or sustain profitability, and we may never do so. As of June 30, 2022, we had 96 employees.

 

Revenues

 

Prior to receiving payments under the clinical manufacturing agreement entered into in connection with the Janssen Transaction, we had not generated any revenue. Under the clinical manufacturing agreement, we manufacture bermekimab for use by Janssen in clinical trials, in exchange for fixed payments, paid in quarterly installments through 2021. In February 2022, we entered a new manufacturing contract with a Janssen-related company whereby we will continue to manufacture bermekimab through December 2023. The contract terminates in December 2023. Our ability to generate any additional revenue and/or to become profitable (or sustain any profitability) depends on our ability to successfully commercialize any product candidates we may advance in the future.

 

Research and Development Expenses

 

Research and development expense consists of expenses incurred in connection with identifying and developing our drug candidates. These expenses consist primarily of salaries and related expenses, stock-based compensation, the purchase of equipment, laboratory and manufacturing supplies, facility costs, costs for preclinical and clinical research, development of quality control systems, quality assurance programs and manufacturing processes. We charge all research and development expenses to operations as incurred.

 

The clinical development costs may further increase going forward with potentially more advanced studies in the future as we evaluate our clinical data and pipeline.

 

21

 

Clinical development timelines, likelihood of success and total costs vary widely. We do not currently track our internal research and development costs or our personnel and related costs on an individual drug candidate basis. We use our research and development resources, including employees and our drug discovery technology, across multiple drug development programs. As a result, we cannot state precisely the costs incurred for each of our research and development programs or our clinical and preclinical drug candidates. From inception through June 30, 2022, we have recorded total research and development expenses, including share-based compensation, of $264.8 million. Our total research and development expenses for the three months and six months ended June 30, 2022 were $10.4 million and $17.2 million, respectively, compared to $9.3 million and $13.9 million for the three months and six months ended June 30, 2021, respectively. Share-based compensation accounted for $1.0 million and $2.0 million for the three months and six months ended June 30, 2022, respectively, compared to $0.4 million and $0.8 million for the three months and six months ended June 30, 2021, respectively, related to research and development.

 

Research and development expenses, as a percentage of total operating expenses for the three months and six months ended June 30, 2022 were 77% and 80%, respectively, compared to 67% and 70% for the three months and six months ended June 30, 2021, respectively. The percentages, excluding share-based compensation, for the three months and six months ended June 30, 2022 were 79% and 82%, respectively, compared to 69% and 73% for the three months and six months ended June 30, 2021.

 

We will select drug candidates and research projects for further development on an ongoing basis in response to their preclinical and clinical success and commercial potential. For research and development candidates in early stages of development, it is premature to estimate when material net cash inflows from these projects might occur.

 

General and Administrative Expenses

 

General and administrative expense consists primarily of salaries and related expenses for personnel in administrative, finance, business development and human resource functions, as well as the legal costs of pursuing patent protection of our intellectual property and patent filing and maintenance expenses, share–based compensation, and professional fees for legal services. Our total general and administration expenses for the three months and six months ended June 30, 2022 were $3.0 million and $4.3 million, respectively, compared to $4.5 million and $6.0 million for the three months and six months ended June 30, 2021, respectively. Share-based compensation accounted for $0.5 million and $0.9 million for the three months and six months ended June 30, 2022, respectively, and $0.5 million and $1.0 million for the three months and six months ended June 30, 2021, respectively, related to general and administrative expenses.

 

General and administrative expenses, as a percentage of total operating expenses for the three months and six months ended June 30, 2022 were 23% and 20%, respectively, compared to 33% and 30% for the three months and six months ended June 30, 2021, respectively. The percentages, excluding share-based compensation, for the three months and six months ended June 30, 2022 were 21% and 18%, respectively, compared to 31% and 27% for the three months and six months ended June 30, 2021.

 

Critical Accounting Policies

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our financial statements, which have been prepared in conformity with generally accepted accounting principles in the United States (US GAAP). The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and expenses incurred during the reported periods.

 

We base estimates on our historical experience, known trends and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Our significant accounting policies are more fully described in the notes to our financial statements appearing in this Quarterly Report on Form 10-Q.

 

22

 

Income Taxes

 

We account for income taxes under the asset and liability method. We record deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in the results of operations in the period that includes the enactment date. We assess the likelihood that deferred tax assets will be realized, and we recognize a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. To date, we have provided a valuation allowance against our deferred tax assets as we believe the objective and verifiable evidence of our historical pretax net losses outweighs any positive evidence of our forecasted future results. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment. We will continue to monitor the positive and negative evidence and will adjust the valuation allowance as sufficient objective positive evidence becomes available.

 

We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is more likely than not that the position will be sustained upon examination. We recognize potential accrued interest and penalties associated with unrecognized tax positions within our global operations in income tax expense.

 

Results of Operations

 

Revenue

 

Revenue during the three months ended and six months ended June 30, 2022 and 2021 are summarized as follows (in thousands):

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Revenue

                               

Manufacturing revenue

  $ 1,530     $ 4,500     $ 2,030     $ 9,000  

Clinical Trial revenue

    -       25       -       375  

Total revenue

  $ 1,530     $ 4,525     $ 2,030     $ 9,375  

 

Under the clinical manufacturing agreement with Janssen and the addendum, we have recorded $1.5 and $4.5 million as manufacturing revenue for the three months ended June 30, 2022 and 2021, respectively. Clinical trial revenue is based on the transition services agreement under which we agreed to continue operational management, on a fee-for-service basis, of certain ongoing clinical trials related to bermekimab, which includes $19 thousand pass-through revenue for the two trials and $6 thousand mark-up revenue for the three months ended June 30, 2021. The clinical trial service agreement was terminated in the year 2022.

 

We have recorded $2.0 million manufacturing revenue for the six months ended June 30, 2022, compared to $9 million for the six months ended June 30, 2021. Clinical trial revenue for the six months ended June 30, 2021 was $0.4 million, including $0.3 million pass-through expense for two trials and $0.1 million mark-up revenue.

 

Cost of Goods Sold

 

Cost of goods sold during the three months and six months ended June 30, 2022 and 2021 are summarized as follows (in thousands):

 

23

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Cost of goods sold

                               

Manufacturing cost

  $ 207     $ 1,341     $ 420     $ 3,376  

Clinical trial cost

    -       19       -       288  

Total cost of goods sold

  $ 207     $ 1,360     $ 420     $ 3,664  

 

The manufacturing cost for the three months ended June 30, 2022 represents cost for the manufacuring department under the February 2022 agreement and the cost for the three months ended June 30, 2021 included expense for manufacturing, quality assurance and quality control departments. Clinical trial cost for the three months ended June 30, 2021 is the pass-through expenses for two trials and other related clinical trial department expenses.

 

We have recorded $0.4 million in manufacturing cost for the six months ended June 30, 2022, compared to $3.4 million for the six months ended June 30, 2021. Clinical trial cost for the six months ended June 30, 2021 was $0.3 million including the pass- through expenses for two trials and other related clinical trial department expenses. The three months and six months decrease was mainly due to the completion of the Janssen clinical manufacturing agreement on December 2021 and the addendum signed in February 2022.

 

Expenses

 

Research and Development

 

Research and Development costs are summarized as follows (in thousands):

 

   

Three Months Ended June 30,

   

Increase

   

% Increase

 
   

2022

   

2021

   

(Decrease)

   

(Decrease)

 

Salaries and related expenses

  $ 4,328     $ 5,656     $ (1,328 )     -23 %

Laboratory and manufacturing supplies

    2,579       1,137       1,442       127 %

Clinical trials and sponsored research

    502       450       52       12 %

Share-based compensation

    979       433       546       126 %

Other

    2,006       1,578       428       27 %

Total

  $ 10,394     $ 9,254     $ 1,140       12 %

 

   

Six Months Ended June 30,

   

Increase

   

% Increase

 
   

2022

   

2021

   

(Decrease)

   

(Decrease)

 

Salaries and related expenses

  $ 6,455     $ 7,212     $ (757 )     -10 %

Laboratory and manufacturing supplies

    4,280       2,018       2,262       112 %

Clinical trials and sponsored research

    885       774       111       14 %

Share-based compensation

    1,969       796       1,173       147 %

Other

    3,625       3,088       537       17 %

Total

  $ 17,214     $ 13,888     $ 3,326       24 %

 

We do not currently track our internal research and development costs or our personnel and related costs on an individual drug candidate basis. We use our research and development resources, including employees and our drug discovery technology, across multiple drug development programs. As a result, we cannot state precisely the costs incurred for each of our research and development programs or our clinical and preclinical drug candidates.

 

24

 

Research and development expenses increased $1.1 million to $10.4 million for the three months ended June 30, 2022, compared to $9.3 million for the three months ended June 30, 2021. The increase was mainly due to the reclassification of expense. Manufacturing department expenses were not reclassed to cost of goods sold in 2022 compared to a portion of manufacturing department expenses were reclassed to cost of goods sold in 2021 were related to the clinical trial manufacturing agreement in the Janssen Transaction. The increase of share-based compensation is due to the new grants to employees in the fourth quarter of 2021. In addition, salaries and related expenses decreased because of the $3.8 million bonus to the Chief Executive Officer in June 2022 compared to the $7.0 million bonus in June 2021, in which 60% was allocated to research and development expenses for both periods.

 

Research and development expenses increased $3.3 million to $17.2 million for the six months ended June 30, 2022, compared to $13.9 million for the six months ended June 30, 2021. The six months increase was also mainly due to the reclassification of expense. Salaries and related expenses decreased because of the $3.8 million bonus to the Chief Executive Officer in June 2022 compared to the $7.0 million bonus in June 2021, in which 60% was allocated to research and development expenses for both periods. The other expense includes the facility allocation and other miscellaneous expense.

 

General and Administrative

 

General and administrative costs are summarized as follows (in thousands):

 

   

Three Months Ended June 30,

   

Increase

   

% Increase

 
   

2022

   

2021

   

(Decrease)

   

(Decrease)

 

Salaries and related expenses

  $ 1,748     $ 3,036     $ (1,288 )     -42 %

Patent filing expense

    141       132       9       7 %

Share-based compensation

    469       534       (65 )     -12 %

Professional fees

    226       350       (124 )     -35 %

Other

    439       464       (25 )     -5 %

Total

  $ 3,023     $ 4,516     $ (1,493 )     -33 %

 

   

Six Months Ended June 30,

   

Increase

   

% Increase

 
   

2022

   

2021

   

(Decrease)

   

(Decrease)

 

Salaries and related expenses

  $ 1,999     $ 3,291     $ (1,292 )     -39 %

Patent filing expense

    287       268       19       7 %

Share-based compensation

    927       1,046       (119 )     -11 %

Professional fees

    519       813       (294 )     -36 %

Other

    605       563       42       7 %

Total

  $ 4,337     $ 5,981     $ (1,644 )     -27 %

 

General and administrative expenses decreased $1.5 million to $3.0 million for the three months ended June 30, 2022 compared to $4.5 million for the three months ended June 30, 2021. General and administrative expenses decreased $1.6 million to $4.3 million for the six months ended June 30, 2022 compared to $6.0 million for the six months ended June 30, 2021.

 

The three months decrease was primarily related to the decrease in salaries and related expenses. The bonus to the Chief Executive Officer in June 2022 was $3.8 millioncompared to the $7.0 million bonus in June 2021, in which 40% was allocated to general and administrative expenses for both periods.

 

Compared to the six months ended June 30, 2021, the general and administrative expense decrease in the six months ended June 30, 2022 was also primarily caused by the decrease to salaries and related expenses. In addition, professional fees decreased $0.3 million mainly due to the decrease in annual audit fees in 2022.

 

25

 

Other income (loss)

 

The following table summarizes other income (loss) (in thousands):

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Interest income

  $ 241     $ 123     $ 343     $ 232  

Other income (loss)

    (119 )     (2 )     (119 )     (11 )

Foreign exchange gain (loss)

    (2,280 )     793       (990 )     1,202  

Total

  $ (2,158 )   $ 914     $ (766 )   $ 1,423  

 

The interest income for the three months and six months ended June 30, 2022 and 2021 was mainly from the interest generated from the Company’s Canadian bank account. Foreign exchange gain (loss) was mainly due to the fluctuation between the US dollar and the Canadian dollar in the three months and six months ended June 30, 2022 compared to 2021.

 

Liquidity and Capital Resources

 

Our cash requirements could change materially as a result of the progress of our research and development and clinical programs, licensing activities, acquisitions, divestitures or other corporate developments.

 

Since our inception on March 22, 2005 through June 30, 2022, we have funded our operations principally through private placements and public offerings of equity securities, which have provided aggregate cash proceeds of approximately $118.2 million. We received $675 million in cash proceeds from the Janssen Transaction in the year ended December 31, 2019. In June 2021, we received the remaining $75 million in cash from the escrow receivable from the same transaction. In July 2021, we paid $75 million in dividends to shareholders. During the following 12 months, we expect that the revenues from Janssen Transaction Addendum will generate part of the cash for our research and development activities. At June 30, 2022, we had cash and cash equivalents of $225.8 million as compared to cash and cash equivalents of $315.3 million at June 30, 2021. The following table summarizes our sources and uses of cash (in thousands):

 

   

Six Months Ended June 30,

 

Net cash (used in) provided by:

 

2022

   

2021

 

Operating activities

  $ (11,500 )   $ 74,606  

Investing activities

    (243 )     (2,349 )

Financing activities

    -       4,998  

Effect of foreign exchange rate on cash and cash equivalents

    553       637  

Net change in cash and cash equivalents

  $ (11,190 )   $ 77,892  

 

During the six months ended June 30, 2022 and 2021, our operating activities used net cash of $11.5 million and generated net cash $74.6 million, respectively. The cash from operations for the six months ended June 30, 2021 primarily resulted from the $75 million escrow payment received.

 

During the six months ended June 30, 2022 and 2021, our investing activities used net cash of $0.2 million and $2.3 million, respectively. The use of cash was for building expansion and warehouse in construction.

 

26

 

During the six months ended June 30, 2021, our financing activities provided net cash of $5.0 million. Employees exercised stock options to purchase a total of 720 thousand shares of our common stock for approximately $5.0 million in net proceeds during the six months ended June 30, 2021.

 

We expect to continue to incur operating losses in the future. Further, the clinical manufacturing agreement with Janssen expires on December 2023, after which we do not expect to receive any additional revenue under that agreement. As of June 30, 2022, our principal sources of liquidity were our cash and cash equivalents, which totaled approximately $225.8 million.

 

Off-Balance Sheet Arrangements

 

Since inception, we have not engaged in any off-balance sheet activities, including the use of structured finance, special purpose entities or variable interest entities.

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risks

 

The Company is not currently exposed to material market risk arising from financial instruments, changes in interest rates or commodity prices, or fluctuations in foreign currencies. The Company has no need to hedge against any of the foregoing risks and therefore currently engages in no hedging activities.

 

Item 4.

Controls and Procedures

 

Management's Evaluation of our Disclosure Controls and Procedures

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by the Company’s management, with the participation of the Chief Executive Officer and Principal Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended. Based on such evaluation, the Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports the Company files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and are operating in an effective manner.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

27

 

 

PART II - OTHER INFORMATION

 

 

Item 1. Risk Factors

 

There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2021. Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K, as well as other risks and uncertainties, could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the trading price of shares of our Common Stock. Additional risks not currently known or currently material to us may also harm our business.

 

 

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

 

Not Applicable.

 

Item 3. Defaults upon Senior Securities

 

Not Applicable.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information.

 

Not Applicable.

 

28

 

Item 6. Exhibits.

 

     

31.1

 

Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

 

 

31.2

 

Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

 

 

32.1

 

Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.

 

101

 

The following financial statements from the XBiotech Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline Extensive Business Reporting Language (XBRL): (i) condensed consolidated balance sheets at June 30, 2022 and December 31, 2021, (ii) condensed consolidated statements of operations for the three and six months ended June 30,2022 and 2021, (iii) condensed consolidated statements of comprehensive loss for the three and six months ended June 30,2022 and 2021, (iv) condensed consolidated statements of shareholders’ equity for the three and six months ended June 30,2022 and 2021; (v) condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021 and (vi) notes to condensed consolidated financial statements (detail tagged).

     

104

 

Cover Page Interactive Data File (embedded within the iXBRL document).

 

 

 

 

 

 

 

 

 

 

29

 

 

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.

 

 

 

 

 

 

 

 

Date: August 9, 2022

 

XBIOTECH INC.

 

 

 

 

 

 

By:

 

/S/ John Simard

 

 

 

 

John Simard

 

 

 

 

President, Chief Executive Officer and Director (Principal Executive Officer)

 

 

 

 

 

Date: August 9, 2022

 

By:

 

/S/ Queena Han

 

 

 

 

Queena Han

 

 

 

 

Vice President, Finance and Human Resources, and Secretary (Principal Financial Officer and Principal Accounting Officer)

         

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30